Here’s an eyecatching statistic. Less than one quarter of 1 per cent of people who are signed up with Britain’s most widely used pension scheme have ticked the “ethical” box.
That still amounts to 32,500 UK workers. They have formally instructed that their monthly pay deductions be invested according to a pre-set moral framework.
But it leaves the other 13.8 million members of Nest, a giant state-backed scheme with £58 billion of assets, content to be invested in other ways, the vast majority of them enrolling in its default fund.
Nest’s ethical fund explicitly shuns arms companies, pubs and drinks groups, casinos and bookies, oil and gas groups, private prisons, pornographers and cosmetics firms that test products on animals. Its default fund is in theory allowed to invest in all of them.
Ethical investing is very much a minority sport and seems to be shrinking in popularity. The percentage of Nest members opting for “ethical” fell from 0.28 per cent in 2023 to 0.23 per cent in 2025.
That might seem counterintuitive. Trust in business is at a low ebb and barely a day goes by without one sector or another being accused of wicked behaviour or not doing enough to protect users of its products or services. Most people would regard themselves as more or less personally ethical. Why would they not want their savings invested in a way that might encourage good corporate behaviour and punish the bad?
At least six reasons spring to mind. First, comes inertia. Nest’s army of savers are initially signed up to the default fund and have to actively opt in to the ethical option. The preference to do nothing or to conform with others seems to be far more potent than the urge to be virtuous.
Second comes perhaps a peculiarly British aversion to anything that smacks of do-goodery. No one likes a canting, sanctimonious preacher. Most of us drink and gamble and drive. Hypocrisy, for many, is a worse sin than burning fossil fuels.
Third is the suspicion that returns will be lower. A portfolio that automatically excludes large chunks of the economy by definition has fewer opportunities to make money. That has certainly been the case in recent years: Nest’s “ethical” fund has produced a pedestrian 4.7 per cent a year over the past five years, compared with 8.9 per cent for the default fund.
That “ethical” track record extrapolated over 40 years would produce a brutal level of underperformance: £1,000 turns into £6,279 when compounded at 4.7 per cent a year, but to £30,277 when grown at 8.9 per cent.
The story is much better over the longer term. Since Nest’s launch in 2012, both approaches have delivered an identical 8.5 per cent a year. Just to confuse matters, members choosing the Sharia option have done better still, bagging no less than 14.3 per cent a year, a level of sustained investment success that would put many a hedgie to shame. This seems to be more about the Sharia fund’s heavy weighting to tech stocks rather than any particular strand of Islamic teaching.
Fourth is a profound disagreement about what is and isn’t ethical. Take weapons: most ethical funds, as well as the Church of England pension fund, shun defence companies entirely, though many in Britain would see arms-making as a key good in a world of Putin aggression and Trump isolationism. Rishi Sunak took the trouble in 2024 to explicitly dub weapon-making as “ethical” in an attempt to deter investors from shunning UK defence companies.
• ‘Ethical’ investing is a kind of corporate cancel culture
Or technology firms. Ethical funds are stuffed with tech stocks, because the moral arbiters at fund management companies don’t seem to have noticed yet that these once-loved companies are increasingly being blamed for some of society’s gravest ills. It may not be long before social media companies such as Meta Platforms (Instagram) and Bytedance (TikTok), which are routinely accused of doing terrible damage to children, are added to the blacklists.
Having more control over what is deemed to be ethical is one reason Nest’s fund is under the spotlight this week. Nest wants to sack the current manager Columbia Threadneedle, which runs it as part of a wider pooled fund, and seek a new manager for a segregated mandate over which it has more say.
Fifth is the public assumption that mainstream funds are already weeding out the worst corporate offenders or at least pressuring them into better behaviour. Almost all pension providers claim to conform to basic ESG principles, ESG standing for “environmental, social and governance” standards. This is sometimes known as “responsible” or “sustainable” investing and is much less hard-core than “ethical”.
Sixth is a scepticism that boycotting harmful companies and industries actually does any good. The companies and industries still exist; they just end up being owned by less squeamish investors. Their cost of capital might marginally increase but that is all. Investors with a conscience merely end up cross-subsidising everyone else.
• So much for ESG? Ethical funds underperform market trackers
The idea that ordinary people could harness the £3 trillion or so of pension assets held in their name to influence corporate behaviour has never gained much traction. Make My Money Matter, the lobby group trying to change that mindset, was shut down last year. That was despite the best efforts of celebrity backers such as Olivia Colman and Benedict Cumberbatch.
Investing in a “sustainable” pension was 21 times more powerful than stopping flying, going vegetarian and switching to a renewable energy provider, MMMM used to say, a claim that always seemed improbably convenient.
Investors alone are not going to make capitalism more ethical. A single-minded focus on profit still takes precedence over any other priorities. ESG was only in fashion when it sold investment products. It is governments, regulators and prosecutors who will still have to do the heavy lifting.