By Dale Critchley, Workplace Policy Manager, Aviva
Recycling undoubtedly helps the environment. Each plastic bottle means less oil pumped from the ground and less waste going to landfill. Less paper means fewer trees need to be felled. This is something most people understand.
What is less well understood is the link between where pension savings are invested and the impact on the environment. Analysis by Make My Money Matter, Aviva, and Route2 last year found that those with an average sized pension pot of £30,000 who moved from a traditional fund to a sustainable option could expect to save 19 tonnes of carbon a year. This was found to be is 57x more effective than switching to a vegan diet, 20x more effective than driving an electric car, and 40x more impactful than moving to a renewable energy provider .
So, why aren’t more of us spending half an hour every week sorting out our pension investments, in the same way we do our rubbish?
The first reason could be that people don’t understand the link between their pension and the environment. Many savers don’t know which funds their pension is invested into - never mind the underlying companies and their impact on the environment. The introduction of digital pension saving tools and platforms - which provide a breakdown of investment funds alongside information about the decisions made by those companies - are making a difference. These help retirement savers to see the link between where their pension is invested and the impact it might be having on the environment.
The second reason might be that it is not always easy for savers to switch into sustainable funds. As ever, necessity is the mother of invention. As more people understood the need to recycle, better systems were developed to make it easier. People used to visit the supermarket to drop their bottles in the recycling banks. Now, doorstep collections are commonplace. Providers are also on a journey towards making fund switching easier, often through technology like apps. Right now, there is often little information about which funds have green credentials and how comparable that information is. It is much like being given the different coloured recycling bins but not being told what to recycle. However, that is changing as workplace pensions, master trusts and large occupational pension schemes will begin reporting climate change data on the funds they make available to members and their policies on the management of their default fund.
Which brings us to the default fund. It could be considered the pension fund equivalent of the ‘big bin’. It is where 90% of people invest their pension contributions, without much thought as to the environmental impact. To get more people to recycle, the ‘big bin’ was replaced with smaller bins which were collected less frequently - making refuse sorting a must-do weekly task. However, there is no suggestion that default funds should be capped.
So, how can default funds play a part in environmental investing?
The sheer amount invested in the default funds of major providers and large pension schemes means they have a huge role to play in protecting the environment. This might be through environmental investment decisions, or by engaging firms within the defaults to encourage change for the benefit of the planet alongside long term returns for shareholders. Aviva has committed to achieving net zero across its defaults by 2040 and, through the Stewardship Default schemes, can invest in funds that take a range of ethical as well as environmental considerations into account.
Providers which commit to making their default funds sustainable are taking the responsibility off the retirement saver. This ‘do it for me’ approach might seem the easiest option. However, it does potentially exclude the wider gains that can be made through engagement and education. Engaging pension savers with their investment choices can help to create better understanding of environmental investing and increase demand for greener investments. This magnifies the impact beyond those enlightened pension schemes which are targeting net zero. It moves retirement savers closer to the point where investing their pension in funds with green credentials becomes as commonplace as sorting out the recycling each week.
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