How to make your pension ethical

Ethical investing is becoming increasingly popular, and there is now a wide range of green and ethical investment options.

It’s also possible to invest in an ethical pension, so saving for your future doesn’t mean you have to compromise on your principles.

In fact, while you may already be taking steps in your personal life to protect the planet - such as cutting down on the amount of meat you eat, trying to take trains rather than planes, and switching to a green energy tariff - making your pension more ethical could be the most effective thing you do.

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According to the campaign group Make My Money Matter - which has now closed - “greening” your pension is 21 times more effective at reducing your carbon footprint than going veggie, giving up flying or switching your energy provider.

It claimed that £88 billion of UK pensions are invested in fossil fuel companies, working out as an average of £3,000 per pension saver.

There are encouraging signs that younger people want to save for retirement in an ethical way, whether it’s a workplace pension or personal pension. According to research by digital wealth manager, Moneyfarm, 86% of Gen Z (18 – 29 year olds) and 73% of Millennials (30 – 44 year olds) say they would rather accept lower returns on their pension savings and work past the standard retirement age to make up the shortfall, than fund what they perceive to be socially or environmentally damaging industries.

Across all ages, the tobacco industry topped the list of sectors that 44% of Brits do not want their pension money invested in. This was followed by alcohol (31%), defence and ammunition (25%), fast fashion (22%) and oil and gas (21%).

However, few savers have yet to fully embrace a green pension. A 2023 study by Scottish Widows found that only 10% of pension savers have switched to a green pension, due to a lack of information and access to them.

So, how can you make your pension ethical and ensure it’s having a positive - not negative - impact on the planet?

What is an ethical pension?

An ethical pension means ensuring that the money you save for retirement is doing good, and not investing in anything that you deem to be harmful.

The question of ethics is different for everyone, of course. But many people would agree that investing in companies involved in fossil fuels, tobacco or gambling is unethical. Conversely, investing in renewable energy businesses is regarded as ethical. You might also add companies that take business ethics seriously (such as paying workers a fair wage) and have a robust environmental policy (such as recycling, preventing waste and striving to be “net zero”).

The result is you may wish to “screen out” companies that do not fit your ethical criteria, or go further and only invest in companies that are actively striving to do good.

How do I make my pension ethical?

If you are in a workplace pension, you will be limited to investing in the fund range that is on offer from your pension provider. There is likely to be an ethical fund option, which will typically filter out companies that don’t meet ESG criteria (ESG stands for environmental, social and governance).

There may be more than one ethical fund. Look out for ESG or SRI (socially responsible investment) in the fund names, as well as “ethical” or terms like clean water or renewable energy.

You can decide which fund is the right fit for you (be sure to check the fees too, and also the risk level - some ethical funds are considered to be higher risk), and whether you want to put your whole pension in the fund, split it across several ethical funds, or perhaps put a percentage into an ethical fund and the rest in mainstream funds.

If you have a DIY pension on an online investment platform, such as a self-invested personal pension (Sipp), there is likely to be a much wider range of ethical investment funds.

These may include active and passive funds, those that focus on a particular area like renewable energy, those that invest only in the UK and those that invest globally.

Look carefully at the factsheets to see exactly which companies they invest in. For example, a company making meat substitutes may be applauded for helping tackle climate change, but it could also have terrible (or non-existent) diversity and inclusion policies. It’s up to you where you draw the line in terms of what an ethical pension should invest in.

With a Sipp, you can also buy shares in companies that you believe to be ethical, as well as funds.

Can I build an ethical pension with a robo-adviser?

Yes, some robo-advisers offer the chance to opt for an entirely ethical or socially responsible portfolio, whether you’re investing via an ISA, pension or general investment account.

These include Nutmeg, Moneyfarm and Wealthify, as well as personal pension provider PensionBee.

Nutmeg offers portfolios built from exchange traded funds that lean towards companies and bond issuers that have high ESG standards.

Wealthify has five ethical plans allowing pension savers to invest in organisations committed to having a positive impact on society and the environment.

If you’re looking for a bit more hand-holding, and require a financial adviser or wealth manager to give you some expert help on building an ethical pension, the UK Sustainable Investment and Finance Association’s find an adviser tool is a good place to start.

Which are the most ethical pension providers?

If you’re looking for an ethical pension provider, a good place to start is The Good Shopping Guide’s list of the best and worst providers.

It names Aviva as the most ethical pension provider, giving it a score of 92. Interactive Investor and PensionBee come joint second, with 83. This is followed by Royal London, Wesleyan, LV= (Liverpool Victoria), NEST and Penfold.

At the other end of the spectrum, the list highlights Bestinvest, Vanguard and Nutmeg as the least ethical pension providers.

The Good Shopping Guide’s criteria includes looking at pension providers’ environmental reporting, including their impact and goals; if they are committed to reducing carbon emissions; if they have unethical lending practices; and, political donations.

Meanwhile, the Good with Money website names what it considers to be the best ethical pension funds. These include:

• NEST ethical fund
• PensionBee Impact Plan
• Penfold Sustainable Plan
• Liontrust Sustainable Future fund range
• Henderson Global Sustainable Equity fund

If you’re looking to make your Sipp ethical, investment platforms often have lists of ethical or sustainable funds that they rate highly (both for their green credentials as well as investment performance). Interactive Investor has ACE 40, which it says is the UK’s first rated list of sustainable investments.

Sipp providers may also offer ready-made ethical portfolios. For example, AJ Bell has a Responsible Screened Growth Fund.

Questions to ask when choosing an ethical pension

It can be tricky building an ethical pension. For example, you want to make sure the investments match up to your idea of ethical (and not become a victim of “green-washing”), while also ensuring you don’t pay too much in fees, and of course still get good investment performance. These are your life savings after all.

Here are some things to consider:

• Beware of “greenwashing”. Check the fund factsheet to view its objectives and top 10 holdings, to ensure it aligns with your principles. If you’re unsure, do extra research to double-check (for example, does it feature in lists of highly rated ethical funds?).
• Make sure your portfolio is diversified. Investing in renewable energy might be your number one priority, but if your nest egg is solely focused on these types of companies, you could be exposed in the event that they suddenly fall in value (for example, due to a change in government policy). Try and aim for a range of different companies, in a number of countries, across multiple asset classes, to protect yourself.
• Do you want to focus on screening out or are you committed to only investing in ethical firms? In other words, you may be happy to simply avoid fossil fuel firms and other sectors you believe to be unethical, while other pension savers may want to invest only in companies that they perceive to be doing good, whether it’s for society or the planet.
• Check the fees. This is one of the golden rules of investing, and it’s no different when it comes to ethical pensions. Always find out what the fees are (the annual charge, and any other extra fees) before you invest.
• Check the risk profile. Ethical funds can have higher risk profiles than mainstream funds. This may be due to them focusing on a niche area and a lack of diversification, or because the companies themselves are risky - perhaps they’re start-ups in a fledgling sector. Always make sure you’re happy with the risk level and that you understand your money can go down in value as well as up.
• If your pension does not offer decent ethical investment options, consider transferring to one that does. For a personal pension or Sipp, it’s fairly straightforward to move to a competitor. With a workplace pension, speak to your pension provider about your options. You could also try lobbying your employer to provide a pension scheme with better ethical investment choices.