Pensions Are Sexy!
Pensions can save the world but only if they are invested in the right things.
How do you tell if your pension is invested to save the world or destroy it?
We have all heard of the importance of checking your pension to see if it is invested in fossil fuels or renewable energy. (see Make Your Money Matter campaigns).
But how easy is it to tell if your pension fund is funding the climate crisis?
Sadly, it is much harder than it should be.
Add to that most of us have never checked and even when we have, we may have been misled and given a false sense of security by “Green “ or “ESG” labels.
The only way to be sure is to work with a sustainable financial adviser who can give you a better picture of what you are invested in.
What question should you be asking your sustainable financial planner?
There has been a growth of funds and advisers adding “green” or “sustainable” or “ESG” to their brands, which should be a wonderful thing but sadly it does not seem nearly as much change in processes or actions to tackle climate change.
The FCA (Financial Conduct Authority) have agreed on new rules to restrict the labels being used without additional disclosure – known as the Sustainable Disclosure Requirements (SDR), we think this is a good start but unfortunately, at time of writing this blog these new rules are yet to be implemented and have once again been kicked into the longer grass. Even with these new fund disclosure requirements there will still be a lot more work required.
For example, it is quite easy to find “highly rated ESG funds” that are rammed full of oil, defence and tobacco stocks. This is because there is not currently any regulation over use of the term ESG. In practice it should mean the fund manager is taking ESG risks into consideration when making investment selections. It has nothing to do with a sustainable approach. An ESG fund might be perfectly comfortable to identify the ESG risks and conclude that they are happy to carry them or feel that the risks have been sufficiently mitigated.
ESG ratings are only part of the picture and other measures should be used to assess a company’s sustainability.
Here are some better questions to ask about your pension funds.
- What is the carbon footprint – all 3 scopes please, and how does this compare to the average fund?
- What are the portfolios implied temperature alignment? Is it consistent with a survivable future? (I.e. well below +2C)
- What controversial issues have been flagged for the underlying holdings? What are the underlying holdings – not just the top 10.
- Has the fund manager signed up to Science Based Targets Initiative?
- What percentage revenue is from ‘green activities’ and what from ‘brown’? – this is based on the EU taxonomy of sustainable activities.
Greenwash – There are lots of funds and financial advisers who have very comprehensive web pages to convince you they are acting in the climate crisis. They look great until you read them with some knowledge in the area.
Questions to ask are – What percentage of their funds under management are invested sustainably and What percentage are they aiming for by the end of 2025?
The answers, disappointingly, may be lacking in historic action and may suggest a lack of experience in this area.
The FCA conducts ongoing research into the financial needs of the UK public, the ‘Financial Lives Survey’ tells us that 80% of people expect their money to ‘being doing some good and avoiding harm’ but only around 8% of people are getting this. The gap can be explained by a big hole in adviser competence. There are, however, good advisers out there that can help clients navigate the sustainable investment landscape.
Engagement policies – This is a bugbear of mine – engagement for change can have its place but it has not worked over the last 30 years and therefore outside of coordinated action by Client Earth etc. We do not consider it to be appropriate to follow an engagement policy with Oil & and gas companies given their ongoing inaction on the climate emergency.
If you are going to place trust in ‘engagement’ then demand sight of the engagement policy and make sure it has teeth. It must have a series of escalating consequences resulting in divestment over relatively short time scales (1-3 years). Otherwise, it is more than likely just more greenwash bullshit used as an excuse to remain invested in the destruction of your future for the profit of the few.
See Al Gores Ted talk for more on the case for treating oil companies with extreme scepticism.
Check out the exclusions policies – do they still include oil and gas? That is a red flag for me! There are lots of other items that should be excluded, but these can be down to ethical & moral judgements. Oil and gas are not ethical judgements. If we want to live on a habitable earth, we must accelerate the transition away from oil and gas. That is a simple statement of truth.
Violation Tracker & FCA register – check your companies out for violations and then consider if you want to work with them. Violation Tracker is a fantastic tool for checking on past misconduct. If a company like HSBC or Barclays breaks the rules year after year, after year. You might conclude they are unlikely to change in the future. Check out their Violation Tracker records here. There is a US and UK version of the site, so check both!
Exit charges and Ongoing fees– Do you get charged to move your money away from their funds? This is an incredibly unethical practice and tends to go along with a lack of transparency of fees. If they cannot be honest about the fees they charge, then what else aren’t they telling you?
Impact reports – If you read a financial adviser’s impact or equivalent report that says they donate cash and recycle and ignore the damaging impact of the advice they give – next!
Financial planning
A financial plan is a model of your financial future, it takes an audit of your current circumstances – everything you earn, spend, own, and owe – and projects into the future using a set of reasoned and reasonable assumptions. A financial plan should be the foundation of good financial decisions. However, most financial plans ignore the future impacts of climate breakdown, both on your exposure to physical and investment risks from climate and on portfolio returns. There is a new financial planning methodology known as sustainable financial planning that takes climate risks and a scientifically aware approach to future assumptions into account. Demand Sustainable Financial Planning from your adviser.
Accreditation’s – B Corp – Are they a Certified B Corporation? Find out more about the B Corp movement here and search for B Corp advisers in the B Corp directory. If they are committed to sustainability, then they will be a Certified B corporation or on their journey towards accreditation.
Science-based targets – Have they signed up for Science-Based Targets Initiative (SBTi)?
Do the funds align with 1.5C world? Your adviser should be able to show you the portfolio temperature alignment of the fund/portfolio. Not all funds make this data available, which is another red flag.
What should your adviser be able to provide?
Training – What training have the advisers taken to understand the climate emergency? Financial advisers should be specialists, and therefore, to offer sustainable advice, they need to have practical experience working in this area and be chartered and independent at a minimum.
Data – The reality is that data on sustainability metrics is not always available. Where data is missing, take a precautionary stance – it likely means that they have something to hide, and you are not in a position to make an informed choice about what your money is funding and the wisdom of doing so.
Factors of Magnetic Importance – The climate emergency is not a matter of ethical debate; it’s a matter of survival that all sane people can agree needs to be solved. There are many issues that are especially important but that reasonable people can have vastly different views about. If you feel strongly about an issue that is of magnetic importance to you – then you have a right to have that considered as part of your investment strategy. Your adviser should ask you and discuss with you and research options. You are morally responsible for the effects of your investments; you should make informed decisions and be OK with the approach taken.
If you would like any help discovering what you are investing in, please contact our independent financial advisers Switchfoot Wealth.