Schemes should poll members to create an environmental, social and governance policy that they can have confidence in, says Stephen O'Neill from mastertrust Nest.
Over recent years, DC default funds have become more diversified – first by investing more in global equities instead of home markets, and then by looking to other asset classes like corporate bonds, real estate and so on.
Being transparent about how a scheme's ethical policy is being applied and monitored will give savers confidence in it
Meanwhile, ethical pension funds continue to be mainly offered as a single asset class, say ethical equities, which are significantly riskier than a more diversified portfolio. But it should be possible to save according to your ethical concerns without giving up returns or taking on significantly more risk.
Diversified ethical pension fund options that mirror more sophisticated default funds, including derisking into retirement, do exist. Some providers have borrowed from best practice in DC defaults in designing their ethical options.
By bundling up some of the available building blocks, from ethical global equities and corporate bonds to real estate funds managed according to strict sustainability criteria, members do not have to compromise risk-adjusted returns for their beliefs.
Engage with members
The shift towards more diversified and better risk-managed ethical funds is only part of the story, however. That ethical investment is still a niche pursuit is both cause and effect of people’s nervousness about it.
There remains a widespread belief that you have to sacrifice something – be it returns, risk management or both – when it comes to ethical investing.
Is it time for DC defaults to embrace ESG?
Large defined benefit funds and defined contribution mastertrusts have long been using their investments to engage with or divest from companies involved in controversial practices. Now, a renewed public focus on ESG could convince more to follow.
And there is sensitivity around what ethical investing means. Providers are perhaps wary of defining it, and investors may be suspicious of promises made in marketing materials.
The solutions include dialogue and transparency. By polling members on their views, collecting feedback and testing different ethical themes, schemes can develop ethical policies they can have confidence in. These may not align with the specific beliefs of every single member but should reflect the broad consensus.
Finally, being transparent about how that ethical policy is being applied, how it is being monitored and if and why it needs to change over time will give savers confidence in it.
Auto-enrolment is bringing millions of new savers into pensions. While only a small proportion may engage with where their money goes or how it is invested, those that do want to make a choice deserve options that suit their beliefs.
Stephen O’Neill is a senior investment research analyst at mastertrust Nest
