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Ethical investing: How to fund your pension while staying true to your values

Would you be happy to sacrifice part of your future financial wellbeing in order to make the world a better place? That is the question asked, ahead of a London conference last month, of users of an app aimed at becoming the TripAdvisor of financial investments.

Almost two-thirds of the mostly millennials who use the Finimize app and responded to the question said they would be happy to accept lower returns tomorrow if it meant the investments they were making today were more socially responsible.

The message of altruism chimes with our times and the attention being focused on the catastrophic impact of climate change and the consequences of global capitalism’s endless determination to squeeze infinite returns from a finite planet.

It would seem that at least some people are now starting to seriously look at their investments to make sure they are not contributing to the problem.

The good news which came from that Finimize event in London in July – according to a piece published by Forbes – is that returns are not automatically reduced by investing sustainably and cutting all companies perceived to have a negative impact might be counter-productive.

“We are less powerful if that is the only way we do impact investing,” the head of sustainable investing at JP Morgan Jennifer Wu told the conference. “If we simply remove companies from our portfolio, we lose our seat at the table and our ability to influence and help them through this transition.”

An investment fund expert Jamie Broderick echoed her view and said people would not “have to sacrifice returns when investing in a socially responsible portfolio. There are several different categories along the spectrum of capital, and you can choose how you’d like to invest in line with your values.”

Chief executive of Finimize Max Rofagha said there was “clear latent demand when it comes to consumers transitioning to ethical and sustainable portfolios. And yet the vast majority of people are not following through on that intent because the offering is not easy to navigate through.”

Slim pickings

Similarly in Ireland, while ethical investing is growing in popularity, when it comes to options for building a pension pot through environmentally, socially or otherwise ethically responsible funds, the pickings are somewhat slim.

There are options available, whether you’re looking to start an ethical pension from scratch, or have been paying into a fund for a number of years and discover you’ve been investing in oil companies, gun manufacturers, for-profit prisons or similar, and you’re not too comfortable with that.

Before we get into that though, a quick look at what ethical investing actually is (it is also referred to as ESG – ethical, sustainable and governance – investing). You may be surprised by the companies considered ethical – it’s not all hemp growers, vegan burger manufacturers and solar-panel makers; tech firms, for example, may be considered ethical if they play by the right rules. The simplest stage in your pension-paying life to ensure your money is going into ethical funds is before you even start

There is no international benchmark for what an ethical fund must look like. It’s down to individual fund managers to make an assessment of each fund, with most using the United Nations’ Sustainable Development Goals (SDGs) as a guide; they will assess whether the fund invests in companies that either work directly towards, or donate to projects helping to achieve one of the 17 goals.

The SDGs include such aims as no poverty; zero hunger; quality education; gender equality; clean water and sanitation; affordable and clean energy; and climate action.

There is a movement towards standardisation of this assessment process, says Terry Devitt, head of investment at Harvest Financial Services, but it is a few years off yet. Companies can’t game the system though, he adds, so “just ticking a few boxes in terms of investing money into projects related to SDGs doesn’t automatically mean a company will be considered ethical by your fund manager.”

Speak to your HR department, or the person who looks after pensions where you work, and find out about the options available with the provider. If your company is with Friends First, take a look at their Stewardship Ethical Fund; if Standard Life are the provider, the European Ethical Equity Fund is an option to look into; and if your pension is with Irish Life, their Indexed Ethical Global Equity Fund could be suitable.

But if your employer doesn’t use any of these providers, or will not make a contribution if you opt for one of the ethical funds, you may not have any option but to pay into an existing fund.

If you have been paying into a pension for a number of years through your employer and you’d like to find out more about the fund, your HR or line manager will be able to direct you to the provider, who you can then contact directly for the fund details.

If you find out your company’s pension plan isn’t investing in ethical funds, and that’s something that bothers you, there are a few things you can do to address it but it’s not the simplest of processes and it isn’t open to everyone.

If your pension provider is one of the few that has ethical options, you can find out if your employer will allow you to switch funds, and if they’ll continue their contribution. “But not all employers would because it’s messy for them,” says Devitt.

“With some providers though, there are just no ethical options, so if your company happens to be one of those – then your only option is to remain in the company pension scheme.”

But, Devitt says, this option is expensive and really only open to individuals who have large pots to play with. “You’d want to be talking a pension pot in excess of €250,000, generally people who’ve been paying into their pensions for a long time, who decide later in their career that they want to move to self-administered, but once you do that, you can invest in anything then and you’ve a lot of options globally.”

It’s worth noting that the Pensions Authority of Ireland strongly recommends that people – both starting their pension or looking to switch providers – seek independent advice on what is the best option for them given varying risk levels and individual circumstances.

The Irish market is, as Devitt puts it, “somewhat behind the curve” on ethical pension options, but he expects this to change within the next 10 years as consumer demand increases.

So the upshot is – go ethical from the very beginning; go ethical at the end; see if your employer will play ball and let you switch; or wait a few years and see what the market brings.