Ethical pensions

What is an ethical pension?

Many pension providers offer ethical funds for their investors – meaning you can save for retirement with a clear conscience.

Ethical investing means looking for investments that align to your personal values. Companies and sectors that go against those values – e.g. by causing harm to society or the environment - are filtered out of funds so that your money can be used sustainably.

Investors are increasingly conscious of what they invest in, so the number of ethical investments is growing too. This reaction means companies are gradually changing their behaviour to attract these ‘green investors’.

How do ethical pensions work?

Ethical pensions let you invest in a socially responsible way where investments must meet a certain level of ‘ESG’ criteria (Environmental, Social and Governance).

• Environmental criteria
  Companies are scrutinised on their energy use, waste, pollution, natural resource conservation, and treatment of animals. Criteria can also include the risk a company or industry pose to the environment, and how those risks are mitigated. For example, how does a company that produces a chemical solution handle toxic emissions?
• Social criteria
  Social criteria consider a company’s supply chain and its relationship to local communities where it is present. For example, are working conditions and employee health and safety well looked after? Or, does a company donate a percentage of its profits to local groups?
• Governance criteria
  Governance criteria look at the transparency of a company’s accountancy, and whether stakeholders can vote on important issues. Fund managers may also look at whether a company uses its power to make political contributions, or engage in illegal practices.

Companies that meet all the criteria are few and far between, so investors must weigh up what is most important to them.

Benefits of having an ethical pension

• You are standing up for your beliefs: We can all think of companies who make poor ethical decisions in how they treat their staff or pollute the environment. Having an ethical pension means putting your money in companies that value what you find important.
• You are rewarding ethical companies: Companies that go the extra mile in protecting their staff, making their accounting transparent and creating an environmentally sustainable supply chain will benefit from your investments.
• You are the catalyst for change: As more investors back ethical companies and projects, other businesses will want to attract funding by aligning to ethical standards. Eventually, there will be a greater number of industries looking after the environment and social causes.
  

Drawbacks of an ethical pension

• Companies can wrongly claim to be ethical: Companies that want investment might claim to be ethical when they are not. For example, Volkswagen’s marketing relied heavily on their clean diesel engines that were safer for the environment; but then were heavily involved in an emissions scandal, leading to the resignation of its CEO.
• Being ‘ethical’ is subjective: Every fund manager will have their own way of scoring companies and industries. There is no industry-standard method for saying that X company is ethical while Y company is not. Putting together an ethical pension relies on research to overcome these drawbacks.