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Ethical investing is failing to make an impact

Paul Farrow
Paul Farrow

BP’s plight has stirred environmental investors into action and may have awoken many people to the fact that part of their pension is invested in the troubled oil giant.

I am sure some of the green investors will be surprised to learn BP is deemed ethically sound for so-called green funds, such as M&S Ethical and Aberdeen Responsible UK equity, while the company represents a considerable percentage of the CIS UK FTSE4Good Tracker and the Family Charities Ethical fund.

FairPensions, the ethical campaigner, has been quick to use the disaster to raise awareness of its cause and wants people to use their right to vote as shareholders. “Few investors exercised their rights to demand the company address environmental and safety risks,” it says.

Yet I wonder whether its goal to spark investors into action is a lost cause. Ethical investing has been a legitimate asset class for more than two decades but is struggling to get its message across. The £9bn of funds under management is a minuscule sum in the scheme of things.

Certainly, all the evidence points to ethical investing in defined contribution and group personal pensions struggling to make an impact – take-up appears as low as ever and it is not as if choice is a problem.

According to the National Association of Pension Funds, the number of options available to employees has increased over the past five years.

The proportion of schemes offering an ethical option in 2005 was 40 per cent, in 2006 it was 38 per cent, 40 in 2007, 39 in 2008 and 55 per cent – the highest on record – in 2010.

Platform providers such as Fidelity admit that trustees and plan sponsors are keen to understand what funds are available within the ethical category. But this has yet to be translated into higher take-up, even though almost one in five plans on its platform have access to so-called green funds.

A look at the performance figures hardly flatters the sector. The five biggest ethical funds in the ABI pension sector have performed dismally over the past five years, not against non-ethical funds but against their peers.

Not one fund has delivered above average performance over one, two or three years. Friends Provident Stewardship, which is the biggest fund by far, is fourth quartile over five years.

It would seem either employees do not trust ethical funds for their retirement pot, or they do not care one jot whether they are indirectly funding an arms baron or investing in a company responsible for the worst oil spill disaster in US history.

That said, it is little wonder when many organisations and charities do not practice what they preach and do not offer an ethical pension for their own workers’ scheme.

Lee Coates, one of the most vocal and longest-established ethical financial advisers, is so concerned about this contradiction that he is writing to charities and Government organisations to examine whether they adopt ethical principles in their operations. The aim of the survey is to “out” those that contradict their principles.

Coates says: “Many charities’ pension funds are funded by donations. These donations are made in good faith without the knowledge they could indirectly be funding sweatshops and children working in mines. Most people are blissfully unaware of this.”

If charities cannot make the effort to invest ethically for their own employees, what chance is there of pension scheme members giving a damn either?

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