What is an 'ethical' pension and how do they reduce your carbon footprint?

Jackup rigs, used in the North Sea oil and gas industry, are silhouetted against the sky at sunset over the Port of Dundee. Credit: PA

By Hannah Ward-Glenton, ITV News Multimedia Producer

UK pension funds are estimated to be worth around £2.9 trillion, and such a huge amount of money can make a seismic shift in whatever it is invested into.

UK schemes are estimated to invest more than £88 billion into the fossil fuel industry, data from campaign group Make My Money Matter shows, which translates to around £3,096 per UK pension holder.

Most of the pension schemes analysed by the Make My Money Matter listed Shell, the largest oil and gas producer in the UK, among their top holdings.

The campaign group has recently drawn attention to the fact that many people may be investing in fossil fuels without realising, with an advert featuring actor Olivia Colman as latex-donning oil executive 'Oblivia Coalmine', who thanks viewers for their support.

"People like you have pumped billions of your hard-earned pounds into our gas and oil businesses. The cash from your pensions has helped us dig, drill and destroy more of the planet than ever before," Colman says.

"Every little drop from your precious nest egg adds up so while the global temperature may go up a teensy weensy degree or two, our profits are literally soaring. And that's all thanks to you," she adds, holding a champagne glass full of oil.

Make My Money Matter said the advert "is really shining a spotlight on a critical, yet poorly understood, area of climate action: where we put our money."

What exactly is an 'ethical' pension?

Pension contributions are invested in stock markets by pension providers to grow the funds people then rely on for retirement, but many people don't necessarily know where that money goes.

Around 80% of a middle-aged worker's pension fund is invested in big global companies, often including oil and gas producers.

Ethical pensions are retirement saving schemes that are contributing to a sustainable future, so they tend to avoid investing in the likes of fossil fuels, tobacco, gambling and the arms industry.

Pension providers are increasingly aware of their climate impact, with many having made net zero commitments for the next couple of decades.

More than two-thirds of UK pension schemes have committed to net zero goals, according to the Pensions and Lifetime Savings Association.

Ethical pensions can also be described as "ESG" schemes, which means they focus on their environmental effect, social impact and governance, or company policies and structures.

Does having an ethical pension actually make a difference?

Due to the size of the typical pension pot, where the money is invested can make a huge difference.

Having an 'ethical' pension is 21 times' more effective in reducing your carbon footprint than a combination of going vegetarian, giving up flying and switching energy providers, Make My Money Matter said in a report published in June.

"Our pensions are perhaps the biggest pot of money any of us will ever have to our names - with a typical pot size at retirement of just over £100,000 for each of us," Rebecca O'Connor, director of public affairs at PensionBee told ITV News.

"Therefore switching to a greener one if you can, can be a huge personal step to take towards helping the planet," Ms O'Connor added.

How do I know where my pension funds are going?

Pension providers will normally give information on the top 10 holdings of any given scheme, but the investments can change frequently depending on where portfolio managers think they can get the best returns on your money.

If investment details aren't clear, you can ask a provider where your money is going, but there is no legal obligation for them to provide a full list.

In recent years there have also been cases of 'greenwashing', where pension funds have been made to look more ethically-compliant than they are, but the Financial Conduct Authority has cracked down on firms that have been seen to mislead customers.

Anybody who is concerned about their pension should seek independent financial advice.

"Pensions can be complicated," Lily Megson, policy director at retired income specialist My Pension Expert said. "For anyone feeling confused or overwhelmed when it comes to pension investments, seeking independent financial advice is so, so important."

"People should know that there is no one-size-fits-all option when it comes to pensions; there are many different options which can help people to achieve the retirement they want, while having a positive impact on the world for future generations."

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