In recent decades, individual investors have had a reasonable choice of options certainly in terms of mutual funds and retail pensions.
One oft-cited milestone in the UK was the launch of the Friends Provident Stewardship funds in 1994.
It was no coincidence that it was a Quaker-founded mutual insurer that offered them with the funds echoing many of their founders’ precepts, while also embracing a ‘stewardship’ role regarding the planet.
Three decades later, an expanded range is available under parent Aviva, with a multiplicity of competitors also offering to meet an investor’s concerns, deploying a wide range of investment techniques including integration, exclusions and tilts, weightings, differently defined investment universes and engagement.
Ethical investing can be defined broadly as an investment strategy in which an investor chooses investments based on an ethical code, such as religious or social values while also seeking financial returns.
When it comes to meeting specifically religious concerns, we now have a long established shariah sector.
Many workplace pensions also offer investment options with various degrees of choice covering ethical and environmental concerns as well as religious ones including, in the case of the former, applying such principles to default funds.
A highly-engaged individual investor can likely find a strategy to fit their requirements and meet most, if not all, of the factors that make up their own personal ethical code, and some workplace pension scheme members will also have a reasonably wide choice where their employer uses a Sipp that connects to a wide choice of funds for auto-enrolment.
But for most, choice is considerably more limited and tends to the general rather than the specific.
While most developments in ethical and responsible investing have been sector or market-led, regulators are increasingly in the driving seat, setting new standards, demanding that the investment industry applies more accurate labels and setting strategies for reaching net zero.
There are also signs of legal activity as well. In 2020 the League Against Cruel Sports was challenged by a vegan former employee over his sacking with workplace pension options an important part of the dispute, one which did see the charity change its pension offering.
However, in general, pension experts are a little sceptical about whether a personal ethical code can be reflected across a scheme’s membership.
Richard Butcher, client director of Zedra says: “With some modest exceptions, it isn’t anywhere and, arguably, nor should it be. In DC, it would be impossible to achieve in a default strategy, as how could one default tick the box of every member’s ethical code?
“In self-select, both contract and trust-based, and with the exception of Sipps, investment is achieved through pooled funds. Although these can be tilted to achieve certain objectives, they are rarely tilted for purely ethical reasons because duty of care and fiduciary duty prevail. This is done at a fund level not an individual member level. It would be wholly impractical, outside of a Sipp, to allow each policyholder to select underlying investments on the basis of their ethics. If you did, a quarter of a million members could result in a quarter of a million different investment strategies.
“That said, it’s possible to imagine a world – although I see no evidence of it being developed – where there are a number of underlying self-select funds that tick particular ethical codes, such as a vegan fund, a no fossil fuel fund, etcetera, with the member free to choose which to use and in what proportions.
“The exceptions are Sipps, where the policyholder has far more freedom and choice, and some generic religious funds, for example, Sharia funds.”
But some think greater personalisation along beliefs is a trend the pensions sector will embrace, particularly as carbon accounting and supply chain metrics become more accurate and individuals understand the climate and societal impact of their investments more clearly. Fund EcoMarket database SRI Services director Julia Dreblow says: “The pensions sector has generally been ahead of other areas on sustainability/ESG issues particularly on climate, but it risks that no longer being the case, as it is not covered by the FCA’s Sustainability Disclosure Requirements (SDR).
“My view is that both better disclosure and labelling will be useful for pension clients. I have suggested to the FCA that adoption of labels should be encouraged across all product types to avoid client/member confusion.”
Dan Smith, head of workplace distribution at Fidelity International, says: “When it comes to default funds, the ambition should always be that they benefit as many members as possible. By the nature of auto-enrolment, many members are put into a default strategy, so it’s important that any investment solution is designed to provide the right asset allocation and the right level of risk based on each member’s time to retirement. So, whilst the investment design is “one size”, there should always be a consideration into the ethics and beliefs of members – whether these are ESG, religion or ethics-related – built into the strategy.
“Concurrently, it remains important that plans offer a range of self-select funds to help members who have more particular requirements. These funds can help those who have specific beliefs or ethics choose where to invest their pensions in a way that suits them, while also being aware of market risk and returns.”
He notes that Fidelity also works closely with Tumelo to provide members the ability to provide their opinions on how their pensions should be managed, which, Smith says, enables greater transparency and accountability.
Indeed, if we do accept ESG as a broad umbrella term for this trend – is there a risk the ‘E’ for environmental comes to dominate the S in particular?
Butcher says: “There certainly was a focus on the E for a long time. Now, there is more focus on both S and G. The problem specific to S, that is holding us back a little, is “what does it mean and how do we measure it?” E we can, in part, define as climate and so measure carbon footprint. But S?”
Royal London senior investment development manager Ryan Medlock says: “There has and always will be a greater emphasis on the E, particularly climate change as it continues to dominate global headlines and remains a very emotive subject. However, I don’t think that necessarily means that we are losing S in the mix. If anything, I think we are starting to see a greater awareness and prominence of certain S issues off the back of this spotlight on E. For example, we are seeing more in the industry speak up about the need for a ‘just transition’ which involves moving to a more sustainable economy in a way that’s fair to everyone – including people working in polluting industries. The pensions industry has an important role to play in this by positively influencing the companies they invest in, particularly those companies within the energy sector.”
Others are less certain. Financial Inclusion Centre director Mick McAteer, who has authored several reports into sustainable investing in the past few years, says: “I think we are losing the S in the mix. It has not been given the same emphasis as the E. The E has been deemed more important. But we are still really struggling with the meaningful definition of the S. At least on the E, even though I have issues with the taxonomies, there has been effort, but we have not really made any progress on the S side in defining what social impact or socially sustainable mean.”
Dreblow says: “I do not worry too much about the S being ignored because the reality is that it is implicit within almost all ‘E’ issues. We split the topics out into separate areas E,S,and G, to help communicate and manage things better – but the concept of sustainability is about the interconnectedness of all these things, so in some ways meeting each separately isn’t that relevant.
“However, as we know, if we go too far down the route of trying to explain interconnectedness, eyes tend to start to glaze over and databases get in a mess, so I do not see this changing.
“To illustrate, climate change is, of course, an environmental problem, but the reason most people care about it – and why we need to manage it, is because of the problems it causes for people – damage to lives and property from flood fire and storm damage, to food supplies, the health implications of it being too hot, and even climate change driving mass migration and increasing the risk of wars from clashes over water resources.
“There are social issues that sit beyond climate and other environmental issues, but if we don’t address the existential threat from climate change and miss climate targets (and nature loss increases etc) the poorest will be hit first.
Is it a matter of offering some choice, some integration, some screening as an option?
Medlock says: “It comes back to recognising that there is a wide variation in preferences in this area. It’s impossible to create ‘catch-all’ solutions that will serve all of these preferences but there are ways to integrate ESG considerations and stewardship within existing investment decisions and processes whilst recognising the fact that choice is required to serve more bespoke preferences.”
Syndaxi Financial Planning’s managing director Robert Reid remains frustrated with the failure to provide significant choice including the question why it has taken so many providers so long to produce a credible shariah option.
BOX:Veganism, tobacco and workplace pensions
In 2020, the League Against Cruel Sports settled an employment dispute with a vegan former employee who had objected to his pension contributions going into a fund that included pharma, oil and tobacco stocks.
Zoologist Jodi Casamitjana had been dismissed after communicating with fellow staff about what the portfolio was invested in.
The tribunal had first ruled that ethical veganism was a philosophical belief and therefore a protected characteristic under the Equality Act 2010, an outcome which garnered most of the headlines.
Perhaps of most interest to the pensions sector is that the LACS moved its auto-enrolment default to an ethical option.
In a statement at the time, it said: “The only reason for the dismissal of Mr Casamitjana in 2018 was his communications to his colleagues in relation to our pension arrangements. Having revisited the issue we now accept that Mr Casamitjana did nothing wrong with such communications, which were motivated by his belief in ethical veganism.
“We are grateful to Mr [Jodi] Casamitjana for having raised the issue of pensions to us, which allowed us to change our default pension fund to an ethical one closer to our values.”
Casamitjana said: “This has been a great victory for all ethical vegans and animal protection. After nearly two years of litigation against the League Against Cruel Sports, I am extremely happy with the conclusion that we have secured.
“The case has established that ethical vegans are protected from discrimination, and I have received the acknowledgement I sought that my dismissal was based on my ethical veganism and was not justified or justifiable.”