How to cut carbon emissions with your pension

Your pension isn’t just about the future; it’s a tool for small businesses to champion sustainability and make a lasting impact on the planet

CREDIT: This is an edited version of an article that originally appeared on ICAEW

In the quest for small businesses to boost their sustainability efforts and combat climate change, many look to their lifestyle changes to reduce their carbon footprint.  However, there’s a potent yet often overlooked weapon for battling climate change – scrutinizing your pension investments.

The UK pensions revolution

The UK’s pensions industry, a colossal £3 trillion powerhouse, sees £20 billion flowing into pensions every year from businesses and their employees. Make My Money Matter (MMMM), a transformative organization established in 2015, is leading the charge to reshape the financial landscape, with a focus on aligning people and the planet with profit.

Corporate pensions and climate change

MMMM’s latest report, “FTSE100 Pensions Emissions,” underscores the powerful connection between corporate pensions and climate change. This report reveals a shocking truth: FTSE100 company pensions are linked to an estimated 131 million tonnes of carbon emissions. That’s approximately a third of the UK’s annual carbon emissions. To put this in perspective, pensions are unwittingly financing carbon emissions seven times greater than the emissions produced by these same businesses.

Awakening to the reality

Surprisingly, less than 10% of FTSE100 companies include pensions in their publicly available sustainability plans. Moreover, a mere 45% of UK CEOs and managing directors recognize the critical link between their company pensions and climate change. It’s high time for a change.

The call for green pensions

MMMM is on a mission to encourage all FTSE100 companies to adopt “green” pensions and sign up for the Green Pensions Charter. Notable signatories already include Tesco, Riverford, Travis Perkins, EY, and IKEA.

The ESG revolution

The past five years have witnessed a surge in investment managers prioritizing sustainability and creating Environmental, Social and Governance (ESG)-driven investment products. By 2025, ESG-labelled assets are expected to represent about a third of all assets under management, primarily driven by institutional investors and pension funds.

Individual and collective action

The pace of transitioning pension funds to embrace sustainable investment practices varies. While some pension funds have shown commitment, others are still in the early stages. Collective effort and regulatory support are essential to ensure pension funds adapt swiftly to the green agenda.

Sorting the sustainable from the superficial

The growing trend of ESG investments has also given rise to “greenwashing” – when products falsely claim to be more sustainable than they are. To curb this practice, the Financial Conduct Authority (FCA) is poised to introduce new rules on labelling to restrict the use of terms like “ESG,” “green,” or “sustainable.”

Navigating the ethical investment maze

For dealers, deciphering whether a pension fund is truly ethical remains a daunting task. Many funds claim to be ESG-oriented, but scrutinizing their composition requires diligent research. Simply having “ESG” on the label is not a guarantee of authenticity.

Proving the ethical advantage

The resistance to transformation in the pension funds sector is partly due to a reluctance to change and influential lobby groups. The majority of people, especially younger generations, desire their pensions to make a positive impact. Still, change is slow to materialize, primarily due to concerns about lower returns from ethical investments. However, research suggests that ethical investments often outperform traditional ones.

A pioneering shift

If we genuinely aspire to have a positive impact on the world, directing the annual £20 billion investment into UK pensions towards ethical funds is a pivotal step. It’s not just about returns; it’s a conscious decision to channel our money into a brighter, more sustainable future.

In the grand scheme of things, your pension could be a powerful weapon against climate change. Small businesses can lead the charge by taking a closer look at their investments and demanding greener pension options. It’s time to put your money where your values are.