Pensions aren’t the most colourful topic but in recent years there has been much discourse about green and brown. Many climate scientists say the climate crisis is already upon us, and this has spurred more people than ever to consider how their choices – including their pensions – affect the environment.
Greening your pension is one of the most impactful steps a person can take, with one estimate suggesting that it is 21 times more effective than relinquishing flying, turning vegetarian and changing energy provider combined. Yet striking the balance between ethical aspirations and financial implications can be a tricky one, as the desire to be environmentally conscious can involve some complex decisions.
Chris Comerford, pensions partner in A&L Goodbody, says pension savers are generally keen to invest in green investment options so long as doing so will not impact on them financially.
“There are exceptions – some savers will make investment decisions based on the green credentials of a fund, and financial implications will be a secondary consideration, but most will make those decisions based on the expected returns and costs of investing such as fees,” he says. “If a green option is available that doesn’t have an adverse financial impact or a material reduction in expected returns, pension savers will prefer the green option over a less green alternative.”
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Yet Comerford says pensions and investments are complex beasts. Deciding to green your pension is one thing, but just how green it is can be difficult to ascertain. “While there is demand for green pension investment options and perhaps even a preference for green options that make financial sense, this is tempered by a lack of real understanding of what makes a green investment option ‘green’,” he says. This, he says, is complicated further by greenwashing concerns and the complexity around rating and comparing the green or ESG credentials of different investment options.
Comerford believes that more education and heightened transparency is required before savers feel comfortable enough to select a truly green investment option.
“The providers, asset managers, financial advisers and brokers have an important role to play here but so do other stakeholders including employers, regulators and the State,” he says. “For example, pension schemes are currently required to offer members a default investment strategy option which meets certain criteria. Legislating to require schemes to offer at least one green investment option in addition which meets minimum green criteria and is marketed as such should remove some of the barriers to savers shifting some or all of their savings into green investments.” He notes, however, that the benefits of doing this would need to be balanced with any additional costs and risks that might flow to the pension plan and its members.
Most experts believe that, over the long term, green investments will match or come close to matching traditional pension fund performance. “This makes sense where the market prices in a premium for the green credentials of the underlying stocks or assets, which over the long term it would be expected to do,” Comerford says. However, he notes that concerns around greenwashing and objective ESG (environmental, social, governance) data may inhibit returns or provide for inconsistent returns over a shorter time period.
For those concerned their pension may be more brown than green, Comerford is reassuring, saying most multi-asset investment options available to Irish pension savers encompass some level of green credentials.
“They may not be marketed as green investments, but investment managers incorporate ESG, or environmental, social and governance factors, into their investment decision-making as a matter of course,” he says.
Comerford does admit it might not always be easy to fully align pension savings with the pension saver’s own particular environmental and social values and priorities. “Given the complexity around some of the options and the fine print it would always be advisable to speak directly to your pension provider or to a financial adviser to ensure that you fully understand how your contributions will be invested and what other options may be available.”