Ethical investment of pension funds

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  • Ethical investment funds enable staff to invest pension contributions in companies that have ethical practices.
  • More employers are offering an ethical pension fund option.
  • A fund can actively seek to invest in organisations considered to be ethical, or screen out those considered to be involved in unethical activities.
  • Positive criteria include environmental conservation, equal opportunities and animal welfare. Negative criteria can include health and safety breaches, poor relations with employees and customers, and nuclear power.


Investing pension funds in environmentally and ethically sound companies has become an attractive option for many employees, says Tynan Barton

In the same way that people avoid certain clothing chains because of their alleged poor attitude to human rights in their factories, or buy fair trade products to ensure Third World workers are paid fairly, so pension contributions can be invested in funds that align with employees’ personal values.

Green cars, carbon offsetting and bikes-for-work schemes are ways for employers to support environmental beliefs, and including ethical investment options in a pension plan can further boost their reputation as a responsible business.

Stephen Hine, head of responsible investment development at Experts In Responsible Investment Solutions (Eiris), says: “If employers think there is a business case for corporate social responsibility in their own organisation, then why wouldn’t they apply those same principles to companies in which their pension funds invest?”

Ethical investment funds operate in two main ways. Firstly, they will actively seek out ‘good’ or best-in-class companies to invest in, which have some form of commitment to environmental, social or governance (ESG) issues or an ethical approach to what they do.

Positive criteria to look for

Examples of positive criteria include companies with initiatives and approaches that oppose degradation of the environment, or support equal opportunities, energy conservation, human rights and animal welfare.

The second approach for ethical investment funds is to effectively screen out companies because they may be involved in activities considered to be unethical, or have poor governance practices. Examples of negative criteria include genetic engineering, health and safety breaches, poor relations with employees or customers, involvement in military hardware and nuclear power.

As well as ESG issues, some pension funds adhere to religious beliefs. A number of funds follow Shariah law for employers that want to accommodate Muslim staff. Shariah law has rules about how Muslims are permitted to make money, so such funds are usually overseen by Islamic clerics.

Ethical investments are increasing in popularity. Eiris says a record £9.5 billion has been invested in Britain’s green and ethical retail funds, up from £2.4 billion in 1999. Jane Ridgley, investment development director, workplace savings at Legal and General, says: “People are more aware of the damage being done to the planet and of the way people in different communities are treated.”

Also, with the winding down of final salary pension schemes and the rise of defined contribution (DC) plans, staff are finding themselves able to make their own investment decisions. Tim Middleton, technical consultant at the Pensions Management Institute, says: “It is a concern for many people in the UK that when they are making an investment decision, they want to think they are doing something socially and morally responsible. Members of DC schemes would like to be able to make their own choice about avoiding companies they think behave in an unethical fashion.”

It has long been thought that investing ethically reduces performance because of the limited range of suitable companies. But Emma Jones, investment development manager at Scottish Life, says: “Because of this cycle of consumers being interested in the behaviour of companies they spend their money with, the companies that do behave in a more ethical way tend to prosper. You can see extremely competitive returns from the ethical funds.”

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