The UK’s biggest pension fund, Nest, is beginning the process of divesting its huge portfolio from fossil fuels. But what does that mean and why is it making the change?

Nine million pension savers use Nest to build a retirement fund. It handles the retirement savings of many workers that have begun saving under auto-enrolment. It has £9.5 billion in assets under management. The move to divest from fossil fuels follows a wider trend of taking ESG (environmental, social and governance) issues into account when investing.

Divesting from fossil fuels

Divesting means getting rid of a business interest or investment. This may be shares in a specific company or sector. In this case, it refers to companies that have a business interest in the fossil fuel industry. Specifically, Nest plans to divest from companies involved in thermal coal, oil sands and arctic drilling by 2025.

In recent years, there has been a growing trend for considering ESG factors when investing. This has included other pension funds divesting from fossil fuels due to the impact of climate change too. But Nest is the largest pension scheme in the UK, representing an investment shift for millions of savers.

Research supports the move made by Nest. Findings indicate that it’s a change many employees would welcome. Some 65% of pension savers believe their pension should be invested in a way that reduces the impact of climate change. Just 4% strongly disagreed with this idea.

Despite this sentiment, only 1% have made a change to the way their pension is invested in the last year. This was down to a variety of reasons:

• 38% had never thought about how their pension is invested
• 25% assumed their money was already invested responsibly
• 17% didn’t know they could change funds

Whether or not ESG factors are important to you, it’s essential you check how your savings are invested. Pension providers will offer a range of funds that will vary in their risk profile and goals. It’s usually simple to change the fund you’re invested in online.

Mark Fawcett, Nest’s Chief Investment Officer, commented: “Not only is this the right thing to do, it’s also what our savers want and expect from us. How can we offer them the prospect of a better retirement if we ignore the world they’ll be retiring into?”

The financial impact of divesting from fossil fuels

Considering ESG issues when investing appeals to many people, but there are often concerns about what it means financially. Does considering climate change, for instance, mean your returns will be lower?

The good news is that isn’t automatically the case. However, you still need to consider risk, diversification, goals and all the other factors you’d usually consider when investing when making decisions about ESG investing.

Figures from Nest show its fund that considers a range of ESG factors outperformed alternatives. In the five years to the end of March 2020, annualised total returns for Nest funds were:

• 6% for the 2040 Retirement Date Fund
• 0% for the High Risk Fund
• 2% for the Ethical Fund.

It’s impossible to predict with certainty how different stocks and funds will perform over the short, medium, and long term. However, divesting from fossil fuels doesn’t mean you have to miss out on returns that will boost your pension savings. If you’re considering making ESG factors part of your pension investment plan, please get in touch.

Looking beyond pension investments

It’s not just pensions where you may want to think about divesting from fossil fuels or other ESG factors either. You may want to look at your wider investment portfolio with these in mind.

With Good Money Week approaching next month, which encourages sustainable investing, now is the perfect time to think about how your money is invested and whether it aligns with your wishes. With many ESG factors, the issues are subjective. This can make it difficult to understand how you can bring your views into your investment decisions while still achieving your wider financial aims. This is an area we can help you with.

Please get in touch to discuss your investments, pensions and ESG goals.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.