Pensions

Ethical and environmentally responsible pensions are now a real option. Several pension providers have recently launched ethical funds, and many more are expected as a result of new government regulations. From next July, all occupational pension schemes will be required to disclose 'the extent (if any) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments.' For the first time, trustees will have to consider ethics even if they do nothing about it.

A recent survey for the Ethical Investment Research Service (EIRIS) found that more than three-quarters of adults thought their pension fund should operate an ethical policy. However, most of these people want their fund to invest ethically only 'whenever it can do so without reducing financial return.'

Performance is still the key to ethical debate. The same survey showed that only 37 per cent would go for an ethical pension if it meant a lower rate of return, and pension fund trustees have a legal duty to safeguard the financial interests of beneficiaries. But whereas several years ago the restrictive nature of ethically invested funds was widely believed to produce lower returns, the argument today is much less clear cut. Indeed, many believe that companies which make positive contributions to the environment are companies of the future and will benefit accordingly.

In the past, because larger companies tend to have interests in many different fields of business, they are almost certain to have a skeleton in the cupboard somewhere, and this led to them falling foul of such a rigid screening system. Because of this, early ethical funds tended to have a smaller company bias, making their performance volatile. However, the process has moved forward now, with funds investing on a positive, 'best in class' basis rather than just a negative basis. This means that whilst all oil companies might have been excluded under the old system, ethical funds might now invest in one that says it wants, say, 40 per cent of its energy from renewable sources by 2020. Some fund managers believe that taking stakes in companies and encouraging them to act more responsibly is a more sensible approach. The "best in class" method could be viewed as a watering down of the ethical criteria by dyed-in-the-wool ethical investors, but most investors simply want a fund which is not too volatile but with an ethical slant.

Occupational Pensions.

Since July 2002, occupational pension providers have been legally required to disclose environmental and ethical information regarding their schemes. Therefore the ethical performance and actions of a company is available to anyone who requests it.

The change in legislation has prompted many pension providers to produce ethical funds, with more expected to follow. A major issue with ethical investment is financial performance, and how much of this is affected with environmental considerations. The public feeling for this situation is summed up by a recent Ethical Investment Research Service (EIRIS) survey which showed that although 75% of people thought that their pension fund should operate an ethical policy, only 37% would compromise a lower rate of return.