“An investment in knowledge always pays the best interest”.
– Benjamin Franklin.
Pensions are powerful and even more so when we understand fully how they work and where they are invested – it’s true that knowledge is power.
In December 2021 the UK financial services regulator, (the Financial Conduct Authority (FCA)), published a policy statement setting out the final rules and guidance for organisations such as asset managers, life insurers and FCA-regulated pension providers – to publish compulsory financial information about their commitments to help reduce Climate Change. This policy supports the move to a low-carbon economy as part of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was created to improve the financial information that is provided by companies that relate to climate risk. Detailed and transparent information is necessary in order to measure progress and make sure targets are met.
The new policy came into effect from January 2022 (it’s January 2023 for smaller firms), so all firms that are directly affected need to familiarise themselves with the rules and guidance and start putting in place the necessary measures to meet the requirements.
So, what will companies need to disclose?
- Publish a TCFD report setting out how they take climate-related risks into account in managing or administering investments.
- Set out the investment products and portfolios as a side by side comparison on an annual basis
- The first reports of this information must be made available publicly by 30 June 2023.
This policy is an important step in helping to protect the planet and moving us towards a greener future. The importance of sharing this information is crucial in monitoring the progress of the changes – but how do we make it understandable and relevant to your average person?
There is evidence that many people are now changing their habits and lifestyle in response to the climate crisis and indeed there are many small changes that can add up to make a big difference – using a bag for life instead of disposable plastic, buying more sustainable clothing, or buying second hand. As with most things in life we’re more likely to do something if we a) understand it, b) it’s easy to do and c) it’s something we’re interested in.
During the COP26 summit, the BBC One Show did a poll asking viewers what changes, if any, they might be willing to make to help reduce their carbon footprint and protect the planet. Viewers were given a choice of 20 options across a range of categories that had been selected by a panel; food, travel, shopping, home and green spaces.
The top four were in the food category, with number one being ‘Eat less meat’. For each of these options, viewers were able to weigh up the effect it would have on their lives; how would this impact me financially? How easy would it be to do? How would this benefit me? These options reflect our interests and we can clearly understand the impact. For viewers who chose the option to eat less meat, we can see a number of positives; meat can be expensive, it’s eating less, not stopping completely and there are the health benefits too.
Interestingly, on the list of choices for the poll, there was no reference to investments, which has a huge impact on us personally and collectively. Most people, if given the choice, wouldn’t choose to invest in weapons or businesses that are actively impacting climate change – and research conducted by the Behavioural Insights Team has found that 68% of people say they would like their investments to make a difference. So, the question is what’s stopping them from investing in environmentally-friendly pensions.
Evidence shows that a high proportion of savers are unaware that their money is invested at all, let alone where. If people aren’t engaging with their pensions on a personal financial level how can we expect them to start delving deeper into where their money is actually invested? And there are a number of behavioural barriers preventing that engagement:
- There’s too much choice
- The risk factor
- Putting it in the too-hard pile
- It’s not urgent – I’ll do it later
- Lack of interest (Pensions are boring)
The introduction of auto-enrollment proves that most members take the approach that requires the least amount of effort. So, providing too much information or not making it easy to understand is only going to increase the barriers.
It’s not that easy being green
If communicated correctly, climate risk can be an important way to connect people to their pension and show them not only how their investments impact them but the world around them. But it’s not enough to just engage – members need to be empowered to take action. And to really change habits and make a difference it has to be a group effort. Fund managers need to work hard to create funds that perform well, whilst doing good and most importantly are easy to understand. For example, simple incentives like green ratings (like star ratings on Amazon) are a clear and visual way to instantly indicate which funds are the most environmentally friendly. It shouldn’t be hard for members to find and understand where their money is going.
That’s why the FCA policy is so important, it has set out clear guidelines for Companies and investors to ensure they disclose information about where money is invested and the continued progress. Pension Schemes need to also make sure they are communicating this information in a relatable way to their members.
Making a difference
“Making your pension sustainable is many times more effective at cutting your carbon footprint than giving up flying and becoming a vegan combined!” Make My Money Matter
Campaigns like ‘Make My Money Matter’ are helping people to understand the power of pension savings. It encourages people to find out where their pension money is invested and to contact their pension providers and tell them to ‘go green’. If you know your pension is invested in something that is against your principles, you can do something about it.
Positive initiatives like this are a great way to engage members. They encourage people to ask questions and feel more in control of their savings. There’s also the feel-good factor. Studies have shown that acts of kindness help to improve our mood and overall well being by releasing hormones in our brain, (save towards your pension, save towards your future – it’s a win-win situation).
Pension Schemes have a great opportunity to really engage with their members on a subject that many people are already passionate about. So, rather than just meeting disclosure requirements, Schemes need to step up the way they communicate. Turn the (green) light on – make it personal, make it relevant and make it matter!
Not sure where to start? We’re here to help you navigate the policy and take that next step to really connecting with your members. You can contact us using the links below.