I feel very excited when I hear customers speak about how they want their money to do good in the world. They want to help the world tackle the climate crisis, or to invest in companies that avoid unethical behaviour such as modern slavery, or they want their money managers to hold companies that they invest in to high behavioural standards.
Above all else, your pension is an investment designed to grow over many years so that you can have a comfortable retirement. But in addition to this, there is a growing movement of consumers who feel strongly that their investments should also help to make the world a better place. They want to support responsible companies with their money, and there is considerable research to support the view that investing in a sustainable way can enhance returns.
We want to simplify the language that we use to talk about responsible investing
A comprehensive study found that companies that perform well on environmental, social, and governance issues often perform better financially, too. In the wake of these positive findings, a McKinsey report suggests that responsible investing is becoming an investment norm.
There are many different ways that consumers can invest responsibly but it can be difficult to navigate the market. The language used to describe responsible investing can be confusing, and there is some risk of consumers being misled. Often, we see savers asking questions like:
- What is the difference between investing ethically and investing with a sustainability focus?
- How are these different from green investments?
- What is an impact investment? Don’t all investments have an impact, whether positive or negative?
- As consumers, how can we see through greenwashing and genuinely invest in a better world and a more comfortable retirement?
We have learned from our customers that pensions professionals can help by simplifying the language that we use to talk about responsible investing. So, with that in mind, here are our definitions of approaches to responsible investing. This language is likely to evolve as responsible investing becomes the norm.
Stewardship
Money managers have a responsibility to be good stewards, by taking good care of the money that consumers entrust them with. This can involve making long-term investments that provide sustainable benefits for the economy, environment, and society. Money managers can engage with the companies that they invest in and drive better behaviour through their shareholder rights. For example, Legal & General recently voiced their concerns to Shell about the company’s carbon emissions, asking them to set measurable goals to decrease emissions. This action helped to push Shell to link their executive pay to carbon emissions, incentivising managers to meet the new goals. If Shell reduces their carbon emissions, it is not only good for the environment but could also make Shell a more sustainable company to invest in, potentially leading to better returns over the long term.
ESG integration
This is where money managers take environmental, social and governance information into consideration when making investment decisions. For example, they may consider a company’s carbon emissions or whether it pays a living wage to its staff. They might also want to take into account how diverse and representative a company’s board of directors is. There is research to suggest that companies that perform strongly on ESG factors are more likely to deliver better returns over the long term.
Ethical investment
An ethical investment plan excludes certain companies, sectors, funds, countries or business activities. For example, you may pick a tobacco-free or oil-free portfolio because you want to avoid investing in these sectors due to your ethical stance.
Religious exclusions
An investment approach that excludes certain companies, sectors, funds, countries or business activities based on a set of religious guidelines. For example, the PensionBee Shariah Plan includes a ban on speculation and gambling, in line with Islamic principles on finance. This type of plan can also be called an ‘ethical’ plan because of its exclusionary, values-based approach.
Green investing
Investing into companies, sectors, bonds, or projects that focus on creating a positive environmental outcome and tackling particular environmental problems, such as renewable energy production, recycling services and pollution control.
Sustainability focus
An investment approach that includes investments that money managers evaluate as sustainable, such as companies that earn green revenues or companies that are considered to have the prospects of long term profitability.
Socially responsible investing
An investment approach that considers social and environmental criteria when evaluating companies. Social criteria includes gender diversity within a company and supporting local communities. Environmental criteria includes prioritising energy and resource efficiency and the impact of a company’s actions on land and ecosystems.
Impact investing
An investment approach that focuses on generating a positive societal impact alongside financial returns. For example, this could mean investing in companies focused on delivering the UN’s Sustainable Development Goals, which aim to create a better future for everyone worldwide.
Which approaches do PensionBee’s plans use?
PensionBee’s sustainable investing options include the Climate Plan and the Shariah Plan - both are designed for consumers who want to invest their money in a more responsible way.
The Climate Plan invests in more than 800 publicly listed companies globally that are actively reducing their carbon emissions and leading the transition to a low-carbon economy.
While the Shariah Plan invests money in companies worldwide in accordance to Islamic principles on finance, approved by an independent Shariah council. The plan excludes certain sectors, such as alcohol, gambling, finance and arms, in line with ethical concerns of both Muslims and non-Muslims.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
