‘Don’t make my pension green’

Pension funds are moving money into ‘sustainable’ustain stocks but future returns are questionable, writes Jessica Beard

Trillions of pounds in pension funds will be shoehorned into “green” and “ethical” investments as the Government plans to employ savers’ hard- earned retirement money to “save the planet”.

However, higher fees, limited investment options and the potential for share price bubbles could hit the future value of pension pots, experts have warned.

Pension providers have started moving retirement pots without consultaulta tion. Paul Darrow, who works for or the City watchdog, the Financial Conduct onduct Authority, said he was “perturbed” bed” that his pension was being transansferred to carbon-free and “socially cially responsible” investments.

Mr Darrow, whose name me has been changed, said: “I’m m worried it has compromised the longterm growth of our pensions ns for a warm, fuzzy feeling in the managanagers’ bellies. The issues of the world cannot be solved by a pension or r two, so why is mine part of this experiment?” nt?”

He said the political world had spilt over into the financial one and he was wa “disturbed” that his pension was targeting social change rather than flat- out growth.

Pension providers have moved money ahead of forthcoming rules enforced by the Government. From October, all pension pen schemes with more than £5bn will have ha to assess what climate change means for fo their scheme and report on the climate climat risk of their investments.

Guy Opperman, Op the pensions minister, said: said “We have put climate risk at the heart h of pension decision-mak

ing. in This will benefit savers, the jobs market mark and, crucially, the planet.” However, How evidence that such moves m will benefit savers is limited. limited The top 10 most popular ethical funds fund held in personal pensions have returned less than the top 10 traditional funds over one, three and five years, data from Interactive Investor, the fund shop, showed, although this was skewed by the large returns generated by Scottish Mortgage investment trust and the Baillie Gifford American fund.

In addition, ethical funds, also known as socially responsible, “ESG” or sustainable, cost 0.3 percentage points more than traditional ones on average. This could push up how much investors pay. Results have always been mixed. Such funds returned nearly twice as much as traditional funds last year, with an average return of 10pc against 5.3pc, figures from Morningstar, a data provider, showed. Traditional funds have grown more in 2021, however.

Dzmitry Lipski of Interactive Investor said: “Funds with strong environmental and social standards can do better, but investors must scratch under the surface before getting carried away. Some, for example, might simply have avoided oil stocks when they fell last year.”

There is also a risk that so much money being forced into ESG or sustainable stocks will inflate the value of their shares. DIY investors and wealth managers added £12bn to ethical funds last year, according to the Investment Association, a trade body. John Teahan of RWC Partners, a fund manager, said this enormous flow of money had driven stock prices to extremes and future returns could be poor.

He said: “There is crowding in the stocks that score really well on sustainability.” Mr Teahan, who invests globally, said it was important to account for such metrics, not just for ethical reasons but because they could influence share prices.

Tony Burdon of Make My Money Matter, a campaign group, said 28 pension funds with £500bn in assets had committed to be “net zero” – a measure of being green. He said: “They aren’t doing it because they are ‘ woke’, they are doing it because they will lose money if they continue to invest as they are.”

A spokesman for the FCA said the watchdog believed the risks associated with climate change should be taken into account to protect pension outcomes but savers had been given alternatives to the default fund.