This multi-billion pound industry can be a force for good

Pensions have real clout. According to the Pensions Institute at Cass Business School in London, UK pension funds have assets of more than £800 billion, owning a third of all shares in the UK and one-fifth of all government bonds. Do you know how yours is being invested? Few are without some kind of pension so everybody has a voice in the socially and environmentally-responsible investments debate. 

 
According to Ethical Investment Research Services EIRIS, many large pension funds have become increasingly interested in how long-term value is affected by environmental, social and governance (ESG) factors. Legal requirements have resulted in improvements in company disclosure of their ESG impacts and in April this year, the Chief Executive of Unilever explained how sustainability is also good for business. ‘Investors are starting to value the company’s approach’, Paul Polman said triumphantly. He talked about how improving the lives of the world's citizens and coming up with genuine sustainable solutions means Unilever is more in synch with consumers. He said, ‘this will ultimately result in good shareholder returns’. 
But not every company sees it this way so it is important to be asking the right questions. The law requires pension funds to declare in their Statement of Investment Principles (SIP) whether or not they take ESG issues into account so you’re well within your rights to ask. Few wish harm to others or their environment but are responsible investments on people’s radars when it comes to pensions?
 
“As a financial adviser, I am very rarely asked about ethical pensions”, says Adrian Johnston at Johnston Financial “and I have never seen a pension scheme where the default fund is an ethical one. Unless the ethical choice is put in front of people, very few will ask for it”. At Johnston Financial they actually ask their private clients whether they want to look at socially responsible investment (SRI) for their pensions and then whether their concern is more social or environmental in nature.
Often, responsible investment funds operate on the basis of exclusion. For example, Brown Shipley offers Kames Ethical Equity to clients, as the fund avoids alcohol, oppressive regimes, gambling, tobacco, the military and genetic engineering. But they also offer investment in the CIS Sustainable Leaders Trust where the criteria are that the companies must have ‘a positive effect on the environment, human welfare and quality of life’. Again, the fund excludes companies which are involved in activities considered harmful, like tobacco, alcohol and arms but also ‘actively seeks’ those involved with positive activities such as education and healthcare. “The criteria are broadly interpreted though”, explains Charles Fotheringham at Brown Shipley. “For example Vodafone Group has the biggest holding in this Trust”.
Clients need to also be asking their pension fund managers how they interpret socially- and environmentally-responsible investments – do they simply avoid certain industries or go one step further and invest in companies that proactively have regard for the health of people and planet? This doesn’t have to be a sustainable timber company or a business focusing on renewable energy. For example if you’re passionate about water issues, think of industries that use a lot of water and research which companies seek to minimize their water footprint – this could be a mining or an agriculture company. By staying mainstream, you can exert pressure on the big names to improve their ESG performance.
 
“Over the last 10 years I have seen interest in ethically-invested funds really pick up”, says Fotheringham “particularly among women. Our approach is to actively focus investments more on the essentials of life, like water and agriculture as well as to avoid certain industries. But we are accountable to our Investment Policy Committee and only have a 10% leeway to go off-piste, for example investing in new technology like solar power. The ethical story is not a straightforward one but interest is growing, which is good to see”. At the profiling stage, when new clients approach Brown Shipley unless they ask about ethical investments they won’t be mentioned. So you’ll need to ask, ask, ask. 
When it comes to company-managed group personal pension (GPP) plans most people participating in one have very limited knowledge of investments and employers tend to choose broad funds that have mixed assets. Johnston explains how they often use lifestyle funds that, as members approach retirement, gradually change the investments to lower risk reducing the stock market element and moving to a mixture of fixed interest and cash. “‘Deep green’ – very ethical – funds may not be able to touch three-quarters of the market”, says Johnston “so investments are more volatile. However, there is now a considerable range of ethical funds with management teams who have built up many years of experience in this area and it is possible to obtain good long term-performance”. 
If you find that you are not happy with the ESG provisions made by your pension fund, you could write and say so. Equally, you could let them know if you approve of their responsible investment policies. Let them know it matters to you.
So put it to your employer, put it to your financial adviser, put it to your pension provider. The more questions asked, the more likely it is that companies will improve their regard for human and environmental health. And the greater the market share of companies worthy of our money, the better the returns. There is a growing awareness that sustainability is good for business; let’s keep the pressure on. 

According to Ethical Investment Research Services EIRIS, many large pension funds have become increasingly interested in how long-term value is affected by environmental, social and governance (ESG) factors. Legal requirements have resulted in improvements in company disclosure of their ESG impacts and in April this year, the Chief Executive of Unilever explained how sustainability is also good for business. ‘Investors are starting to value the company’s approach’, Paul Polman said triumphantly. He talked about how improving the lives of the world's citizens and coming up with genuine sustainable solutions means Unilever is more in synch with consumers. He said, ‘this will ultimately result in good shareholder returns’. 

But not every company sees it this way so it is important to be asking the right questions. The law requires pension funds to declare in their Statement of Investment Principles (SIP) whether or not they take ESG issues into account so you’re well within your rights to ask. Few wish harm to others or their environment but are responsible investments on people’s radars when it comes to pensions? 

“As a financial adviser, I am very rarely asked about ethical pensions”, says Adrian Johnston at Johnston Financial “and I have never seen a pension scheme where the default fund is an ethical one. Unless the ethical choice is put in front of people, very few will ask for it”. At Johnston Financial they actually ask their private clients whether they want to look at socially responsible investment (SRI) for their pensions and then whether their concern is more social or environmental in nature.

Often, responsible investment funds operate on the basis of exclusion. For example, Brown Shipley offers Kames Ethical Equity to clients, as the fund avoids alcohol, oppressive regimes, gambling, tobacco, the military and genetic engineering. But they also offer investment in the CIS Sustainable Leaders Trust where the criteria are that the companies must have ‘a positive effect on the environment, human welfare and quality of life’. Again, the fund excludes companies which are involved in activities considered harmful, like tobacco, alcohol and arms but also ‘actively seeks’ those involved with positive activities such as education and healthcare. “The criteria are broadly interpreted though”, explains Charles Fotheringham at Brown Shipley. “For example Vodafone Group has the biggest holding in this Trust”.

Clients need to also be asking their pension fund managers how they interpret socially- and environmentally-responsible investments – do they simply avoid certain industries or go one step further and invest in companies that proactively have regard for the health of people and planet? This doesn’t have to be a sustainable timber company or a business focusing on renewable energy. For example if you’re passionate about water issues, think of industries that use a lot of water and research which companies seek to minimize their water footprint – this could be a mining or an agriculture company. By staying mainstream, you can exert pressure on the big names to improve their ESG performance. 

“Over the last 10 years I have seen interest in ethically-invested funds really pick up”, says Fotheringham “particularly among women. Our approach is to actively focus investments more on the essentials of life, like water and agriculture as well as to avoid certain industries. But we are accountable to our Investment Policy Committee and only have a 10% leeway to go off-piste, for example investing in new technology like solar power. The ethical story is not a straightforward one but interest is growing, which is good to see”. At the profiling stage, when new clients approach Brown Shipley unless they ask about ethical investments they won’t be mentioned. So you’ll need to ask, ask, ask. 

When it comes to company-managed group personal pension (GPP) plans most people participating in one have very limited knowledge of investments and employers tend to choose broad funds that have mixed assets. Johnston explains how they often use lifestyle funds that, as members approach retirement, gradually change the investments to lower risk reducing the stock market element and moving to a mixture of fixed interest and cash. “‘Deep green’ – very ethical – funds may not be able to touch three-quarters of the market”, says Johnston “so investments are more volatile. However, there is now a considerable range of ethical funds with management teams who have built up many years of experience in this area and it is possible to obtain good long term-performance”. 

If you find that you are not happy with the ESG provisions made by your pension fund, you could write and say so. Equally, you could let them know if you approve of their responsible investment policies. Let them know it matters to you.

So put it to your employer, put it to your financial adviser, put it to your pension provider. The more questions asked, the more likely it is that companies will improve their regard for human and environmental health. And the greater the market share of companies worthy of our money, the better the returns. There is a growing awareness that sustainability is good for business; let’s keep the pressure on. 

This article was first published in Scottish Field magazine, July 2012.