Think pensions are boring and complex? Well, sure, you're not wrong. But they could also be crucial to tackling climate change
Some of the most important things in the world are as boring as watching paint dry. Hollywood docu-drama The Big Short made this point in the case of the global financial crash of 2008. The film argued that Wall Street bankers got away with profiting from the collapse of the housing market by hiding behind mundane jargon. As the late novelist David Foster Wallace wrote: “It is the key to modern life. If you are immune to boredom, there is literally nothing you cannot accomplish.”
Which is all a meandering way of saying that it's time to talk about pension funds. Let’s be honest, they don’t exactly get the heart pumping, and perhaps for this reason they are largely absent from the conversation around the climate emergency. When polar bears are eating each other and Australian forests are engulfed in terrifying infernos, getting a financial adviser on the line to discuss monthly contributions may not be your first instinct. But according to David Macdonald, that could be about to change.
Moving your pension cash to sustainable funds could be 27 times more effective at lowering your carbon footprint than other changes in lifestyle
Macdonald is founder of The Path, a new financial advice firm devoted to providing savers with pension fund portfolios that help save the planet. That might not sound very radical, but look at the figures. According to the financial group Nordea, moving your pension cash to sustainable funds could be 27 times more effective at lowering your carbon footprint than other changes in lifestyle such as reducing the amount of flights you take or your diet.
The Path works with external analysts who have totted up the numbers. A typical balanced portfolio from the firm—in other words a pension pot where they invest your money in various different places—has some pretty striking impacts. According to this analysis, an investment of £100,000 saves 20 tonnes of CO2, equivalent to the emissions of four cars, as well as generating 17MWh of renewable energy, equivalent to the energy use of five households. It also recycles 1.4 tonnes of waste, equivalent to one household’s typical waste. “Everything else that you're doing is a drop in the ocean compared to how your money is behaving,” Macdonald claims, though it’s worth noting that the customers he works with have a substantial amount of cash to start with.
Still, The Path is literally the only financial advice firm in the UK dedicated to helping this cause, he says. There are other firms which have eco-options as an adjunct to their business—and increasing amounts of regulation are coming in about Environmental Social and Governance metrics—but according to Macdonald, no other advisory firm has made environmental good their sole focus.
There’s relatively little fanfare about that in Britain, despite the fact that environmental sustainability has become an urgent priority for the UK public as a whole. “People just don't think about it,” Macdonald suggests. “It's not through any fault of their own; it's because it's complex and it's boring. Maybe it's never really been pointed out. It took me a long time to figure it out and I’ve been involved in the financial world for a very long time.”
He has. Macdonald has been a financial adviser throughout a career spanning three decades, but The Path wasn’t originally part of the plan. He was on the cusp of retiring when he had something of an eco-awakening. “I was seeing this divestment movement for the very biggest pension funds and philanthropy [to invest sustainably] as being something which mega consumers if you will can have influence in, but there was nothing in the market for the sort of 'mass affluent' if you like,” Macdonald says.
A quick note about the term ‘mass affluent’. For some, it might sound like an oxymoron in today’s economy (amirite!?) but the demographic to which Macdonald is referring to is essentially people with enough wealth built up to justify paying for a personal financial adviser to help them manage it. These people tend to have personal pensions rather than, say, a workplace pension organised through their employer. But that isn’t to say people on workplace pensions with major providers such as Nest or Aviva don’t have the option to look into how their money is being invested too. Macdonald points out both of these examples have “a good range”.
As Laura Stewart-Smith, Workplace Pensions Manager at Aviva, confirms to Change Incorporated: “When someone joins a workplace pension scheme they are put into a default fund. Aviva’s default, My Future Focus, already considers ESG (environmental, social and governance) factors which means the companies that receive investment have been assessed for how they are affected by those factors.
We've got to make this the new normal. Why wouldn't you try and make your money behave better?
“Most members of a modern workplace pension scheme will also have access to a range of funds that they can select from, including ethical funds. What amounts to ‘ethical’ is very personal so it may be necessary for the individual to research the funds to make sure they are in-line with their own beliefs. Aviva also offers an ethical default, Stewardship, which is available to schemes and members. All investing comes with a level of risk, so we recommend anyone looking to change their pension funds should take regulated financial advice.”
For Macdonald’s part, he’s convinced there is a huge amount of good that can be done from his customers using their money for the good of the planet. He has a simple message: do you want your cash to influence the direction of travel for capitalism and corporate behaviour? Because it can.
The cumulative impact is convincing: “Get 10 people with 100 grand together, you've got a million quid,” he says. “Get a thousand of them together, you've got a billion quid. Coming together, the mass affluent can have a voice in a way maybe we hadn't appreciated that we can.”
Is there a basic reason more companies aren’t springing up doing the same thing as The Path, and does it have to do with environmentally minded investing just being less lucrative than the alternative? Macdonald thinks not. “I believe that if you're investing in emerging technologies where people are going to invest their money such as Beyond Meat or Tesla, which are two shares which have trebled in value in the last six months, and you're avoiding the dying industries [then it’ll be economically productive]. Who'd want to be invested in the stagecoach business as the trains are just about to arrive as a new disruptive technology?”
For Macdonald, good business and technological advances are the path to better ethics and profit; the two are not mutually exclusive.
So what does he advise if you want to get thinking about this now? “Think about who you're banking with,” he says. “Triados don't fund any companies that are involved in a thing which is unsustainable for people or planet.
“And look at where your invested money is—your pension and your ISA, for example. We've got to make this the new normal. It's not like some cranky, bunny hugger thing. It's: 'why wouldn't you—everything else being equal—try and make your money behave better?'”