Personal Finance: Hidden danger of ethics

For anyone interested in ensuring that their money is invested in a way that reflects their ethical concerns, the options have been sparse. Ethical personal pensions are available, but occupational schemes are limited by the primary focus of their funds' trustees being based on a remit to act in the interests of all members, not just those concerned with social or environmental justice.

All that may change. From next July, pension scheme trustees will be required to disclose "the extent to which social, environmental, or ethical considerations are taken into account in the selection, retention and realisation of investments".

This clause, added to the 1995 Pensions Act and passed by Parliament only a few weeks ago, could have far-reaching consequences for scheme members.

Opinions differ about whether it is a good or bad development. Alan Pickering, chairman of the National Association of Pension Funds (NAPF) can see both sides of the issue. "This will bring increased transparency to the running of pension funds but it may open the way for attempts to direct trustees on investment policy by pressure groups, perhaps with a very narrow interest. Suppose we get 60 activists picketing a trustee meeting on, say, Third World debt or the sale of weapons to a repressive regime. Single issues could make it difficult for trustees to meet their responsibility to act in the best interest of all the members."

Competing interpretations of this fiduciary responsibility are at the heart of the debate over whether any considerations apart from strictly financial ones should be used by scheme trustees to decide on investment policy. Trustees are voluntary and unpaid, but they can be held legally and financially liable if a scheme fails to meet its obligations to members and they can be shown to have been negligent.

Defined benefit schemes - those that are set up to pay a pension equivalent to a fraction or percentage of final salary - are often designed to render the employer company liable for any under-funding. If the scheme cannot meet pension liabilities, members can sue the firm for the extra amount needed.

The 1995 Act was introduced in the wake of the Maxwell scandal, in which the pension fund of a major public company had been ransacked by trustees and its funds utilised to buy company shares in an illegal scheme to support the share price.

Mr Pickering says: "I am not convinced of how well the original intention behind the Act sits with the introduction of these other matters-such as notions of what is, or is not, `socially responsible investment'. We shall just have to hope that they do."

A spokesperson for the Pensions Minister, Steven Timms, says: "We are not trying to direct investment policy in pension funds. Scheme trustees are free to choose what if any non-financial considerations they will take account of.

"Another clause in the Act adds that trustees should state `their policy in relation to the exercise of rights - including voting rights - attached to investments'. Here also it is government policy that we want to see shareholders use their voting rights at AGMs to express their views on matters such as pollution, or employment policies. But we leave it up to them as to how they vote."

A growing number of occupational schemes are adopting non-financial criteria in their investment policies. Tradecraft, set up to fight Third World poverty through trade, has pounds 2m invested in two ethical funds - the Stewardship Fund, run by Friends Provident, and Global Care, run by NPI. A scheme trustee Rob Lake, who is also head of policy at Tradecraft, says: "We are confident we are not losing by pursuing an ethical policy. Our statement of investment policy includes reference to ending Third World poverty."

Far larger funds are opting to make socially responsible investment decisions. Nottinghamshire County Council has decided to switch pounds 150m of its pounds 1.3bn fund to Henderson Investors. Roger Latham, Nottinghamshire Council treasurer, says: "The main focus of our policy is toward investment along ecologically or environmentally sound principles. In the long run, companies that take account of matters such as pollution are adding cost in possible future liabilities to their current operations.

"Managements who can see these issues are likely to outperform in other areas, and this makes them good investments in the medium to long-term. We think this is very much in line with meeting the fiduciary duties of scheme members."

This emphasis on environmental issues reflects the way that matters, such as the cost of cleaning up pollution, can be factored into share prices on the stock market. "They are quantifiable and measurable for that reason," says Mr Latham. "That means you can find general agreement on them.

"By contrast, the difficulty with ethical issues, such as Third World poverty, is that there may be very different , competing views about where the best interest of scheme members lie in regard to these."