Climate change poses a financial risk ‘too important to ignore’, according to pensions minister Guy Opperman, particularly for the working generation saving for retirement. Pension funds with a high exposure to investments in fossil fuels are likely to take a hit to their long-term growth, as countries around the globe move towards greener energy sources. Conversely, renewables are set to attract increasing levels of backing from governments, making these industries more attractive prospects.
Several major pension schemes are already anticipating this shift, and are reducing their investments in areas such as coal, oil and gas. While some are simply increasing their focus on renewables and cutting back their exposure to fossil fuels, others have pulled out their funds entirely from non-green energy companies.
At a conference of the Association of British Insurers, Opperman hailed the ‘excellent work’ already achieved by these schemes, but called for further action. He said, ‘Pension schemes can identify investment opportunities which will make market-beating returns for members as we move to a low-carbon economy.’ He also called for schemes to engage ‘much more forcefully’ with investment firms who fail to take environmental and social issues seriously. He suggested that the shift to renewables would be mutually beneficial, both for savers’ retirement funds and for the battle against climate change.
This announcement came in the wake of a similar move by Parliament’s pension fund trustees. In April the trustees pledged to take account of climate change issues in considering how MPs’ pension funds are invested. Though stopping short of an all-out boycott of fossil fuels, it was welcomed by Green Party MP Caroline Lucas, who had campaigned for the reform. Rules will also come into effect in October 2019 requiring trustees of UK pension funds to reveal how they take climate change into account.
What does this mean for SIPPs?
Although most workplace and personal pensions will likely follow this trend towards greener energy, this may not apply to people whose pension is a SIPP (self-invested personal pension plan). An estimated one million savers in the UK have a SIPP, which is a pension fund that allows the holder to choose the investments held in it. A SIPP can hold a wide range of different investments within the overall pension wrapper, such as
- Government securities
- Unit trusts
- Investment trusts
- Insurance company funds
- Traded endowment policies
- Deposit accounts with banks and building societies
- Some NS&I products
- Commercial property
For this reason, SIPPs suit people who want to take an active role in investing their pension, and are willing to spend time managing the investments in it. Anyone with a SIPP that is over-exposed to fossil fuel companies is therefore free to move their investments into renewables at the most appropriate time. However, it will be up to them to take this decision for themselves, as no-one else will prompt them to do it (unless their investments are overseen by a financial adviser). Opperman’s warning raises the prospect that a number of SIPP holders may neglect to move their investments when the big schemes do, and so leave themselves more exposed.
If you hold a SIPP and want to consider moving some of your investments towards renewables (or just away from fossil fuels) then speak to an independent financial adviser about ethical investing.
A version of this article was previously published by Unbiased on 5th June 2019