Clare Reilly, head of corporate development at PensionBee, believes the current challenging economic conditions could lead people to engage with their pensions more closely.
Having noticed a sharp decline in their pensions’ fortunes in recent weeks, people may begin to look more closely at what their money is invested in and what causes it to go up or down.
“We have very low levels of financial literacy in this country and people generally don’t engage with their pensions, which is a well-documented problem,” Reilly tells Finextra Research.
“I don’t think a lot of people really appreciated that their pension was invested in global markets, and so seeing it go down in the last month may have led them to realise it was because it was invested in the S&P 500 and the FTSE 100, both of which had tanked.”
She believes that this may be positive in the longer term for sustainable investing practices, as people being to feel more empowered about who and what they can invest in, just as they do in other aspects of their spending.
“I think if we are to look for positives, people are more likely to go on that journey of engagement and may understand more about where their money is going,” she says.
“The next step would be thinking more about what they can do with it if they don’t like what it’s invested in. People have so much power in their life now to remove what they don’t want from the things they buy, whether it be food or clothes or beauty products.
“It’s funny that when it comes to investments and pensions, people don’t have that same power.”
Divesting from oil
PensionBee recently announced it would be launching a fossil fuel free fund in partnership with Legal & General, following a letter from the Romi Savova, PensionBee’s chief executive, questioning the worth of Royal DutchShell in their Future World Fund.
The fund will launch later this year, after a survey conducted of its customers found that 34% did not want to see investment in oil companies as part of their portfolio.
Many of these customers’ pensions were invested in Legal & General’s Future World fund, which has an “engagement with consequences” approach, aiming to improve companies’ transparency around carbon emissions and so on.
“A lot of customers didn’t believe that this approach was working,” Reilly says.
“They fundamentally didn’t believe Shell when they said that they were going to become carbon neutral by 2050 - they thought they were going to continue increasing production and just plant an unauditable number of trees.”
PensionBee acknowledges that fossil fuel reliance is such that oil companies and their peers will exist somewhere in all financial institutions’ investment instruments for the foreseeable future.
What is important however is to see a demonstrated desire to aid in the transition to a zero-carbon economy and to provide customers at least with the option to divest away from this industry should they wish to.
“Oil reliance isn’t going to just stop overnight,” Reilly says, “so we need to find a way to move to an economy that doesn’t use fossil fuels slowly.”
Another of the pain points of sustainable finance is the intricacies of supply chains and the lack of clear data on a company or investment’s environmental and social impact.
It is inevitable that a pension plan will be invested in the fossil fuel industry one way or another even if it does not directly fund oil companies. For example, companies that are included in a fossil-fuel-free fund will inevitably rely on coal and oil companies to provide the energy to heat and light their offices or fuel the vehicles used to transport goods from one place to another.
“This fund won’t be so concerned with that,” Reilly says. “It will simply exclude pure fossil fuel companies and then use the same principles that the Future World fund uses to engage with companies where they see bad business practices on a range of issues.”
Self-sacrifice
PensionBee’s survey found there was a significant appetite for disengagement with oil companies, from a combination of environmental concern and a belief that they are not profitable in the long term.
Oil has been hit particularly badly amidst the Coronavirus crisis. Prices sunk comfortably below $30 a barrel, as the market was squeezed between oversupply and depressed demand owing to the Covid-19-induced lockdown.
However, there will swathes of investors who will see this as a significant opportunity to bargain hunt in the oil market, safe in the knowledge that demand will rebound sooner or later. Major companies like ExxonMobil and Royal Dutch Shell’s share price have both sunk to multi-year lows, possibly now offering a price that traders will find difficult to ignore.
According to PensionBee however, customers are willing to divest entirely from oil production even if it does mean a reduction in the profitability of their plan.
Reilly acknowledges that this can prove quite a trade-off, particularly at a time like this when economic uncertainty is rife and there is a natural inclination to seek safety and security.
“We see that some of these oil companies are paying the highest dividend because they are among the most profitable,” she says.
“So, we tell our customers that they might see a 6-8% return on their pension year-on-year, and often it will be because of these companies.
“There is a population of people who are prepared to sacrifice those returns and that population is growing.”