What is the distinction between ethical pension and regular pension funds?

Ethical funds are those which purport to invest in companies and other organisations that do not harm individuals, the community or the physical environment. They have developed only in recent years, but remain a market segment, or niche market. They appeal to investors whose mission and objectives include a commitment to ethical values, however expounded. Institutional investors form the majority of holders of equities, and some of their stakeholders demand that their strategies are aligned with their needs. However, most institutional investors are driven by their stakeholders’ claims, which are usually to maintain or enhance capital value and improve dividend flows, and the extent to which ethical investment strategies are consistent with this is questionable.

What constitutes an ethical pension?

As the question implies, this is purely subjective, and a function of what the investor regards as ethical. If the investor has a narrow ethical stance, anything goes. If it is somewhat broader, then the investor has to be more selective. The latter might include companies such as Cooperative Bank in the UK, which has an explicit policy in this regard. A good example of the former is Philip Morris, a tobacco company, which has performed consistently well in terms of share price. One investor even commented that it is happy to invest in ‘one of the most hated companies in the world’, an allusion to the almost universal demonisation of tobacco products, because it can deliver shareholder value.

Very few banks would give a guarantee that a saver’s deposit would not be used for loans to unethical companies

What is the role, if any, of governments in advancing ethical pensions? Are they doing enough?

Governments are reactive to public demands, and there is evidence in the UK that the love affair with ethical principles and environmental concerns has its limits. Scepticism about what we can do about the environment, for example, is diluted by the reality that we are a small nation and unless the big nations such as the US and China fully and sincerely embrace ethical values, any domestic initiatives are probably futile. However, if governments really want to do something about it, they have to adopt policies that punish unethical behaviour and reward ethical behaviour. This probably has to be implemented via taxation and tax breaks.

What is the role of the private sector in promoting ethical pensions?

There remains an excellent opportunity for the private sector to capitalise on ethical funds, as there is most certainly a segment of the market that would respond positively to initiatives promoted by pension companies. Ordinary people in the street want to do their bit to preserve the plant’s resources, however little a contribution they make. It is an honourable aspiration, and I imagine that most pension companies are aware of this and will diversify the range of funds available to meet this need.

What is the extent of personal responsibility when choosing ethical and ‘unethical’ pensions?

It is a matter of personal conscience, and ultimately choice. We are dealing with future livelihoods, so the individual may have to choose between personal well being and social and environmental conscience. The unfortunate fact is that too few people have an adequate pension in place to serve their future needs, so they may place their own perceived personal responsibility to themselves and their families ahead of nobler, broader concerns. Look at simpler products such as bank deposits. Very few banks would give a guarantee that a saver’s deposit would not be used for loans to unethical companies. These banks exist and their number is growing, albeit slowly.

Robert Souster is a partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He was recently in Malta addressing the national conference organised by the Institute of Financial Services (ifs-Malta) in collaboration with Allied Newspapers Ltd.

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