- Responsible pensions investment considers environmental, social and governance (ESG) factors, and ethical and sustainable outcomes for financial returns.
- Organisations that want to responsibly invest should choose a pension provider with credible capabilities.
- Employers may want to lean towards towards climate and environmental targets and exclude industries without these.
Responsible pensions investment can be described as a practice of considering environmental, social and governance (ESG) factors when making investment choices, to balance financial returns with ethical and sustainable outcomes.
Scottish Widows’ March 2025 research found that while 69% of UK employers offer a responsibly invested pension option, just 44% have this as their default option. Employers, therefore, have a chance to highlight this as a choice and explain what it entails.
Responsible investment funds
Responsible investment funds can be engineered to tilt in favour of those working positively or neutrally in terms of ESG and pro-climate, engaging with organisations with desired practices, or excluding those that do not meet the criteria or are unethical.
In the context of a pension scheme, responsible investment can mean offering a range of funds that have been stated to be, or marketed as, responsible regarding ESG considerations, says Kate Granville Smith, director in Burges Salmon’s pensions team.
“The hope is that employees have a choice which reflect their values and beliefs, without compromising long-term security,” she says. ”The Financial Conduct Authority (FCA) introduced four investment labels for products with sustainability objectives and criteria, which must be applied before use and need to be treated with caution.”
These labels comprise sustainability impact, sustainability mixed goals, sustainability focus, and sustainability improvers.
Responsibly-invested investment funds should understand ESG risks and opportunities in their design and implementation. They should aim to deliver pension pots that offer positive sustainability outcomes. Eva Cains, head of responsible investment at Scottish Widows, says: “A responsibly invested pension should consider the world that people will retire into more holistically. Employers should have a clear approach for integrating ESG into their investment decision making for good retirement outcomes.”
Employees’ views
It is clear employees care about where their pensions are invested; the aforementioned Scottish Widows research also found that 17% of respondents class the environmental or social impact of their pension as a top priority, rising to 25% among those aged 18 to 34 years. Seeing pension investments generate positive environmental and social outcomes, as well as financial return, could help attract and retain employees.
Employees want to know if their money has been put into organisations or assets that benefit or harm the planet, says Granville Smith. “As more employers are making their own public statements on net zero, inclusion and diversity policies, it is important these aims are reflected across the business,” she says. “Employers could look critically at their pension provisions for employees as part of a holistic view of their business, making sure there is alignment.”
Additionally, Now: Pensions’ March 2025 survey, which gauged how 18- to 25-year-olds view pension savings and sustainability, found that 81% feel tackling climate change is equally, if not more, important than growing savings.
Martyn James, director of investment at Now: Pensions, says: “This presents an opportunity to educate young people about the role savings can play in tackling global challenges, such as the systemic economic risk of climate change, and how to align their values with their financial choices to limit negative impacts on long-term financial returns.”
Creating the right strategy
When designing a responsibly-invested pension strategy, employers should choose a suitable workplace pension provider with credible experience and capabilities. They should do this at an early stage to ensure staff easily understand what is on offer.
Employers may want to consider responsible investment options in their default pension offering. When creating a responsible investment default strategy, they could lean towards funds with climate and environmental solutions and targets, and consider an exclusion policy around certain industries, to make their portfolio more resilient in the long-term.
“Employers could think about the locality and sectors in which they operate and actively seek member input when working with a pensions provider to design a suitable offering,” says Granville Smith. ”For example, employees may favour investments into local environmental or regeneration projects or pro-climate solutions, but less about sectors such as coal, tobacco or alcohol.”
Scottish Widows has noted an increase in employees asking how ESG is integrated into pensions. To combat this, employers should engage staff on their understanding, what they care about, and any alternative options.
“Some might be happy with what is embedded in the default, but others may want to exclude fossil fuels or focus on actively managed impact funds that deliver on sustainable development goals beyond the default,” says Cains. “These options, with the right information and transparency about them, are something that employers can make available. Employers can help by bringing this to life for employees with examples.”
Avoiding greenwashing
If an employer has declared that it invests responsibly, it needs to prove that this is, in fact, the case, otherwise it could be accused of greenwashing. This refers to the practice whereby sustainability-related communications or declarations do not accurately reflect the sustainability credentials of a financial product or service. The FCA’s 31 March 2024 anti-greenwashing rule requires firms to ensure a product or service’s sustainability references are fair, clear and not misleading.
“For employers operating a DC [defined contribution] arrangement, a key focus will be the data quality they are receiving from advisors and investment professionals, as this will feed into their own communications,” says Granville Smith. “Any public statements made to employees should be unambiguous, independently verified, and consistent with disclosure requirements.”
Cains adds: “It’s important to be clear on how it is integrated into the pension, aware of regulations and terminology, and have an authentic, honest and transparent message.”
There is a lot to consider around responsible pensions investment, but employers should always ensure that they steer away from greenwashing, clearly communicate their policies and expand on their default option.
