Money where your mouth is
Ethical pensions are in vogue, but does avoiding investing in harmful industries inevitably mean smaller retirement revenue? Bill Jamieson looks at the pros and cons
Of all the fashionable trends in the investment market, ethical investment is one of the fastestgrowing – and most problematic. Hundreds of environmental funds are already on offer, and now the field has broadened to include ethical pensions.
We all want to save responsibly and avoid companies that cause ill-health, promote harmful addictive behaviour or damage the environment. But like any investment trend, there can be snares. Everyone who saves into a pension is an investor. And since auto-enrolment was introduced in 2012, that now includes most people in employment, as well as many self-employed, amounting to around 18 million savers. The value of global pension assets is currently around £29.7 trillion. The UK is the secondlargest market, with around £1.9 trillion in funded and private pension arrangements – a lot of financial clout.
According to Make My Money Matter, 70% of pension savers are concerned about the ethics of their investments, but only 20% of investments are ‘responsible and impactful’. According to the website, many pension funds have been invested in ‘some of the most unsustainable and exploitative industries on the planet, from tobacco to fossil fuels, arms manufacturing and gambling.’
One of the website’s co-founders is Comic Relief creator Richard Curtis, the writer and director responsible for TV and film hits such as Four Weddings And A Funeral and Blackadder. His message is that committing to ethical investments should not mean having to compromise on returns and that sustainable businesses have the potential to be as profitable – if not more so, in the long term – than more damaging ones.
Just 5% of people have changed how their pension is invested, and many of us struggle to define an ‘ethical’ or ‘sustainable’ investment. There are questions of fund performance and costs – if we constrain the investment choice of fund managers, are we not risking damage to fund performance? It is not immediately obvious that well-behaved companies deliver better results, and over the lifetime of a pension, the lower returns on a poorly performing fund could prove considerable.
Yet there is an appetite among pension savers to make behavioural changes, such as cutting energy usage, choosing a ‘clean’ car, driving less and limiting air travel. But as a driver for change on areas such as climate change, pension activism is exponentionally more effective than any of those actions. According to sustainable fund manager Nordea, the impact of ‘sustainable saving’ on climate change is 37 times higher than limiting meat intake to one meal a week, 82 times greater than taking the train instead of driving and 117 times better than cutting their travel to one international flight a year.
The good news is that not only is there a wide range of ethical funds from which to choose, but also that setting up an ethical pension can be simple. Some pension funds are already ahead of the curve, including the UK’s largest, the Universities Superannuation Scheme, which no longer invests in any company connected with tobacco, thermal coal or arms.
Unless they express a preference, members of workplace pension schemes may end up being enrolled in the scheme’s default fund. But most schemes offer other options and these may include funds with largely or exclusively sustainable investments.
If your workplace pension offers no specifically ethical funds, or if you are self-employed with a personal pension, it is possible to take charge of your own pension investment by using a Self-Invested Personal Pension (SIPP) where you choose all the investments and/or funds, so you have control over where your money goes. A financial adviser can help
you set up a SIPP that avoids certain industries or practices.
Some investments classed as ethical simply focus on ‘best in class’ companies, so might for instance still include industries such as fossil fuels, albeit those found to be less polluting. At the other end of the scale are those companies or funds that rigorously screen for activities that fail to meet their strict standards.
What investors should watch out for is ‘green-washing’ – funds which appear fashionable but where the investment screening can be minimal. Fully FCA regulated recommendations with names like Standard Life & BlackRock are highly regarded, awardwinning products with impressive pedigree. If you already have a pension it may be possible to transfer your fund into ethical investments either within your existing pension or a new pension scheme with more ethical choices.
Previously, some pension scheme trustees argued that they were bound by ‘fiduciary duties’ to seek the best returns regardless of considerations such as climate change, and citing these legal obligations as a rationale for rejecting members’ calls for divestment. Now, the government is introducing new investment regulations, enabling pension schemes to ‘mirror the ethical concerns of members to address environmental problems’.
Currently, almost all formal pension options invest in global companies which may be involved in activities such as tax avoidance, animal abuse and fossil fuels that many investors would prefer to avoid. Bespoke saving allows those wishing to tailor their investments to their ethical views to avoid this.
Finally, for those starting out on this path, here is a shortlist of strongly-performing ethical investment funds picked by investment professionals:
Laith Khalaf of Hargreaves Lansdown has selected the Kames Ethical Fund. This invests in UK shares, but two-thirds of the UK’s biggest companies are excluded on ethical grounds, including tobacco manufacturers, gambling companies, or those that excessively damage the environment. This gives the fund a bias to medium and smaller companies, and while that can add to volatility these companies also have the potential to deliver out-sized growth.
Over at Interactive Investor, Moira O’Neill has chosen the Impax Environmental Markets Investment Trust. Launched more than 17 years ago, it has been ahead of the pack on climate change issues. It aims to help investors grow their wealth by investing in markets that target the cleaner and more efficient delivery of basic services of energy, water and waste. Renewable energy features strongly, as does recycling. She also highlights the Royal London Sustainable World Fund. This invests globally and with a strong ethical policy.
Another O’Neill recommendation is JP Morgan’s Emerging Markets investment trust, which has a strong Environmental, Governance and Social (ESG) filter. It has, she says, ‘a rigorous ethical policy, which investors looking to invest in emerging markets may find comforting’.
Adrian Lowcock of Willis Owen has singled out the Standard Life Investments UK Ethical Fund. Exclusions include companies that cause environmental damage, animal testing, alcohol and gambling, while its positive inclusions are environmental technology and pollution control companies, and those that promote equal opportunities. Independent financial advisers can provide a wide choice in the ethical arena.
WHAT DOES THE UK ECONOMIC RECOVERY LOOK LIKE AFTER COVID-19? ANSWER:
Investors endured more bounces than Zebadee on a trampoline as markets reacted to Covid-19, with more volatility than ever before. We may have seen the peak in deaths from the virus in the UK but where does that leave the economy?
There is much discussion about what this recovery will look like. Will it be V-shaped (sharp fall, followed by a quick bounce back — very little chance in our view), U-shaped (where it takes longer to recover — unlikely we think), or will it be L-shaped (worst case scenario — a long time before we see an economic recovery)?
Perhaps this looks more like a W-shaped recovery. We have seen euphoria come back into the markets as some restrictions are lifted, but this is not a return to normal. We believe there will be further repercussions to come as companies’ earnings take longer to recover than expected, and perhaps there’s a second virus wave. As long-term investment managers, we maintain that 2020 will take patience.
Perhaps the biggest challenge in this crisis has been lack of visibility. Every company we’ve engaged with, regardless of size, says it’s impossible to forecast what impact Covid-19 will have. Longestablished companies that have weathered every downturn for 50, or even 100 years, have learned an important lesson — nobody ever regrets making fast, decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. As Charles Darwin surmised, ‘those who survive are not the strongest or the most intelligent, but the most adaptable to change.’
The stock market is often accused of being too short-term; for the next few months we should expect it to inhabit a parallel universe, as it discounts what we already know and potentially rewards those that think long-term. To simplify a complicated stock market debate of confrontation between bull and bear, who wins if bulls have central banks’ bazookas and bears just teeth and claws? Your capital is at risk. Investments can go down as well as up.
“
JOHN HENDERSON IS MANAGING DIRECTOR AT CLOSE BROTHERS ASSET MANAGEMENT. CALL 01316 563038 OR EMAIL JOHN.HENDERSON@CLOSEBROTHERS.COM