Bonus episode: Socially responsible investing tips

The Pension Confident Podcast

by , PensionBee Content

at PensionBee Content

13 Mar 2024 /  

Philippa Lamb smiling with podcast logo

The following is a transcript of a bonus episode of The Pension Confident Podcast - socially responsible tips. You can listen to this bonus episode or scroll on to read the conversation.

PHILIPPA: Hello and welcome to another bonus episode of The Pension Confident Podcast. This time we’re taking a close look at responsible investments. You might be surprised to know there’s a big link between your pension and the planet. Small steps you take today could have a lasting impact. So, listen up to find out how your pension can be used as a powerful tool for good.

Before we get into it, remember, anything discussed on the podcast shouldn’t be regarded as financial or legal advice, and when investing your capital is at risk.

Now, socially responsible investing used to be a bit niche. Not any more - now global interest is surging. So what is it, and how does it work? Here’s Clare Reilly, she’s PensionBee’s Chief Engagement Officer, talking about this in episode one.

CLARE: Well, sustainable investing is about investing in progressive companies that are trying to take into account some, or all, of the problems this world’s facing. That’s companies that are going to help with the transition to a low-carbon economy, or it’s companies that are really embedded in the communities that they’re operating in, or values driven companies with a clear social purpose. So for some, that’s the right thing to do, but for more and more people, it’s because there’s this huge body of evidence that says, long-term, those companies are going to be more financially successful. What was that David Attenborough quote recently about how illogical it is for your pension to kind of seek short-term profit from companies that are simultaneously destroying the world you plan to retire into?

PHILIPPA: And there’s one acronym you might have come across already; ESG. Here’s Clare’s quick recap on [what an ESG rating is], and what it actually means if you’re looking at investing.

CLARE: Every company can have something called an ‘ESG rating‘. So, ‘ESG’ stands for ‘Environmental, Social and Governance’. And really, this is a measure of how well a company is operating. So, for an ‘E’ or environmental measure, you’d look at - does a company have a public commitment to net zero? Does the company have carbon emissions targets? Does the company have a waste reduction policy? That would be an ‘E’ score. An ‘S’ score is about workforce - do you have a gender pay gap or an ethnicity pay gap? Do you pay a living wage? Are your employees happy? Do you have a safe workplace? They’d be your ‘S’ scores. And then your ‘G’ scores are your governance scores. So, that’s the diversity of the [company’s] board, do you have protected voting rights and shareholder rights? Do you have the same Chair and CEO (Chief Executive Officer)? These factors are making sure that your company is properly run.

PHILIPPA: OK, so this is about how organisations operate. Whereas impact investing is about their intentions, the difference they’re making in the world. Is that right?

CLARE: Yes, that’s exactly right. And the important thing to note is that you can have a very high ESG score, but also have a very negative impact on society. So, a tobacco company can have a very high ESG score, or a mining company can have a high ESG score because they score well on those things. But ultimately, again, can have a negative impact on society, on [the] planet and people.

PHILIPPA: A lot of different investment styles are now clustering under the ‘responsible investing’ umbrella. In episode 16, I asked Clare about one you might have heard of; impact investing.

PHILIPPA: Clare, shall we kick off with a definition of impact investing? What exactly is it? What is the goal?

CLARE: What is the goal? So impact investing is investing with the aim of generating positive and measurable environmental and social outcomes, while at the same time generating financial returns. So really it’s about positive outcomes-based investing. It’s looking at companies, looking at the impact that they have on the world around them, on people and on [the] planet, and making a decision about whether or not you want to invest in those companies based on that information. It’s a little bit different to the type of investing that you’ll probably be doing through the workplace, for example. So, if you’re in a workplace pension, chances are you’re in the default fund. So that plan caters for the widest mix of people possible. It’ll have a range of different things in there, maybe adjusted for your age, and it’ll invest in global equities (company shares). It’ll invest in all of the world’s biggest publicly-listed companies. But what that doesn’t tell you is the negative impact that that oil producer or that company has had on the world around them. It’s just looking at their short-term profit. So, it’s a very different type of investing.

PHILIPPA: Of course, responsible investing can be about more than environmental issues. It can be based on religious principles too. In episode six, Ibrahim Khan Co-Founder of Islamic Finance Guru, joined us on the podcast and he explained one example of that; Shariah investing.

IBRAHIM: So Shariah investing is really just looking at the two words. It’s Shariah-compliant, so it’s compliant with Islamic law. What that actually means is you look at the Quran and the sayings of the Prophet Muhammad, peace be upon him. And then investing, is just investing in line with those rules and regulations. So in a nutshell, that looks like not investing in things that generate interest, or gambling, or investing in alcohol or pork. These will be like the really obvious ones, and then there’s some others that are under the surface and a bit more technical.

PHILIPPA: OK. So Shariah-compliant investments, they have different criteria, completely different criteria from, say, fossil fuel free investments, but you’d still class them as socially responsible?

IBRAHIM: I think there’s a really strong overlap between the two. But there’s still a difference.

PHILIPPA: So yeah, so the crossover is, I mean, it’s directly excluding certain sorts of companies, and also its business practices as well, isn’t it?

IBRAHIM: Yeah, absolutely. So if, you know, a company is involved in, let’s say, the war in supporting Russia in some way, shape or form. That could be a clear question mark.

PHILIPPA: So there’s judgments involved?

IBRAHIM: 100%.

PHILIPPA: Do you want to fill us in on some of the terminology?

IBRAHIM: Yeah, for sure. So ‘Riba’ is interest essentially, and that’s not allowed. And then you’ve got ‘Gharar’, which is uncertainty or doubt and that would rule out certain areas such as, as I said, derivatives or lots of types of insurance wouldn’t be allowed. And then you’ve got ‘Maysir’, which is gambling. So you know, Bet365 can’t be in a Shariah-compliant portfolio. And then you’ve got a few other technical things as well.

PHILIPPA: OK. So they’ll be described as ‘haram’?

IBRAHIM: They’ll be haram.

PHILIPPA: Prohibited.

IBRAHIM: That’s the one.

PHILIPPA: Now you might be listening to this and thinking, ‘responsible investing - it’s all well and good, but what about investment returns? Is there a trade-off here?’. I asked PensionBee’s VP Product; Martin Parzonka, about just that in episode six.

PHILIPPA: Martin, what about investment returns? Because, there’s big money to be made from haram industries, like tobacco, isn’t there, realistically? So does that mean Shariah returns are bound to be lower than conventional investments?

MARTIN: Like all investments, it’s a bit of a cop-out answer, but ‘it depends’. There can be money to be made with haram investments. I’m using tobacco as an example. I think the reality is that whilst those companies might pivot into something that’s not tobacco, necessarily, the general community will look at those companies and say, ‘you know what? I know what you’re all about, and I’m just not going to invest in you’. And so, you know, those companies by virtue of that, their market cap [short for market capitalisation, meaning the value of all their shares] will decrease.

PHILIPPA: So your argument is they’re not actually sustainable?

MARTIN: I don’t think they are. That’s my personal view. And I don’t think they’re sustainable and I think money will go elsewhere, to more sustainable investments. The other comment about returns, though. It’s fair to say that the Shariah investments, certainly the ones that we have at PensionBee, it’s 100% equity. Which means stocks in companies, therefore, it’s subject to market turmoil. And that fund doesn’t invest in things like bonds, because of the Riba component, right? It can’t earn interest. So there’s a consequence that bonds are usually used to offset the volatility of stocks, because it can’t invest in bonds, it’s going to, as a consequence, have a volatile risk-reward profile in Shariah-compliant investments, certainly the one we have.

PHILIPPA: So you’d say this is [over the] long term, as you said, and that’s maybe the point to really stress. We’re not talking about immediate wins here.

MARTIN: No, not at all.

PHILIPPA: So who might want to put their money into these Shariah plans? Are they only suitable for Muslim investors?

IBRAHIM: The majority or a very significant number of people who use the Nest Shariah workplace pension, were actually non-Muslims, just because they were attracted to the tech stocks aspect of it and the high growth.

MARTIN: Shariah Islamic finance is based on religious principles. But so what? Right you can be non-religious and still be interested [in], like you say, tech stocks, right? People that want to take on that risk, high growth kind of fund at the start of their career - they look at it and go ‘100% equity? Cool, that’s for me, why not be invested in this?’. And then also, you know, that it’s got that sort of moral aspect of excluding ‘bad’ industries. And so, it sort of ticks a couple of boxes for a lot of people.


PHILIPPA: Interesting thought that, isn’t it? And if hearing that’s making you wonder where your pension is actually invested right now, you’re not alone. So let’s hear from David Hayman from Make My Money Matter - he joined us in episode 16 and he talked about the power of knowing where your hard-earned money is invested.

DAVID: I think what we’ve seen over recent years is a real increase in individuals thinking about the impact they’re having on the world around them. From the food they eat, to the clothes they wear, to how we travel, to the brands we associate with, to the organisations we work for. There’s been a real uptick in engagement on our individual impact on the world. But what we’ve also seen is a significant disconnect between how we think about our money as a vehicle for impact. Most people think about the money in their pensions as being sat in a bank vault somewhere in Switzerland, slowly accruing interest. Hopefully in 30 years’ time when they retire, they’ll have some money to live a nice life on.

But the reality is - that money is invested all around us for better and for worse in the companies which are shaping the world. So you have vegans invested in factory farming, you have doctors who are invested in tobacco and you have climate campaigners who, through no fault of their own, find themselves invested in the very companies they’re campaigning against. So our campaign is all about raising awareness, helping people understand the links between their money and the world around them, and empowering them with more voice and with more choice to say where they want that money to go.

PHILIPPA: We all understand about consumer power, but this is a huge extension of it?

DAVID: Exactly. We see this as the next frontier of consumer power. There’s £3 trillion invested in UK pensions. That isn’t money which belongs to financial institutions. It’s not private capital. That’s money which belongs to each and every one of us. Our pension pots are, for most people, the largest pots of savings that we have. These are huge amounts of money and we can put that to work in businesses which are gonna build a better future for us. We can, not only make our money work better for us today, but over the next decades it can be building that better world for us to actually retire into.

PHILIPPA: So if you want to find out where your pension is invested, here’s Clare telling us exactly how to do just that.

PHILIPPA: If people are listening to this and they’re thinking, ‘yeah, I’m interested’, what are their next steps here? Because investments aren’t always as transparent as they should be. We’ve talked about this, people don’t know, as David said, where their money is invested. How can they find out, Clare, where their pension money is invested?

CLARE: Well, the first thing to do is have a look on the fund fact sheet. Log in to your portal or google the name of the pension fund you’re invested in. Try and find the fact sheet, see if you can look at the top 10 companies that the pension is invested in. If it’s not on the fact sheet, you’ll probably be able to find it on Google. Look at those and ask yourself, ‘is that what I expected? Are those the companies that I want to be giving my money to?’.

PHILIPPA: Not all providers make it that easy to switch, do they?

CLARE: No they don’t. They don’t. PensionBee has been calling for many years for a pension switch guarantee to give people the ability to pick up their money and move it around the system. The way that you can do with current accounts or utilities. You have a right to move that money to another regulated provider. So keep trying, move the money and move it again if you find that the provider that you’ve moved to isn’t offering you the choice or the type of investments that you want.

PHILIPPA: If you’re feeling intrigued about using your pension to drive change, here’s David again with a couple of things you could do to get started.

DAVID: One is an individual finding or switching a pension which they feel works better for them. And that’s absolutely an option people should take if they wish to. They should be able to see where their money is, see the alternatives and make a positive, proactive decision about that. That should be easy and straightforward. There’s also another option for people and that’s something that our campaign encourages. It’s for those who don’t feel confident in switching or who aren’t able to switch, to lobby for change to the pension funds they currently have. And that can have a really significant impact in and of itself.

So, we’re not a switching campaign actually, we’re not trying to move everyone’s money one by one, as valuable as that is. We’re actually trying to impact the ‘macro’ [or large-scale] default investment decisions of those big pension funds where the trillions are invested. And get them to invest the default fund more sustainably, more for impact. And by doing that, we think you can achieve real scale change. So, what we encourage people to do, who don’t wanna switch, is to contact their pension fund and ask them what actions they’re taking on net zero, on deforestation, on investing for impact, on stewardship and on speaking out. We’ve got a helpful template on our website which lets people do that with a click of a button. And we feel like that can drive real change, showing the pensions industry that their customers really expect more and better.

PHILIPPA: So there you have it, a deepdive into what it really means to invest responsibly and how you can get involved if you’d like to.

You can listen back to all of those episodes in full wherever you get your podcasts. The Pension Confident Podcast is available on YouTube and the PensionBee app too! You can subscribe to the series right now and keep an eye on our feed - our next episode will be live at the end of this month.

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.

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