As companies increasingly demand that their workplace pension providers offer more sustainable investments, the pension industry has an opportunity to drive faster decarbonisation by investing in businesses that are serious about cutting their carbon emissions.
Scheme members are also increasingly willing to accept slightly lower returns if their investments are more ESG-friendly. A Smart Pension survey in 2021 found that 39% of respondents said they would be willing to earn less of a return on their pension savings in order to create a better future world. This year, that number has risen to 42%.
We believe that investing in companies that are doing good things for people and the planet will actually generate a better investment return. We think it’s a slightly moot point anyway because we don’t think you have to sacrifice returns for doing the right thing.
While some pension schemes are attempting to meet their net zero targets by buying carbon offsets, this doesn’t actually help reduce emissions.
In and of itself, offsetting doesn’t actually decarbonise the economy. If you’re claiming to be achieving net zero by using offsets, that’s a little bit disingenuous – it’s just kicking the can down the road. And, if you take into account the cost of buying offsets, compared to the potential for better returns by investing in decarbonising companies, we believe it’s a better approach financially, too.
A more authentic approach to sustainable investing is to focus on companies or projects that are actively decarbonising the economy. That means investing in assets that are already contributing towards a low carbon economy, such as renewable energy providers. It also means engaging with companies that are striving to improve their green credentials by having a clear carbon reduction plan, and then funding their transition. Smart Pension is making impact allocations, such as investing in biodiversity projects and green bonds, as well as new carbon transition strategies.
There are a number of strategies that we’ve identified we’re confident will lead to decarbonisation.
While pension providers have traditionally allowed scheme members to select the level of risk they are willing to take. For ESG funds it makes more sense to adopt a belief-based system that allows members to choose their investments based on how green they want to be.
There’s no one size fits all with sustainable investing. One person might be more interested in excluding tobacco from their investments, while someone else might have a stronger preference for leaving fossil fuels out of their portfolio. With our digital platform, we’re able to move away from a very bland risk-rated approach to one that is beliefs-oriented and gives members more options.
This approach means scheme members can choose between different shades of green-flavoured funds. For instance, some might want to invest in a darker shade of green that has a more immediate ESG impact but is therefore slightly more expensive. Others might prefer to invest in a lighter shade of green that has a slower impact trajectory but is therefore slightly cheaper.
Part of the reason why sustainable investments tend to cost more from a fee perspective compared to traditional passive or index fund investments is that more active management is often involved, with some projects having more venture capital-like characteristics.
At Smart Pension, we reduce the costs associated with sustainable investing through our technology platform Keystone. By automating administrative processes, we can lower our fees and ensure more of members’ contributions goes into investments.
It's all about embracing technology and really understanding what our customers want. We're investing in a way that is going to generate good returns but will also ultimately benefit society more broadly, as well as the planet.
Read the full 'Sustainable Investing' report featured in The Sunday Times, by Raconteur.
Launched in 2015, Smart Pension exceeds £4bn in assets under management (AUM) and now serves over one million members and more than 70,000 employers. It is powered by Keystone, Smart’s global savings and investments technology platform.
Aquiline Capital Partners, Barclays, Chrysalis Investments, DWS Group, Fidelity International Strategic Ventures, J.P. Morgan, Legal & General Investment Management, Link Group and Natixis Investment Managers are all investors in Smart Pension.