For most of us, our homes and pensions are the biggest investments we will ever make. With the former, all our money goes into bricks and mortar. With our pensions, we get to decide how our money is invested. This means we can choose to invest not purely for financial return, but also to help tackle environmental and social problems.
Profit with principles-type investment is on an upward trajectory. Figures from Morningstar show that global sustainable mutual fund assets hit a record $2.3 trillion (€1.96 trillion) in the second quarter this year, the fifth consecutive quarter of growth.
Ethical investing is becoming mainstream, with many fund managers requiring investors to opt out if they do not want it rather than clients having to specify that they would prefer a fund that follows environmental, social and governance (ESG) principles.
There is huge variation across the spectrum, from exclusion-type funds that merely avoid certain investments, such as weapons manufacturers, to funds that seek companies actively tackling climate change or social disadvantage. As noted by Moneycube co-founder Ralph Benson, funds that market themselves on the basis that they don’t invest in bombs are a little hard to take seriously given how far ethical funds have come.
Proponents of ethical investing argue there are solid reasons for sending your pension money in this direction. The most obvious is the potential impact on society and the environment. For example, if your fund invests in renewable energy, there’s a clear benefit for society. Yet there are other inherent strengths in these types of investments. They can help investors to avoid companies and sectors most likely to be hit with sanctions and regulations as governments seek to disincentivise poor practices.
Jerry Moriarty, chief executive of the Irish Association of Pension Funds, says there is evidence that ESG funds at the very least don’t perform any worse than other funds, adding that a strong ethical ethos at a company often indicates better practices in other parts of its operations.
“Companies that pay proper attention to climate change or social issues tend to be better run, and therefore have better results,” he says.
According to Benson, investors must focus on risk and opportunity. “Ask yourself what risks you are reducing by having at least a portion of your pension in these funds. For example, funds that avoid fossil fuels weathered the downturn when oil prices plummeted last year much more successfully than others,” he says.
“In terms of opportunity, the general thrust of regulation is towards a low-carbon economy, and the people who are capitalising on this, as opposed to fighting against it, are the ones poised to grow. It is no longer a question of beating yourself up about investing in sin stocks; it’s about making sure your investments are managing risks and capitalising on opportunities.”
Ethical investing is an alphabet soup of terminology. You’ll see acronyms and buzzwords such as ESG, ethical, sustainable, impact, socially responsible investing (SRI), and the word “green” here and there for good measure. All have positive undertones, although it is not advisable to judge the merits of a fund by its title. If you want to know what a fund actually does, as opposed to what it seems to do, ask your adviser or at least look at the fund’s fact sheet, which should tell you its objectives and top ten investments.
Moriarty says that if you don’t have the time to drill down into your pension funds, ask your adviser or pension trustees to do it for you. “Everyone is claiming to be good at responsible investment but this can’t be true for them all,” he says. “It’s about cutting through the noise and choosing the right one.”
Financial watchdogs are attempting to rein in the use of misleading labels. The Financial Conduct Authority (FCA) in the UK recently issued guidelines on how these funds should be marketed. This move was prompted by numerous examples of what the FCA considered to be misrepresentation. In one case, the top ten holdings of a “sustainable investment” fund included a pair of energy companies with high carbon emissions.
If you have a private pension or personal retirement savings account, you can ask your adviser about ethical options. If you are tied to a large occupational scheme, it can be a little trickier — though not impossible — to direct your money towards worthier investments.
“Corporate pensions, which is where the bulk of the money is, have a long way to go,” Benson says. “If you’re a trustee it can be difficult to get administrators to introduce new funds. They tend to want to stick to vanilla options, which goes against the idea of people taking charge of their own pensions.”
Many people in workplace-based schemes have their pensions invested in the default fund option, but there are usually other options if you ask for them. “Some schemes keep it simple, as having too much choice can overload people, while others give numerous options including ethical, socially responsible or impact funds,” Moriarty says.
In general, employers with large numbers of younger staff tend to offer a better range of ethical options. For employees not happy with what’s available, it’s a case of talking to the trustees.
“Employees need to collectively put pressure on their employers to provide the kinds of ethical options they want,” Marc Westlake, managing director of Global Wealth, says. There are thousands of ethical-type funds available but anyone tied to an occupational pension is most likely to be offered one of the handful of funds on the Irish market. Examples include Cantor Fitzgerald’s Green Effects fund, Aviva’s Stewardship Ethical Equity fund and Standard Life’s Global Equity Impact fund.
Green Effects is the largest with, according to its fact sheet, 40 per cent of its holdings actively invested in tackling climate change. Its largest investments are in wind turbine firm Vestas; Tomra Systems, which develops advanced collecting and sorting systems to minimise waste in the food, drink and recycling industries; and Svenska Cellulosa, Europe’s largest private forest owner.
The Stewardship Ethical Equity fund invests in companies such as Apple, Linde and Thermo Fisher Scientific. The Standard Life fund invests only in companies that have a measurable impact either socially or environmentally; its top three holdings are WuXi Biologics, Samsung and Tetra Tech.
New Ireland has the Pension Alternative Energy fund and the Pension Water fund, while Irish Life introduced new funds from Amundi earlier this year: the Multi-asset Sustainable Future fund and Global Ecology ESG fund. These come at a premium in terms of fees but, given that Irish Life is the biggest corporate pension provider in Ireland, the move should at least give more employees choice on the ethical front.
“It’s progress,” Benson says. “If I were working for a big employer that is with Irish Life, I’d be asking about these funds.” Westlake says that anyone not tied to an occupational scheme should be aware that they do not necessarily have to stick to the ethical offerings from Irish life insurance companies.
“Even if you go to a broker, you will probably be offered something from one of the Irish insurance companies, when in fact there are thousands of funds available on the open market,” he adds.
Ethical-type funds have traditionally tended to come with higher management fees. This, Westlake says, has been attributed to the cost of using experts to analyse company practices and assess their suitability for particular funds.
Irish Life’s new funds, for example, have fees that are 0.4-0.5 percentage points higher than its flagship multi-asset portfolios, while Aviva’s Stewardship fund is 0.25 percentage points more expensive than its main range.
Experts say that the gap between the cost of ethical choices and the rest is starting to close. For example, the cost of Standard Life’s Equity Impact fund was reduced last year, meaning it is now cheaper than its main multi-asset range.
Also, as Westlake notes, cheaper index-tracking funds such as Vanguard’s ESG index fund have started to come on stream as another option for cost-conscious investors. Yet not all passively managed ethical funds are as rigorous as you might hope in terms of where they put their money. Recent research from French think tank Edhec into climate-related exchange-traded funds (ETFs) found that 35 per cent of companies with worsening environmental performance received an increase in their weighting in these funds.