What is an ethical pension and who are the best providers in the UK?

You can be ethical in many ways, such as making environmentally conscious buying decisions. You can also invest your money to reflect your values and principles. 

For example, you can open a bank account with an ethical provider or opt for an ethical pension so you can do good while also saving for your retirement. 

This could have a significant impact.

According to research by Make My Money Matter, moving the average pension into a sustainable fund could save 19 tonnes of carbon a year. It also reckons it will be 21 times more effective than becoming a vegetarian, giving up flying and switching to a renewable energy company combined.

We explore what an ethical pension is and reveal the most and least ethical pension providers.

What is an ethical pension? 

With an ethical pension, you can put your money into funds that meet environmental, social and governance (ESG) standards, which measure a company’s impact on the environment and society. 

It also reveals how accountable a company is, including how transparent it is with its investments.  

Of course, what is deemed ‘ethical’ can vary widely. However, specific industries, such as gambling, tobacco, and mining companies involved with fossil fuels, are usually avoided in ethical pension funds.  

Essentially, an ethical pension fund will avoid harm to the environment or society and aim to promote investments in ‘green’ or sustainable projects. 

Many pension providers offer ethical pensions, where your money is invested in ESG-friendly assets.  

However, that alone may not make a pension provider an ethical choice, as they may still invest in companies or sectors you don’t want to invest in via a different pension fund.  

What you should be wary of when considering an ethical pension 

When you’re looking for an ethical pension, you should watch out for ‘greenwashing.’ 

This is where a pension fund is labelled as ethical, but it may not be, as there’s no set standard to meet to acquire this label. This means you must do your own due diligence to see where the fund is invested to ensure it aligns with your personal values.

It’s worth flagging that if you have a workplace pension, you’re usually placed in a default fund, which generally isn’t an ethical fund, so you may need to switch to this if you prefer.  

Many workplace pensions will offer an ethical fund.

According to data by Corporate Adviser Intelligence, LifeSight, Hargreaves Lansdown, and Legal & General have the highest carbon footprints.

LifeSight has a footprint of 84 tonnes of carbon dioxide emitted per million pounds (tCO2e/£m) for its diversified growth fund, while Hargreaves Lansdown has a footprint of 83.4 tCO2e/£m. Legal & General has a footprint of 81 tCO2e/£m for the growth phase pathway for its master trust default.  

What should I consider with an ethical pension? 

First, it’s worth considering your principles and values – what would you like your money invested in? For example, are you passionate about the environment or against investing in certain sectors, such as gambling? 

It’s also worth exploring what the companies you invest in are focusing on, any exclusions in your pension fund, and how these have been selected – is it based on ESG standards or other measures? 

You’ll want to ensure transparency in your pension fund, including clear goals and a top 10 list of the biggest holdings.  

A qualified financial adviser may be able to help you find an ethical pension or review any funds to ensure they align with your values.  

Who are the most ethical pension providers? 

If you’re looking for an ethical pension (and provider), a good place to start is The Good Shopping Guide’s (GSG) list of the most and least ethical pension providers. 

The benchmark for ethical pensions is 70.

The following providers exceed this:  

Who are the least ethical pension providers? 

Below is a list of the least ethical pension providers, according to the GSC: 

There are other well-known pension providers at the bottom of the pile, including Fidelity (67), Hargreaves Lansdown (55), Legal & General (67) and Prudential UK (66).

How does the GSG decide if a pension provider is ethical? 

The GSG looks at many factors when compiling its rankings, including:  

• Environmental: This consists of a pension provider’s environmental reporting, including their impact and goals, with fixed targets. The GSG examines whether they have been involved in harmful projects and if they are committed to reducing carbon emissions.  

• People: This looks at whether a pension provider has recently been involved in a project that human rights groups have widely criticised, and if they are engaged in unethical lending practices or have offered political donations.

• Other factors: This looks at whether the company has GSG accreditation and if they integrate ESG and sustainability principles into their investments and avoid unethical ones. Other things considered are whether a pension provider has a clear ‘ethical ethos.’ 

Need help with your pensions or retirement planning? 

Planning for retirement, including deciding where to invest your money, can be daunting – but you don’t have to go it alone. 

Unbiased can help by matching you with a qualified financial adviser who can help you build a retirement plan.  

They can also look at your circumstances, investment appetite, and future goals and help you choose the right pension fund that aligns with your values.