Most people don’t give much thought to what their pension is actually invested in. You set up your workplace scheme, the contributions go out each month, and that’s about it. But here’s the thing: your pension pot could be funding fossil fuel companies, tobacco firms or arms manufacturers without you even knowing.

If you care about climate change and want your money to reflect your values, you’re not alone. The FCA’s Financial Lives 2024 survey found that 72% of UK adults with investments want their money to do some good alongside providing a financial return. The gap between that desire and what actually happens with most people’s pensions is enormous. The vast majority of employees stick with their default pension fund, but those defaults don’t always align with green or ethical principles.

Let’s take a closer look at what your options are and how sustainable investing actually works in practice.

What Does Sustainable Pension Investing Actually Mean?

Sustainable investing is a broad term, and it covers several different approaches. The three you’ll hear about most often are ESG-screened funds, impact investing and green bonds. They overlap in places, but they work in quite different ways.

ESG-Screened Funds

ESG-screened funds filter investments based on environmental, social and governance criteria. A fund might exclude companies with poor carbon records or those involved in controversial weapons. It might also favour businesses with strong worker protections or transparent governance structures.

ESG screening is the most common form of sustainable investing, and it’s what most workplace pension providers will offer if they have a green option at all.

Impact Investing

Impact investing goes a step further. Instead of simply screening out the bad, impact funds actively direct money towards companies and projects that aim to deliver measurable positive outcomes for the environment.

That could mean renewable energy developers, affordable housing projects or clean water infrastructure. The intention is to generate both a financial return and a specific social or environmental benefit.

Green Bonds

Green bonds are fixed-income securities issued to raise money for environmental projects. The UK government’s Green Financing Programme has raised more than £51 billion since 2021 through green gilts and NS&I Green Savings Bonds. Those proceeds fund renewable energy, sustainable transport and climate adaptation projects.

Some pension funds now include green bonds within their portfolios, though they’re more common in self-invested personal pensions (SIPPs) where you have greater control over asset allocation.

How to Find Out What Your Pension Is Invested In

Before you can make changes, you’ll need to know where your money is currently parked. If you have a workplace pension, log into your provider’s online portal and look for your fund factsheet. This will tell you the fund’s objectives, its top holdings and whether it applies any ethical screening.

Most workplace schemes put your contributions into a default fund, which is designed for the average saver. These defaults tend to spread your money across global equities, bonds, property and cash. They’ll include big names from every sector, and that often means oil and gas companies, mining firms and tobacco stocks. Make My Money Matter estimates that UK pension schemes collectively hold around £88 billion in fossil fuel investments.

How to Switch to a Greener Pension Fund

Once you know what you’re currently invested in, you have a few options. The simplest route is to check whether your workplace pension scheme offers an ESG or sustainable fund alongside the default. Many providers now do, and switching is usually straightforward through your online account.

If your employer’s scheme doesn’t offer a suitable green option, you could consider opening a self-invested personal pension (SIPP). A SIPP gives you access to a much wider range of funds, including dedicated ESG portfolios, impact funds and green bond funds. It’s worth noting that you won’t get employer contributions into a SIPP, so most people keep their workplace pension running for the employer match and use a SIPP as an additional pot. When thinking about how to plan for retirement, choosing where your pension is invested is one of the most personal decisions you’ll make.

The FCA introduced its Sustainability Disclosure Requirements (SDR) labelling regime to help cut through the noise. Funds that carry an SDR label, such as “Sustainability Focus” or “Sustainability Impact”, have to meet specific criteria and report on how they deliver on their stated aims.

This is good news for anyone trying to avoid greenwashing, where a fund claims to be sustainable without much substance behind the label.

Will a Sustainable Pension Perform as Well?

This is the question everyone asks, and it’s a fair one. There’s no point aligning your pension with your values if it leaves you short in retirement.

The honest answer is that sustainable funds have performed competitively over the long term. Research from Morgan Stanley has consistently shown that ESG-focused investments can match or outperform traditional portfolios over extended time periods. Companies with strong environmental and governance practices tend to manage risk better, avoid regulatory fines and adapt more effectively to changing markets.

That said, no fund is guaranteed to outperform, and sustainable portfolios can behave differently during certain market conditions. For example, funds that exclude oil and gas stocks might underperform during an energy price spike. Over a 20 or 30-year investment horizon, though, the performance gap is typically small, and in many cases it favours the sustainable option.

The key is to match your fund choice with your risk appetite and your timeline. If you’re decades away from retirement, you can afford to take a longer view. If you’re closer to drawing your pension, you’ll want to make sure your sustainable fund is properly diversified and not concentrated in a single sector.

The Bottom Line

Your pension is likely one of the biggest pots of money you’ll ever accumulate. Where that money goes matters, both for your future and for the wider world. The good news is that investing sustainably doesn’t mean accepting worse returns. With the right fund, you can grow your retirement savings and back the kind of economy you actually want to live in.

The tools and transparency are better than they’ve ever been. SDR labels, impact reports and independent ratings make it far easier to tell the genuine article from the greenwash. Take 30 minutes to check what your pension is invested in. You might be surprised by what you find, and making a change could be simpler than you think.

Important note: The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Past performance should not be seen as an indication of future performance.