Investing for your future and your retirement via a pension is one of the most powerful things you can do. That’s a big statement but the fact that it is likely to be your pension, more than anything else, which supports you financially once you finish working, means it will shape your wellbeing for decades. The investment decisions you make for your pension as a younger person should reflect that importance.
Typically, these decisions will revolve around core pensions questions such as ‘how much risk can I afford to take?’, ‘when do I want to retire?’ and ‘how much money will I need to live comfortably?’. However, through socially responsible investing (SRI), investors are now able to address another key question: ‘what kind of world do I want to live in when I retire?’
It’s very easy to see this question as a gesture rather than a guarantee that you’ll be able to change the world. But by choosing SRI for your pension you can give your money the best chance of making significant environmental and social changes in the world. This is because investing for retirement is about maximising the time you have to benefit from investment returns and compound interest. And, there’s reason to believe that rather than a performance trade off, SRI can actually lead to greater returns in the long run. As shown by the chart below, SRI portfolios have notably outperformed portfolios of global equities over the last ten years. Most importantly though, as your investment grows, so does the impact it has.
Source: MSCI, Nutmeg
Over time that can have real impact. One measure for SRI is how much it reduces the amount of carbon entering the atmosphere by investing in companies with sustainability goals rather than polluting companies who do not have such concerns. The infographic below shows the power of this carbon deficit based on a £20,000 annual SRI investment. Imagine the impact you could have by investing into an SRI pension over 40 years…
Source: MSCI, Nutmeg
It is a mistake to simplify SRI as a periphery consideration for those looking to do good or to take on extra risk. It is legitimate and clever investing which, as we’ve seen in the graph above, can bring market beating returns. We also wrote earlier in the year of a number of studies, notably from State Street and academics at the University of Minnesota, Harvard Business School and North Western university, showing that ESG improves returns. And for many investors today, SRI is seen as the best way to secure long-term returns.
But the argument in favour of socially responsible investing goes further. Out of all the investment options it is arguably the one that makes the most sense for the future. While SRI makes it harder for manufacturers of weapons or tobacco products to develop their businesses by discouraging investment in these sectors, it also promotes progressive change by putting a premium on developing the new technologies and economies which will define the next generation of markets. It is through the business approach enshrined by SRI that hydrocarbon giants such as BP can legitimately aim to be carbon neutral by 2050.
SRI means your pension is invested only in scrutinised companies that are well positioned when it comes to environmental, social and governance (ESG) tenets.
A notable example is Larry Fink, CEO of the world’s largest asset manager BlackRock, who last year told his investors the firm would only seek to invest in companies which met a strict ESG criteria. Elsewhere, ESG concerns have seen authorities such as the London Bullion Market Association (LBMA) set best practice standards that seek to transform industries such as gold mining: aiming to make commodities responsibly sourced, sustainable and holding producers and miners accountable for environmental and social violations.
The individual matters too. For the past two years Nutmeg has set out its own ESG criteria to let our clients know how their portfolio scores against specific ESG metrics, empowering them to make informed and effective decisions. The criteria and research is undertaken with socially responsible research leader MSCI and is part of the pledge we made in signing the UN’s Principles of Responsible Investment.
Elsewhere, other campaigns such as Make My Money Matter have championed how private investors can make a difference through their pension allocations. The recognition of that impact can be seen at the highest level: The Department for Works & Pensions (DWP) has asked all larger pension funds to disclose their ESG holdings by 2022 in a bid to encourage further SRI.
This kind of disclosure is indicative of the power of SRI. That it has been broadly cheered by the industry shows not only that investors at all levels welcome the change to invest money responsibly but that they understand that SRI can be an excellent path to seeing compounding returns overtime, something especially valuable to pension investing.
Finally, it is worth noting that the companies of the future will be those who use resources responsibly and who don’t fall foul of ESG violation regulations. Those companies benefitting now from SRI are in good stead to last well into the future, meaning that as they grow, your pension will be able to share in their success, compounding over time to reward your investment.
So, while an SRI pension is an appropriate way to support the issues you care about, it is also a considered and prudent investment in your future.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.