Every defined contribution pension plan has a small group of members who want their fund’s investments to reflect their own ethical values. Unfortunately, no two ethically conscious members have the same view of what constitutes an unethical investment worthy of being screened out; nor, again, of what amounts to constructive environmental, social and governance behaviour that can readily be counted in.
The result is that the ethical fund universe covers a very wide spectrum. At one extreme is a Calvinistic lowest common denominator of exclusion: no arms, tobacco, alcohol, gambling or sex. At the other lie funds with sophisticated rating systems designed to identify companies that make a positive ESG contribution. Because the criteria vary from fund to fund comparisons are difficult. And if many ethically aware pension scheme members took the trouble to look at what they were investing in, they might be rather unhappy.
I recently looked at three funds available on a well-known DC platform, starting with the Legal & General Ethical UK Equity Index fund. This aims to track the sterling total returns of the FTSE4Good UK Equity index. The FTSE4Good index series is weighted, like the FTSE All-Share index, according to market capitalisation. It excludes shares with links to tobacco, arms and nuclear power and has a rigorous methodology for identifying good companies suitablefor inclusion in the index.
The original article can be found at www.ft.com