GLOBAL - Engagement is a tough task for smaller pension funds to undertake, according to Roger Urwin, special adviser to MSCI and global head of investment content at Towers Watson.

Speaking at the recent MSCI ESG research media networking event on 'Integrating ESG into the Investment Process', he said: "Engagement is very difficult to do on a cost/benefit basis unless you are a very large investor such as the California Public Employees' Retirement System or the Norwegian Pension Fund Global, which gives them traction.

"It is tougher for the smaller pension funds, and you do wonder about the effects and motivation behind that. Instead, it may be better for them to follow the guidelines of the UK Stewardship Code, which asks investors to have their own policy. Engagement is a work in process."

Remy Briand, managing director and global head of index and environmental, social and governance (ESG) research at MSCI, added that a more efficient way to influence company behaviour, and hence performance, is to invest passively in an ESG index, as the corporates act on the incentive of being included in the index.

Urwin also said asset owners needed stronger investment tools to implement ESG.

"Asset owners struggle to find the time for ESG, and tools are difficult to find," he said.

"Trustees have to be clear about their financial proposition, as approaching ESG from a financial point is absolutely critical. Too often the integration of ESG is still based on value propositions. But in the end, they have to find a portfolio that is fit for today and for tomorrow."

He added that consultants are driven by the agenda given to them.

"Trustees are worried about the condition and funding position of the pension fund today, as well as their legal position in practice," he said. "ESG is a difficult part of the investment agenda, which is why sometimes trustees take the easier, box-ticking route."

Urwin conceded that pricing-in ESG factors over the shorter term did not help. He added that, although pension funds have a long-term motivation to pay pensions in the future, they tend to measure investment performance in the short term.

"Measurement gives the subject respect, but it also brings with it its own brand of trouble, as sometimes investors measure something that is not relevant, such quarterly performance.

"Asset managers also very aggressively monitor their quarterly performance, while corporates operate according to 12-month targets. Measurement is needed, but it needs to be longer term and intelligent."

In other news, the annual survey by the UN-backed Principles of Responsible Investment (PRI) found evidence of growing commitment to responsible investment.

The aggregate results to the survey, published in the 2011 Report on Progress, found that:

Ninety-four percent of asset owners and 93% of investment managers have an RI policy More than half of asset owners' externally managed funds are subject to ESG integration, and 40% of the external assets of PRI asset owners are managed by PRI investment managers Nearly 80% of asset owners inform companies of their rationale when voting against management, an increase from 69% last year Seventy-one percent of signatories asked companies to integrate ESG information into their financial reporting Ninety percent of signatories collaborated with other investors on RI-related topics Sixty-one percent of investment managers now publicly disclose their voting policies, up from 55% last year.

In total, 545 investors completed the 2011 PRI annual assessment survey, which asks signatories how they are putting the six principles into practice.

Of the 516 investors required to complete the survey, 93% did so. 

Signatories are also encouraged to publish their responses to the survey in full, and this year around 44% of investors have made their responses public, up from 40% in 2010 and 25% in 2009.

The survey responses are available here.

The PRI now has 900 signatories from 47 countries, including 209 new signatories that have joined since September 2010.

Over the same period, 119 signatories left the initiative, primarily due to the introduction of mandatory fees.