IPE asked three pension funds in Italy, the Netherlands and Norway the same question: ‘What is your approach to exclusions and the screening of stocks?’ Here are their answers:

Bram van Els, communications officer at PME, the Dutch industry-wide Metalektro fund, which has AUM of €22bn

The basis of PME’s policies is fiduciary duty to its members. That is why its investment strategy is set up according to ALM studies. But although risk and return come first, PME still tries to be as socially responsible as possible within this fiduciary framework.

The PME board established a new SRI policy in March. The key part is a set of eight leading principles for all PME investments based on international treaties - such as the UN declaration of human rights and the ILO core standards - that cover a range of issues from the environment to labour standards and good corporate governance.

Our fiduciary manager, Mn Services, screens all the companies in our 3,500 stock investment universe against these principles. Those that don’t comply do so for two main reasons.

First there are companies that do not comply at a product level because they are involved in the production of controversial weapons, such as cluster bombs, that are excluded from the investment universe. There are some 19 or 20 exclusions in this category.

Second are those that fail at a process level because they are, for example, involved in child labour, cause environmental damage or operate in a country with no human rights.

However, we do not exclude them. Instead PME has decided to use its power as a shareholder to improve the way these companies produce and we include them in our engagement programme, which contains around 100-150 companies a year. It is very active and involves calling, writing to and meeting the companies over a three-year period. If they refuse to talk or fail to improve after that time they can be put on the exclusion list.

PME’s engagement programme was - and partially still is - run by F&C Investments. But we set up our own policy because the F&C programme does not entail a specific PME policy and was unclear why certain companies were in the engagement programme and others were not. PME’s criteria are very clear for the exclusion list as well as the engagement programme.

PME wants to avoid that its SRI policy is steered by hype, action groups or a day-to-day vision and that is why it is based on international and widely accepted standards. We felt some indirect pressure from the heated public debate that followed the so-called Zembla television programme in March 2007 that accused some leading Dutch pension funds of investing in cluster bombs. However, we were unscathed having already started to sharpen our SRI policy in December 2006.

PME did a backtest on whether the exclusions would have affected fund performance over the last five years but the result was neutral.

Michael Atzwanger, managing director at Pensplan, a foundation promoting and providing asset management services to pension funds that have AUM of €700m in Italy’s Trentino-Alto Adige/Südtirol region 

Although SRI plays a role in Italian mutual funds it is quite new to Italian pension funds. We are further behind when it comes to considering environmental, social and governance (ESG) criteria in asset management.

The biggest pension funds we assist in asset management are PensPlan Plurifonds and Laborfonds.

PensPlan Plurifonds includes an SRI investment line, AequITAS, which was established with Italian Banca Etica, among the six it currently offers. It was launched last year. One of the four investment lines offered by Laborfonds, a closed pension fund, is its SRI investment line, which has a maximum 25% in equities. The 110,000 Laborfonds members had until the end of April to decide whether to switch to it so we do not yet know how much it will have in terms of assets.

As Italy is new territory for SRI, negative screening is the most widely used strategy. Banca Etica’s asset management arm, Etica SGR, provides the investment universe for PensPlan Plurifonds’ AequITAS investment line, from which PensPlan Invest SGR, which administers the assets, and selects bonds and equities.

Laborfonds outsources the management of the SRI line to an external manager, having been advised on manager selection by PensPlan Invest SGR.

For both pension funds’ SRI lines we and the selected manager exclude investments linked to violations of human rights, armaments, money laundering, pornography, alcohol and tobacco. However, we also apply a best-in-class approach where, for example, we rate how countries deal with issues like nuclear waste. After the exclusions we have a universe of 150-200 investable stocks, which is large enough to achieve diversification.

As we are at the beginning with our SRI lines, the Italian pension authority has asked us to be as broad as possible with our investments. Given the low level of assets we currently invest the AequITAS equity portion in Etica SGR mutual funds. But as the assets grow we will have more possibilities. A recent survey of our members found increasing interest in environmental but not much interest in social issues. Consequently, in future we will concentrate on environmental issues.

PensPlan will also consider ESG criteria in its future asset management to further improve performance. This is in line with what is being done by the world’s biggest pension funds, which are a major driving force behind ESG strategy developments.

Currently we do not have to consider whether SRI investments deliver better or worse performance as SRI lines are required by our members, irrespective of their performance.

Martin Skancke, director general and head of asset management at the Norwegian finance ministry, which owns and oversees the operations of the Norway’s Government Pension Fund - Global, which has AUM of NOK2trn (€252bn)

The fund has a set of ethical guidelines relating to unethical acts or omissions and its sustainability for future generations. The council on ethics screens the stocks in the portfolio according to these guidelines.

We apply two forms of exclusion to the fund: a negative screen and an ad-hoc exclusion mechanism.

The negative screen only excludes weapons that in their normal use contravene basic humanitarian principles, such as nuclear and biological weapons, cluster bombs and landmines. But it is a narrow group and does not, for example, include handguns or fighter aircraft. Nonetheless, it forms the largest element of our exclusions - 20 of our 27 current exclusions are related to weapons production.

Our ad-hoc exclusion mechanism is related to the behaviour of companies and concerns environmental damage, human rights and other breaches of ethical standards.

If necessary the council on ethics will engage with the companies through our manager, the central bank Norges Bank, which has a very active corporate governance policy. Based on that the council decides what companies it will recommend for exclusion. We only use the ad-hoc exclusion mechanism as a measure of last resort, where there is a risk of being complicit in unethical activities or conduct that cannot be mitigated through engagement with the company.

As we have only excluded 27 companies out of a universe of 7,000 we do not think that it affects investment performance. As long as the investments are spread across a range of sectors and countries the portfolio will still be diversified.

Our exclusion policy is part of the evaluation of the ethical guidelines that we will present to parliament next year. The evaluation will address financial questions as well as a best-in-class approach that we currently do not apply to our stocks.

Our policy on engagement is very recent so it is difficult to tell how successful it is. But according to the Norges Bank’s 2007 report on engagement activities it has so far been positive.

Our ethical guidelines, investments and exclusions have aroused a lot of public and press interest, particularly in the areas of environmental and human rights criteria, and we monitor the public and media response closely.

Interviews conducted by Nina Röhrbein