A growing number of pension savers would like to see the oil sector completely excluded from their pension fund’s investments.

Some 21 per cent of pension savers say they want oil to be axed from their pension, according to a survey from online pension provider PensionBee.

This has jumped from 15 per cent of pension savers last year.

Alongside oil, the main investments people want excluded from their pensions are companies contributing to deforestation, habitat destruction and predatory lending.

Pension savers also believe alcohol and gambling investments pose long-term financial risks to their pension.

PensionBee found that in the top ten holdings of three of the UK’s biggest master trusts, Aviva had 0.5 per cent invested in Shell and The People’s Pension had 0.39 per cent invested. Shell didn’t feature in the top ten holdings for Nest.

Scepticism over ethical and sustainable investments

This comes amid reports last week of investors ditching funds branded as sustainable or ethical at their fastest rate ever last month, with people pulling out more than £300million in May.

Research from the AIC conducted late last year also showed that private investors are more sceptical and pessimistic about environmental, social and governance investing than they were a year ago.

They were less convinced than they were last year by ESG claims from funds.

Investors who thought that ESG investing was more likely to improve performance shrunk from 33 per cent per cent to 22 per cent, and those who expected it to have a negative impact on returns increased from 20 per cent to 25 per cent.

Earlier this year, the global ESG fund returned -13.7 per cent.

A case of choosing returns over ESG concerns

For many investors, the decision to invest in oil or not comes down to prioritising returns over ESG concerns.

Becky O’Connor, director of public affairs at PensionBee, explains: ‘Pensions are investments. Through them, trillions of pounds are invested in companies that can improve or harm the planet and society through their business activities and collectively, that is our money, which will be used to fund our retirements.’

For this reason, the vast majority (79 per cent) of people don’t feel ready to exclude fossil fuel companies from their pension completely PensionBee’s data shows.

A recent survey by broker Charles Schwab revealed 67 per cent of UK investors are more concerned with maximising returns on their investments, rather than how sustainable they are.

US exploration and production companies have seen the best shareholder returns of the different types of oil companies over the last five years, with a 40 per cent total return.

Commodities and natural resources was the best performing sector in the Association of Investment Companies’ universe at the end of 2022.

It returned 26 per cent over the 11 months to the end of November 2022, compared to the average investment company return of -15 per cent over the same period, benefitting from inflation.

But the renewable energy infrastructure sector also stood out among the top performing sectors, delivering a 7 per cent return – over a period which was dominated by the energy crisis and concern about global climate change.

O’Connor adds: ‘At PensionBee we believe that companies that focus on their contribution to society and the planet have a better long-term chance of being financially sustainable and will bring stronger returns.’

What’s the alternative?

For pension savers who do not want exposure to oil in their pensions, what kind of sectors and companies would give them returns comparable to oil?

Alice Guy, head of pensions and savings at Interactive Investor says: ‘Many workplace pensions will have a default fund which invests in shares across the world including oil companies.

‘It may be possible to switch to a sustainable fund which limits its exposure to oil companies, but you’ll need to read the small print because even these funds often don’t exclude oil exposure entirely.

John Moore, investment manager at wealth manager RBC Brewin Dolphin says: ‘The UK windfarm investment trusts, Greencoat UK Wind and The Renewables Infrastructure Group, show returns that are linked to wholesale energy prices and RPI (retail price index), but don’t have the carbon footprint or wider uncertainties of oil or the capital commitments.

‘The high level of income and long duration of cashflows attaching to these assets offer attractions to a pension fund and an alternative away from the traditional oil company exposure.’

Guy adds: ‘One option that excludes oil companies is the Montanaro World fund which invests in mid and small-cap companies focusing on six themes: environmental protection, green economy, healthcare, innovative technology, nutrition and well-being.

‘Another option is CT Responsible Global Equity which invests in mid cap stocks and focuses on high quality businesses across a range of sectors including IT, industrials and healthcare.

‘There are several sustainable bond funds to choose from, although many include some oil exposure. Popular choices include the Royal London UK Ethical Bond and the Lyxor Green Bond.’

Engage or divest?

Oil giants are not necessarily a no-go for all pension savers, even where they have their concerns.

Whether it is better to engage with companies to try and influence them, or to divest from them in an attempt to starve them of capital, is a central question in the ESG debate.

Laurs Hoy, ES analyst at Hargreaves Lansdowne, says: ‘Best-in-class oil and gas firms are likely to be part of the solution rather than just a problem, investing in renewable energy sources, researching into more efficient and less harmful ways to mine existing sites.

‘Preparing your pension for the energy transition therefore doesn’t have to mean divesting in all oil and gas companies.’

Through engaging with companies by attending their AGMs and voting, investors can use their shareholder power to influence oil companies and encourage them to improve their working practices and to invest in renewables.

But the results of the PensionBee survey show that just 13 per cent of pension savers remain invested in oil companies for the purpose of engaging, while 21 per cent wish to divest.

Almost half of customers who want to continue investing in fossil fuel companies only wish to do so if these companies show a concrete commitment to cutting greenhouse gas emissions to as close to net zero as possible, and improving their environmental impact.

When it comes to voting and influencing companies to do less harm to the planet, pension savers’ top priorities were companies reducing their carbon emissions – rather than buying offsets to compensate for their greenhouse gas emissions and halting habitat and wildlife destruction.

Read more @thisismoney