Light and dark green pensions – and everything in between

Just what is a ‘green’ pension? Simply put it is a pension that follows a green or sustainable investment strategy. In other words, your money is being put to productive purpose over destructive, short term uses. As green investment has gathered momentum over the past few years it has generated a confusing range of labels: sustainable, ethical, responsible, impact, positive. Then there are the acronyms: ESG (environmental, social and governance), SRI (socially responsible investment) , GBS (green bullshit) … ok, we made that last one up.

To keep things clear we stick to the terms ‘green’ and ‘sustainable’. ‘Ethical’ investment is a wider term that can refer to laudable aims like improving conditions for workers, or avoiding tobacco or the arms trade. But our particular focus is to encourage pensions that will help speed the transition to a net zero economy, either by financing the green technologies of the future, or by avoiding the polluting industries of the past. These are what we call green pensions, as contrasted with ‘brown’ pensions, maintained with little or no consideration given to the sustainability of the companies in which they are invested.

Light green pensions

Some pensions are greener than others. ‘Light green’ pensions avoid investments in certain companies, but still hold investments across all economic sectors. A light green pension, for example, may well include holdings in some oil companies and other high carbon emitting firms. But those investments will be in what fund managers call ‘best in class’ companies: those whose carbon footprint compares well with that of their peers. Many ESG funds take this approach, especially ‘passive’ ETFs (exchange traded funds) that automatically track a particular set of companies (in contrast to ‘active’ funds, managed by fund managers personally picking investments to buy and sell).

Managers of these lighter green funds argue that by holding shares in carbon-generating companies they can exert pressure to make them go greener. But you should look into these claims carefully: many funds are guilty of ‘greenwashing’, claiming they are doing more than they actually are to encourage change. Look at their shareholder voting record as one sign of actions meeting nice words.

Dark green pensions

Dark green funds avoid carbon-generating sectors altogether, and prioritise impact investing: financing businesses developing green technologies and solutions. These include the now familiar sources of renewable energy like wind and solar farms, but also innovations like battery storage, cultivated meat, regenerative agriculture, and AI-driven energy efficiency solutions. Many of these companies are still establishing their commercial viability, so dark green investments tend to be speculative, best suited for professional or wealthy investors willing to take some losses across a portfolio. Once they survive and grow for a while, they are more likely to be available as market listed investments to pension fund managers.

A balanced green pension

Most green pensions, therefore, tend to be lighter in shade: after all fund managers have a primary responsibility to ensure the investments they manage secure a sufficient return for their customers in the long term. But the best green pensions are flexible, expanding to encompass green innovations as they mature, and their managers use their clout as significant shareholders to pressure the firms in which they hold a stake to continually go greener.

Only a few of the workplace pensions we looked at offer a decent selection of green options, although, as we suggest in the tool, there are things you can do to push your pension towards an investment strategy that is at least light green.

But right now the only way you can be sure your pension is dark green is by choosing the funds that comprise it yourself. If you have a pension from a previous job, or are starting your own personal pension, you can pick one of the greenest providers. Or you can start a Self-Invested Personal Pension – usually called a SIPP – that allows you to actually pick the funds that constitute your pension.