A pension fund that invests in environmentally responsible companies can offer reassurance to employers and help engage staff, writes Diandra Soobiah – head of responsible investment at Nest, the government’s workplace pension scheme
At first glance, climate change and saving for a pension may seem to be two entirely different issues. However, scratch the surface and it quickly becomes clear that the two are indeed linked.
Companies that fail to make provisions for moving to a low carbon economy are not likely to perform well over the long-term and as such will not be attractive for pension investors.
Government regulation on environmental matters across most markets is starting to have an impact on the way companies operate and do business. Smart investors are now incorporating this trend into their decisions.
To deliver the best possible retirement outcomes to savers, it’s important for pension investors to consider both the implications of companies’ practices as well as their products.
While their products might seek to do good and provide a solution to a worldwide problem, a company’s behaviour could still undermine and negatively impact their bottom line, which is not an outcome any investor wants.
Climate aware investments
Across the pension industry, over 90 per cent of members stay in the first fund they’re placed into – commonly known as the default fund.
That’s why, when designing our Retirement Date Funds at Nest, we ensured that our members were given access to a sophisticated investment strategy.
Part of this strategy is our Climate Aware Fund which is a key building block that makes up our default funds. Our Climate Aware Fund aims to manage climate risks while delivering our return objectives for our members.
It does this by investing more in green technology and renewable energy companies and less in organisations that contribute most to climate change.
The fund applies a negative ’tilt’ to reduce investment in businesses that are heavy carbon emitters or who are simply not making the changes needed.
We don’t exclude any companies, instead we try to positively influence them by engaging with them and using our voting rights to encourage change.
How does this impact me and my staff?
Nest is a workplace pension, set up by government to ensure every employer has access to a high-quality, low cost pension scheme.
We now have over 7 million members with over 700,000 employers. Our default funds are tailored to an individual’s retirement date – so a member due to retire in 2060 would be placed into the 2060 retirement dated fund.
The Climate Aware Fund is included as a key building block of the overall investment portfolio for members in their default fund. They therefore do not have to make an active choice to invest in it.
As such, by providing your employees with a Nest pension you can be confident that you’re offering them an innovative and market leading scheme.
This is regardless of whether they choose to regularly engage with it or, like most pension savers, remain in the default fund. Our five-year figures show that Nest is delivering some of the best risk related returns of any default fund in the UK pensions market.
Making it relevant
We think that linking pension fund investment to a real and pertinent issue such as climate change could help engage people with their pension saving.
Research into our membership has shown that 73 per cent of savers want their pensions invested responsibly.
It also revealed that younger generations are particularly interested in finding out how their pension investments are creating positive change, as well as delivering a sustainable return over the long term.