Personal pension: Moneybox explains the benefits
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Many people would be horrified to find that they have unknowingly invested in arms firms, tobacco companies and fossil fuel miners. This could well be a reality, as many people’s pensions are being invested into unethical funds which are not even providing them with the best returns.
A new survey from NerdWallet examined the ethics of UK adults saving into a pension, finding nearly nine in 10 people would feel unhappy for their pension to be invested in a company with a poor environmental or social or governance record.
Meanwhile, 79 percent said that they would take issue with their pension being invested in a fund or company that is not ethical, even if it is delivering a good return. Many people seem to be in the dark regarding how their pension is invested.
According to the survey, 85 percent of pension holders do not know where their pension is invested, with over a third wanting their workplace or personal pension provider to be more transparent about the companies their funds are invested in.
As a result, 85 percent of respondents did not feel confident that their pension fund is in assets that are not harmful to society. In many cases, unethical funds are not even providing the benefit of superior returns.
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Indeed, ethical investment funds can often outperform traditional funds, with nearly 60 percent of sustainable funds beating their traditional rivals over 10 years, according to Morningstar.
An ethical pension means that one’s investments have been carefully selected to either avoid companies and investment sectors that harm society or the environment, or that go out of their way to actively improve things.
People who are interested in exploring more ethical pension investments can contact their provider to see how much control they have over what is held in their pension, and those with a workplace pension may be able to choose from a range of funds that their provider offers.
Those who have a self-invested personal pension (SIPP) should be able to choose what they hold in their pension from a vast array of funds, stocks, bonds and other assets.
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One can then look at the investments on offer and hunt out the ethical funds they would like to invest in. A potential way to do this is to look for ESG funds. These are funds where the underlying investments meet certain criteria for environmental, social and governance standards.
In terms of environmental criteria, companies are assessed in various ways, analysing their energy efficiency, waste, pollution, treatment of animals and conservation efforts.
On the social side, how a company treats its employees and suppliers is looked at. For example, its health and safety record or whether it pays a fair wage. It may also look at the impact a business has on its local community.
The governance criteria looks at how the company is run. This assesses how transparent its accounts are, whether it has ever been caught operating illegally or takes part in political lobbying.
This will give an overview of how ethical a fund is, but NerdWallet has warned that it is not fool proof. They said: “There is no industry-wide method for deciding if a firm is ethical or not, it is down to you or a fund manager to decide.
“This means you may not personally agree with what a fund manager thinks is ethical. For example, an ethical fund may invest in an energy firm that still gets a lot of its profit from fossil fuels but invests in sustainable energy.
“That may not match with your own ethical standpoint. So, it is also worth looking at the fund’s objectives and its top 10 holdings. This will give you a clearer idea of what your money could be supporting.”
Ethical investing appears to be increasing in popularity, and investment companies are keen to meet the growing demand. This means most pension providers now offer some ethical investment options. This could be some ethical funds or entire ethical pension portfolios.
People who want help deciding where to invest their pension can also find help online. Some investment platforms, for example, feature ethical fund shortlists to help people in their search, which can be accessed whether one is a customer or not.
Even people who are auto enrolled into a workplace pension may still be able to invest ethically if they wish. For instance, the workplace pension scheme Nest which is created by the Government offers an ethical pension fund.
On the benefits of switching to more ethical pensions, NerdWallet said: “Switching some, or all, of your pension into ethical investments can help society and the planet. Research by Nordea found that placing your pension money into green investments could save 2,223 tonnes of carbon over your working life.
“Your pension could be your secret weapon in the fight against climate change. By investing your pension in ethical companies, you provide them with long-term capital to help grow their business and achieve their aims.”
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