Making ethical pension choices is no easy task

As a former financial adviser who often discussed ethical investments with clients, I am ashamed to admit that it wasn’t until last year I considered investing my own money ethically.

My epiphany came while listening to a talk by a leading investment manager urging advisers to press clients to consider the impact of their money.

Listening to this talk as I sorted my recycling, I was suddenly struck by the futility of my small day-to-day actions when I had not bothered to make ethical selections for my investments or pension. In that moment, I decided to move all my money into ethical investments.

In spite of an explosion in the number of funds brandishing ethical credentials, it was not straightforward trying to ascertain which funds do what, and how compatible these were with my ethics.

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I was surprised to find that the two largest investment platforms, Hargreaves Lansdown and AJ Bell, offered no filter to identify ethical funds.

This needs to change: platforms could make it much easier for DIY clients to find green funds that suits them. People want to see at a glance the “greenness” of a fund and its broad approach. Is it excluding “negative” stocks, holding “ethical” stocks or seeking stocks that maximise a responsible impact? Does its focus lie with new technology companies or the best of traditional business?

This information is not neatly available in a standardised format from different fund houses, but assuming it were regularly and objectively evaluated, it could be.

Left to fend for myself, I drew on my own knowledge, searched the internet for reports and explored asset managers’ websites.

When I dug deeper, I realised that two funds from different investment managers may have similar names but do vastly different things. Or, conversely, funds which sound quite different may do remarkably similar things.

With a plethora of terminology and no objective criteria, terms like SRI (socially responsible investment), ESG (environmental, social and governance), “ethical” and “impact” are used by different investment managers to mean different things.

Despite thinking I’d done a good job of creating a diversified portfolio, when I used a tool available via my investing platform to analyse correlation, I was disappointed to see that several funds I’d invested in held many of the same underlying stocks.

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Even with my background, the tools and data currently available to consumers made it difficult to make meaningful comparisons between funds when it comes to their ethics.

But I had another reason to see the task through to completion: the very strong performance of ESG funds in 2020. Even if your interests are purely mercenary, the evidence suggests that companies with robust ESG frameworks have outperformed. Doing good is now also increasingly seen as the superior way to improve returns.

Claire Walsh is an independent chartered financial planner