What is a sustainable pension?
A guide to pensions and impact investing
When you save for retirement, the money you put into your pension is invested. What many people don’t realise, though, is that you can have a say on which companies and causes your money is invested in. That’s why many people are beginning to use their pensions to do good.
That’s what impact investing is all about—using your savings to invest in companies that are having a positive impact on the world. Given that your pension is probably the biggest savings pot you’ll have, that money can be a really powerful tool for changing the world for the better. Research from Make My Money Matter, suggests that a sustainable pension can be 21x more effective at cutting your carbon footprint than going veggie, giving up flying and switching energy providers, combined.
What’s more, impact investing can outperform regular investment decisions. As a result, you’ll do good and give your pension the chance to grow at the same time.
In this guide, we introduce you to how your pension can make a positive impact on the wider world, as well as the benefits for your retirement.
What is impact investing?
Impact investing is the term for investments made specifically to generate beneficial change in the world with the aim to generate financial returns.
That change could be environmental or social, political or technological. As an impact investor, you support companies and organisations that are addressing some of the world’s biggest challenges, from climate change and conservation to healthcare and housing.
Whatever the ultimate aim, impact investing is about directing your money to companies that are doing good with the aim to make a return. But to avoid things like greenwashing (which is where companies claim to be more sustainable than they actually are) and make sure your savings are being put to effective use, that good has to be measurable. As an investor, you want to know that your money is actually having an impact.
In practice, there are a couple of ways to make these investments. For example, as an individual investor, you can invest your money directly into specific businesses whose goals you support.
More commonly, most people, tend to invest money in different companies through an investment fund. In this case, a regulated company like CIRCA5000 allows you to set up an account such as a pension or an ISA and build your own investment portfolio.
The difference between a CIRCA5000 pension and a standard pension is that with a standard pension, you might not always have full visibility over where your money is invested — especially with old workplace pensions. CIRCA5000 gives you control over your money, you can see control which ‘themes’ you are invested in e.g. Clean Energy and know that you are only invested in companies actively doing good. That means you can trust that your savings are helping to make the world a better place for the future and you won’t accidentally be investing in oil or animal testing. You can think of impact investing as the gold standard for investing sustainably.
Impact investing examples: What will your CIRCA5000 pension be invested in?
For impact investing to be worthwhile, the good that a company does must be measurable. That’s why in our investment process at CIRCA5000, we verify every company that your pension will be invested in.
Part of our selection criteria is that companies we invest in need to contribute towards at least one of the UN’s Sustainable Development Goals, such as quality education, clean energy, or climate action.
To give some examples of impact investing, here are some of the companies you can invest in through a CIRCA5000 personal pension:
- Vestas Wind Systems: Vestas are the people you call if you want to build a wind farm. The company has installed more than 165 gigawatts of wind power capacity in over 84 countries and is involved in the production of 18% of global wind power. The results speak for themselves. Vestas has installed 68,000 turbines helped the world to avoid 16.82 million tonnes of CO₂ emissions while producing enough energy to power 42 million US homes.
- Beyond Meat: One of the leaders in plant-based meat products, Beyond Meat, helps consumers reduce the carbon footprint of what they eat. In 2020, the company helped customers avoid 32.9 million kilograms of meat production, as well as nearly a million tonnes of CO₂.
- Xylem: As a leading water technology company, Xylem provides ways to manage, treat, and move water sustainably. The company has helped businesses save 108 million cubic metres of water or the equivalent of the annual consumption of 656,000 UK households.
Find out more about what your pensions can do in our impact report.
Why impact investing has taken off among savers
While the term ‘impact investing’ was only coined in 2007, investors have been making financial decisions led by their consciences for decades. The only difference now is that it’s easier to do than ever before—and arguably more urgent.
According to the think tank Global Impact Investing Network (GIIN), the size of the impact investment market worldwide topped $1 trillion in October 2022. That’s up by 63% since 2019.
Here are some of the reasons why:
It’s now easier to identify companies doing good
Over recent years, changes to how transparent the investment industry is and the amount of data they give to customers has made it easier for regular people to understand which companies are aligned with their values. But, it's important to note that not all 'sustainable investing' is created equal. Some sustainable investing is more about 'avoiding' the really bad stuff, but it doesn't actively seek to do good, either.
You have probably heard a lot about two terms in relation to sustainable investing, but impact investing actually goes a little further than both:
- Environmental, social, and governance (ESG): ESG looks beyond just financial performance and refers to the impacts that investments have on the environment or on people. Investment and pension funds that consider companies’ ESG performance have soared in recent years, to over 20% of all assets. While this has brought attention to a business’s total impact, the thing about ESG is that that impact only matters as far as it affects returns. For example, you might find some funds labelled as ‘ESG’ that might include companies such as Amazon and Coca-Cola. What’s more, recent investigations have found that the risk of greenwashing in ESG is high.
- Socially responsible investing (SRI): SRI funds have grown as an alternative way for people to choose investments that align with their values. Typically, SRI funds deliberately exclude companies such as those in industries such as tobacco and weapons manufacturing. While that’s a start, it’s not to say that these funds actively try to invest in businesses doing good. SRI is more about excluding the bad than it is about actively trying to make the world a better place.
Impact investing has picked up speed because it only includes companies that can prove that they are actively doing good. In other words, it's not just about excluding the bad stuff, it's about investing in companies changing the world for the better.
People want to know that their money is making a difference
As we noted, impact investing is a growing field precisely because the impact is measurable, and companies are seeking to make a return for their investors.
Investors are no longer convinced by greenwashing and other techniques to make businesses look more responsible than they are. Instead, people increasingly want their investments to go into companies they know are having a positive impact, and impact investing gives them certainty.
For example, putting your money into a green pension cuts your carbon footprint by 21 times more than lifestyle changes such as stopping flying, going vegetarian, or switching energy providers—according to research by Make My Money Matter.
The GIIN estimates the size of the worldwide impact investing market to be $1.164 trillion.
Investing in the future
Impact investing wouldn’t have the popularity it has if it didn’t also have financial returns. The truth is that investment in the future of our planet and society is also investing early in structural trends like transitioning to clean energy that is set to shape our future.
As the reality of climate change unfolds, businesses are increasingly moving towards greener solutions. Impact investing aims to improve results as the world transitions.
Studies of impact investing have found that impact funds don’t sacrifice financial performance for social benefits:
- 88% of investors say that their impact investment portfolios meet or exceed their expectations for returns, according to a study by GIIN.
- Impact investment funds outperformed the S&P 500 Index by 15%, according to an analysis by researchers from the World Bank and the International Finance Corporation.
- An analysis of over 2,000 studies found that 90% revealed a positive impact of ESG funds on financial returns.
Your pension and impact investing
Whether you have a workplace pension or a personal pension, your retirement fund will likely be the largest savings pot you’ll have in your lifetime. If have a workplace pension, you’ll be putting away a minimum of 8% of your salary into a pension pot.
Those savings will be invested in companies selected by a fund manager. But the reality is that most savers won’t be aware of where their money is going or what impact it’s having.
The alternative is to take control of your pension savings and put them somewhere you know they’ll do good. At CIRCA5000, our pension lets you choose the themes you care about investing in, according to the impact you want your money to have.
For example, you can choose to invest in:
- People, to focus on helping humanity to thrive. Your pension savings will support digital learning, cybersecurity, pharma, and other companies having a social impact.
- Planet, to help make the essentials available for everyone and protect the planet. You’ll invest in clean energy, clean water, and sustainable food.
- People and Planet, to ensure your pension has both a positive social and environmental impact.
When you invest, your capital is at risk. You should carefully consider whether opening a CIRCA5000 pension or transferring your old pensions is right for you. Please note that tax rules and reliefs depend on your personal circumstances and may change. CIRCA5000 does not provide any ﬁnancial or tax advice, and you are responsible for your own tax reliefs/payments. This article does not represent ﬁnancial advice. Your investments and the income from them can go down as well as up. It is sensible to seek independent ﬁnancial advice if your pension is worth £30,000 or more.