Can you invest in Coca Cola and still be ethical? Green finance experts say yes – if you look carefully at your fund manager of choice. Almost £88 billion of UK pension value is invested in fossil fuel exploration, but polls show strong support for the transition to renewable energy. David MacDonald, founder of the UK’s first ethical financial advisory, Path Financial, explains how a stewardship-based solution can empower everyday investors.
£100 billion is the estimated amount invested in and supporting the fossil fuel industry in the UK through pension funds alone. This excludes ISAs and other investments, and the deposits we place with banks that in turn lend to fossil fuel exploration and production.
I focus on pensions because they are the ultimate plain-sight disguise. UK pension funds collectively hold more than £3 trillion. A significant portion of that capital is invested across global equity markets, including fossil fuels, deforestation linked industries, carbon intensive manufacturing, fast fashion, large scale waste producers and other environmentally damaging sectors.
Money talks. Or at least it can talk. Too often, especially when the money in question is invested in pensions, the voice gets lost and mindless fund managers do not vote responsibly.
For many people, pensions are opaque, technical and easy to ignore. They also create anxiety, because most workers suspect, often correctly, that they are not saving enough. The result is disengagement. We tell ourselves that we will deal with it another day.
That inertia has consequences – capital allocation shapes the world we build.
Do we have a choice?
In many cases, yes.
Members of defined benefit schemes may find it harder to switch investments, but trustees can be challenged and influenced. Those with defined contribution pensions or SIPPs can usually change funds, although doing so requires engaging with documentation and understanding which companies your retirement savings are actually being invested in.
Funds do publish details about their strategy and underlying exposures, so there exists a degree of transparency. The more important question is not simply what appears in the top holdings, but whether your capital is allocated to companies that are positioned to benefit from a changing world, or to companies that are resisting change and contributing to negative outcomes.
Two levers investors can pull
There are two principal mechanisms available to pension holders.
Divestment
This means choosing not to invest in, and not to earn returns from, businesses whose activities conflict with your values. Its effectiveness depends on reaching sufficient scale to influence capital costs and corporate behaviour. When adopted widely enough, it can shift incentives meaningfully.
Stewardship
This involves influencing how invested assets are managed through engagement and voting. Studies indicate that effective stewardship is one of the most powerful ways to ensure the long-term resilience of companies1.
This is because owning companies’ shares comes with the right to make your voice heard by engaging with the board and voting to encourage good corporate practices, aiming for resilient financial returns and positive outcomes for people and the planet.
Divestment can send a signal. Stewardship allows investors to apply pressure from within. Both approaches have a role.
Why this matters financially
There used to be an assumption that supporting the climate transition or stronger environmental, social and governance standards required sacrificing returns.
Attention has now focused on something more important. We now understand that climate risks are systemic. While systemic, they remain under reflected in expected returns because the wider economic spillover effects of high emission projects are not captured, and nor are the benefits of mitigation. The question is no longer whether climate risk matters, but whether it is properly priced.
Businesses that fail to adapt to regulatory, technological and societal change risk stranded assets*, rising costs and declining relevance. Shareholders in such companies may ultimately see value eroded.
By contrast, companies that account for a changing world, whether through the products and services they provide or through the way they operate, are more likely to remain competitive and financially resilient over the long term.
This is not about chasing a narrow theme. It is about allocating capital to companies that are equipped to survive structural transition.
Fiduciary duty is evolving. Portfolios should evolve with it.
The uncomfortable irony
There are vegans whose pensions finance industrial animal agriculture. There are environmental professionals whose retirement savings support oil and gas expansion. There are clean energy employees whose long-term savings are exposed to coal.
The disconnect is widespread.
Yet £100 billion, and indeed £3 trillion, represents significant influence. If even a portion of that capital were reallocated with intent, markets would respond.
A potential win-win
Pensions can be repositioned in a way that seeks competitive long-term returns while allocating capital to companies that are adapting to, and shaping, a changing world.
The objective is not perfection. It is resilience.
The companies most likely to endure are those that take environmental, social and governance risks seriously, rather than dismissing them.
The handbrake exists. It does not have to remain engaged.
The role of advice
It is difficult for individuals to analyse this alone. However, specialist ethical pension advisers do exist and can help interpret fund documentation, assess exposure and align portfolios with both financial objectives and personal values.
Taking proper financial planning advice is often a prudent step regardless. Experienced advisers can help avoid costly mistakes, identify overlooked risks and take advantage of opportunities that may otherwise be missed.
*Stranded assets are investments, such as fossil fuel reserves, power plants, or industrial infrastructure, that lose economic value prematurely because of regulatory changes, technological disruption, market shifts, or environmental constraints. They become “stranded” when they can no longer generate the expected returns, often due to the transition toward a low-carbon and more sustainable economy. Oil company share prices are often cited as the ultimate example of potential stranded assets. For example, a quick shift to renewables could leave cost of extraction so high relative to renewables that share prices in undiversified oil companies could collapse, taking shareholder investment values down with them.
