How do I know if my pension is ‘ethical’ – and will it effect my money?

In our weekly series , readers can email any question about their finances, to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot Financial Planning and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk

Question: How do I know if my pension and investments are truly invested in “ethical” funds? This is important to me. Also, if they are in these ethical investments, does it probably mean worse returns for me?

Answer: The growing popularity of ethical investing has led to a surge in demand for funds that promise to consider environmental, social and governance (ESG) issues. But how do you really know if your pension or investments live up to the ethical standards you are hoping for?

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It is a fair question, and unfortunately, there’s no single standard or certification that confirms a fund is definitively ethical. Instead, you have to do a bit of detective work.

If you want to dig deeper, tools like Morningstar and Ethical Consumer offer more detailed ratings and breakdowns of how a company scores on various ESG factors.

These can give you a sense of how seriously a company or fund takes issues like climate impact, workers’ rights, executive pay or board diversity. But again, no system is perfect. ESG is a broad umbrella, and two funds with the same rating might approach ethical considerations very differently.

Let’s start with the basics. Most pension funds and investment platforms publish fund fact sheets. These include the top holdings, sector breakdowns and sometimes an ESG rating. This gives you a starting point to spot companies that might clash with your values—for example, arms manufacturers, fossil fuel giants or gambling firms.

You might also come across terms like ESG, SRI (socially responsible investing) or just plain “ethical.” It is worth understanding that ESG does not necessarily mean a fund is avoiding companies you might consider problematic. ESG ratings often reflect how well a company is managing its risks, not necessarily whether it is good or bad in an ethical sense. That is why it is important to look under the bonnet.

If your aim is to avoid certain sectors altogether, look for funds that apply “negative screening”. These will explicitly exclude certain industries, such as tobacco, oil and gas, or defence. Some funds also apply “positive screening”, seeking out companies that contribute positively to society or the environment.

There’s also the question of performance. Will ethical investing penalise your returns? It is true that narrowing your investment universe can affect performance, sometimes for better, sometimes for worse. During the early phase of the pandemic, ESG and ethical funds outperformed, thanks in part to a surge in tech stocks and the relative weakness of the oil sector. More recently, the pendulum has swung the other way.

Ultimately, ethical investing is more about aligning your money with your values than maximising returns at all costs. It may be that performance lags in the short term or that it outpaces the market. But for many investors, knowing they are not profiting from activities they find objectionable is a reward in itself.

If you are struggling to navigate the options, a financial adviser can help you find funds that better align with your beliefs. But do not be afraid to ask questions and look beyond the marketing labels. Ethical investing, done properly, is all about clarity and intention, not just ticking a box.