Collectively, UK pension pots are worth over £2.6 trillion. This is a huge amount of money, which, if invested in green technologies and eco-friendly businesses, could be a powerful weapon to help us reach Net Zero. But in reality, many pension funds invest in activities which are harmful to the planet, such as fossil fuel extraction, deforestation, and pollution.
In recent years, campaigns such as Make My Money Matter have worked to raise awareness of the potentially negative impacts of pension fund investments, and galvanise the pension industry to do better. But while promising changes have happened (such as 63 pension providers signing up to Make My Money Matter’s Green Pensions Charter), we are still a long way from a truly green pensions system. Although 68% of pension-holders want their savings to help fight climate change, a recent report by the investment research firm MorningStar found that just £1 in £10 is invested sustainably.
Greening our pensions requires behaviour change. But to achieve transformative change, we need to act both downstream and upstream. Downstream, at the individual level, we need individual pension-holders to switch to greener funds. But upstream, pension fund managers must develop high-quality green pension investment options, based on quality environmental disclosure from individual businesses.
In our latest report, we outline seven ideas, grounded in behavioural science, to achieve a greener pensions system and help to avert the climate crisis. Downstream, we aim to support individual pension-holders to take up greener pension options, and upstream, we address the pensions market itself to improve the availability and integrity of green pensions.
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BIT’s seven behaviourally-informed ideas to green pensions
- Label pension funds to communicate environmental performance. The environmental impact of individual pension funds presented to pension-holders in a consistent and clear format. Research by BIT suggests that one-to-five star ratings would be most effective.
- Provide regular feedback on the environmental performance of pension pots. Pension-holders should be given regular updates on their pension’s environmental impact, with prompts to switch to a greener fund if relevant. This information should be communicated at timely moments (e.g. during their annual benefits windows or when they receive their annual statement).
- Make it easy to switch old pension pots to a greener fund. The government is currently developing a ‘Pensions Dashboard’ where individuals can see the value and location of all of their pension pots. This should be augmented with (1) information about each pot’s environmental impact; and (2) functionality to easily switch to more sustainable funds.
- Force a periodic active choice. Pension holders should be asked periodically to make an active choice about their pension fund selection. These choices should be presented during moments of change (e.g. at the point of receiving a pay rise, or when making a mortgage application).
- Make green pensions the default. Workplace pension providers should be mandated to select a sustainable option as the default pension fund.
- Provide clear and timely information on businesses’ environmental impacts: Difficulties understanding the environmental impact of different investment opportunities is a key barrier to greener investing. Professional investors should be given standardised, clear, and timely information about funds’ environmental impact so that they can easily take it into account when making investment decisions.
- Highlight the short- and medium-term disclosure benefits to business leaders. Business leaders are often motivated by short-term, quarterly, and financial outcomes, rather than longer-term environmental wins. To make disclosure more attractive, business leaders should be presented with nearer-term incentives to pursue disclosure schemes. For example, individual business leaders could be given prizes or official accreditation for successfully implementing a disclosure system.
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If you are a business which provides a workplace pension, pension provider or a policy-maker and would be interested in helping us to develop and test these ideas, please do get in touch at kristina.londakova@bi.team.
