A leap of faith?
Socially responsible investment (SRI) is now well established in European institutional investment decision-making as an accepted investment style for pension funds but, the issue of SRI as a means to effect positive social change aside, whether corporate social responsibility (CSR) adds value as a stock picking device for investors remains contentious.
Brian Pearce, director of the Centre for Sustainable Investment at Forum for the Future, addressing PIRC’s socially responsible investment conference in London – ‘From social concern to investor focus’ – put the business case for being green and socially responsible. As Pearce said there is “clear evidence that corporate social responsibility and socially responsible investing doesn’t lead to underperformance”. However, the evidence for outperformance has been “ambiguous”. Yet, recent evidence on screening in a study carried out by the Cooperative Insurance Society demonstrated that screen funds showed very similar risk-adjusted returns. This, as Pearce said, is interesting given that the “universe is obviously narrower”, suggesting some SRI effect. In his view, it depends on management strategy, sector and how shareholder value is created. Corporate social responsibility is not for all economic sectors and companies; yet active fund management using CSR screens demonstrated that, at the least, risk-adjusted returns are comparable and outperformance may be possible, there is evidence for this. He believed it was a matter of not, does CSR pay, but when? Stuart Bell, research director of PIRC, also agreed that CSR does not demonstrate a clear correlation with positive company performance. It remains essentially unproven. The Myner’s report has led to a “focused impact on how trustees can demonstrate added value”. He views the issues as long-term, because “putting the requirement for trustees to demonstrate this is a pretty onerous task”. However, although it is hard to measure the relationship between CSR and positive performance, Bell also supports the view that there is no evidence of a relationship to underperformance. He therefore describes the CSR effect as “neutral” and, as such, asks why investors should seek a rationale for CSR. Fundamentally, it comes down to the fact that socially responsible investment is “more than another investment style” and the greatest challenge facing SRI is “ensuring it is fully integrated into investment decision making”. Pension funds as investors have an obligation to make “responsible use of economic power and shareholder engagement”.
Alan MacDougall, managing director of PIRC, discussed the practicalities of shareholder engagement and pension fund activism. Namely, “pension funds using their position as owners to influence the corporate practices of companies in which they invest, market practices or the activity of other investors”. As MacDougall pointed out : “of the 10 principles of better investment practice, Myners thought that shareholder engagement would be the most difficult to achieve”. The difficulties of both informal engagement (such as writing to company management or arranging special meetings, either alone or with a group of other investors) and formal methods (shareholder attendance at AGMs with the specific purpose of raising questions or the calling of EGMs) prescribed a degree of caution. As MacDougall pointed out, engagement “if carried out assiduously can be very labour intensive”. Individual pension funds or investment managers acting alone may not be sufficiently large to achieve an impact and the results of engagement “may not always be clear”. MacDougall did however broadly agree that engagement works. The 1997 Shell AGM shareholder resolution regarding environmental reporting and human rights, lodged by PIRC, was one cited example of successful engagement. Another was the Local Authority Pension Fund Forum’s campaign to get FTSE 350 retail sector companies to adopt socially responsible policies on the standard and use of child labour, recently taken up by JJB Sports, Signet and Boots.
With the recent decision of CalPERS to pull out of four emerging Asian markets on ethical grounds, which he regards as an important statement to this end, Rob Cartridge, campaigns director for War on Want, regards pension funds as having a “major moral responsibility” over what is being invested in. He concludes that there is “a lot of responsibility riding on trustees and pension funds in responsibility of international development”. UK pension funds are “dwarfing the amount going into international development from foreign direct investment” by around 20 fold, said Eddie Rich from the Department for International Development (DFID). It is not just in terms of volume though that his department is focusing on pension funds in maximising the poverty-reducing impact of institutional investment. They recognise that institutional investors are the drivers of corporate attitudes and pension funds themselves are “slightly ahead of the game” in having to declare their SRI intentions. Moreover, as long-term investors, they have a sustainable interest. Yet, Rich saw several obstacles to pension fund investment delivering more pro-poor growth in developing countries. These are the lack of suitable assets offering an acceptable rate of return; poor information or data on risks; issues of liquidity which given pension funds legal requirements would make it difficult to invest in developing countries; tax and regulatory obstacles and asset management practices. However, he said, there is a “great opportunity here as investors to effect reporting systems and quality and quantity of investment into developing companies”. This could be achieved by stimulating demand amongst fund managers by SRI branding and reporting, improving the investment climate in developing countries, improving information on investment opportunities and also reviewing fund management incentives.
If SRI outperformance remains unclear, the ethical considerations for SRI clearly remain compelling.