In this comment, we report the results of research on pension fund trustee decision-making relevant to socially responsible investment (SRI). Based upon a sample of over 150 UK trustees, it is shown that a majority of trustees believe there are significant barriers to the implementation of SRI. At the same time, it is shown that experienced and professionally qualified trustees are more doubtful about SRI than recently appointed trustees.
We asked our respondents to indicate whether their plans had implemented SRI policies including screens on investment in specific types of firms and countries, and the adoption of SRI principles.
On these counts, it is shown that there are profound differences of policy and opinion compared to Oxford undergraduates. In conclusion, it is suggested that these differences may be due to different scales of moral commitment - local and global - as well as different conceptualisations of time – now, and far into the future. Tentative paths of reconciliation are also noted and commended.
Social responsibility is arguably a mainstream issue; its advocates have moved from the university campus to shareholder groups including institutional investors. What started as an attack upon unresponsive corporations seemingly operating at will around the world has been remade into a broad-based agenda for investors focused upon improving standards of corporate governance against a variety of economic, social and environmental criteria. There is unease amongst many investors about joining together (‘legitimate’) concerns for economic efficiency with (‘contentious’) concerns for global equity and social justice.
Nonetheless, there is an increasing body of research arguing that any commitment to superior long-term rates of return must be mindful of the sustainability of chosen investment strategies (witness the activities of UK, US and European pension funds with respect to climate change; see Mercer Investment Consulting 2005).
Care should be taken not to exaggerate institutional investor concern for social responsibility. Equally, these issues are controversial in the financial services industry and especially amongst fiduciaries responsible for the design and execution of investment strategies on behalf of beneficiaries. Even so, those advocating SRI have moved from Hyde Park corner, the snow-packed paths of Davos, and the margins of parliamentary politics to major institutional investors, their service providers, and pension funds. For example, there is a significant student lobbying effort directed at the investment policies of universities and colleges just as there is an organised faculty lobby group focused upon the SRI policies of the Universities’ Superannuation Scheme (one of the largest UK pension funds to which most university academics belong). These are forceful, articulate, and informed advocates of SRI: they are not going away.
Student expectations and their points of reference are likely very different to those of pension fund trustees whose responsibility for beneficiaries’ welfare is inscribed in statute and common law. But is there empirical evidence for such a difference? In research on UK pension fund trustee decision-making, Oxford undergraduates were used as a reference point against which to compare the competency and consistency of decision-making in a series of tests involving probabilistic judgment (see Clark et al 2006a, 2006b). It was found that there was little difference between trustees and undergraduates with respect to the behavioural foundations of competence. There were, however, significant differences between trustees and undergraduates with respect to the consistency of decision-making such that trustees with higher levels of a formal education and professional qualifications are likely to be more consistent than their peers and undergraduates.

In what follows, we draw upon that material to compare the attitudes and behaviour of pension fund trustees against Oxford undergraduates with respect to SRI. Before doing so, brief comment should be made about the socio-demographic characteristics of these two groups: given their household incomes, levels of educational attainment, age, and ethnic status, the trustees surveyed could be the fathers and mothers of Oxford undergraduates. They come from much the same social strata of UK society. The trustees (about 150) surveyed were those who had volunteered to be evaluated in terms of their competence and consistency and a group of newly appointed trustees participating in training programmes. They came from larger funds, both public and private. As for the undergraduates (about 80), they were first year students drawn from a compulsory class on research methods in the human and physical sciences. Finally, most trustees were men. A slight majority of undergraduates were women. Background details on the trustees and undergraduates surveyed are available in Caerlewy-Smith (2006).
It should be emphasised that SRI questions were mixed with a large set of puzzle problems that required close attention in terms of comprehending their meaning and applying relevant probabilistic decision techniques. SRI questions were relatively few in number and tangential to the apparent logic of the study. Neither group of respondents were aware that we would ask SRI questions; trustees would have seen these questions as leading-on from questions concerning pension fund governance. The simplest question posed was whether trustees and undergraduates believed there were barriers to the implementation of SRI in UK pension funds. Basically, about the same proportion (just over 50%) of trustees and undergraduates believed that there were barriers to implementation. There was no evidence to suggest that age, gender, status (member-nominated or employer nominated), and household income (trustees alone) made a difference to their answers.
There was evidence that the smaller the pension fund the more likely trustees would indicate the existence of significant barriers to SRI investment. There were also differences between pension fund trustees on this count once we considered years of service as a trustee, the number of training sessions taken by a trustee, and their level of professional qualifications. Newly-minted trustees tended to be more optimistic about the prospects for SRI than trustees with years of service. Furthermore, it was found that training did not have a consistent effect on the answer yes or no – a small amount of trustee training seemed to magnify the likelihood of there being barriers to implementation, a median level of training seemed to dispel those concerns, while high levels of training seemed once again to amplify expectations about the barriers to implementation. The higher trustee professional qualifications the more likely they believed there were significant barriers to implementation. The more experienced and sophisticated a trustee the more likely they would answer with a strong affirmative: less experienced trustees were likely to answer as the educated public would answer.
Four related questions were posed to elicit the SRI policies of pension plans compared to undergraduates’ idealism. There were clear differences between the two groups of respondents on the following issues.
1. Trustees were asked if they ever sought the views of plan beneficiaries about SRI while undergraduates were asked whether they would seek the SRI views of beneficiaries if they were trustees. Their answers were very different—about 80%of trustees indicated that they rarely or never sought beneficiaries’ views whereas about 80% of undergraduates would seek beneficiaries’ views if they were in that position (Figures 1a, 1b).
2. Trustees were asked to indicate the types of firms (eg, those producing alcohol, tobacco, firearms etc.) their plans screen-out from investment portfolios just as undergraduates were asked how many firms they would screen-out if they had the responsibility. Again the answers were clearly different – about 95% of trustees indicated that their funds did not screen out any firms whereas all undergraduates would screen out at least one type of firm, and about 50% would screen out more than three types of firms (figures 2a, 2b).
3. Trustees were asked whether their funds screened-out countries with poor human rights records from their investment portfolios as undergraduates were asked whether they would do so if it was their responsibility. Once again the answers were clear-cut – about 90%of trustees indicated their funds did not screen-out countries whereas about 77% of undergraduates would screen-out these types of countries (a lower than expected proportion compared to the previous results) (figures 3a, 3b).
4. Trustees were asked about their funds’ commitment to SRI principles while undergraduates were asked whether they would use SRI principles if they had the opportunity. Nearly 80%of trustees indicated that their funds had not adopted any SRI principles with nearly 20 %indicating that their funds had in fact adopted one or more such principles. All undergraduates would adopt one or more such principles with a strong bias in favour of two or three such principles (figures 4a, 4b).
We draw four main implications from these findings. First, there is a profound though unappreciated difference of opinion about the role of pension fund trustees in relation to community aspirations. Through interviews, it is plain that trustees believe they are not appointed to “represent” community aspirations (about SRI or anything else). This is a significant point of contention.
Second, there is a profound difference of opinion about the proper roles and responsibilities of trustees. Few trustees believe their role is to directly ‘represent’ beneficiaries’ views and opinions on investment – rather, many correctly believe they are legally delegated the power to act on behalf of beneficiaries’ long-term welfare. In play are competing theories about the proper roles and responsibilities of trustees; whereas trustees refer to their legal obligations, Oxford undergraduates refer to an ideal moral order of global equity and social justice. Perhaps under-appreciated by those agitating for SRI action, trustees are also motivated by conviction – albeit at a different level and about a particular issue.

Third, trustees believe that there are significant barriers to the implementation of SRI policies (just as there are barriers to innovation in general). The most experienced and the most qualified trustees believe this to be the case, with significant implications for pension fund investment policy. The reliance of trustees on expert judgement for effective decision-making combined with the apparent diversity of trustee competence and consistency, suggests that the opinions of experienced and qualified trustees carry more weight than the opinions of newly appointed and less qualified trustees. This may lead to resistance to new ideas with unproven track-records. After all, the industry is awash with fads and fashions clamouring for attention. With widespread disagreement amongst academic researchers and industry analysts about SRI effects on fund-specific performance, deference to those with evident knowledge and superior judgement seems entirely likely.
Fourth, apparent differences between trustees and undergraduates over the appropriate implementation of SRI policies may hinge on the fact that the former are ultimately responsible for fund performance whereas the later are not. Undergraduates’ sense of responsibility for global welfare is laudable and encouraging. Equally, there is the hint of moral hazard in the would-be adoption of SRI policies by undergraduates – should SRI policies fail, the burden of failure would fall heaviest on the current welfare of beneficiaries and their plan sponsors rather than on the future welfare of undergraduates. Perhaps the issue is really one of the time-horizon over which to judge these issues: if investing in fossil fuels is justified by the expected rate of return (set against plan liabilities), it may be inconsistent with the expected welfare of subsequent generations. In this sense, the apparent differences over SRI between our study respondents may be attributed to how young and older people value the future.

Reconciling these differences in attitudes and beliefs between the generations may not be possible – after all, trustees’ obligations to beneficiaries’ welfare have a firm foundation in statute and common law. No compromise need be made or indeed even considered. But there have been moves to open a dialogue between stakeholders on SRI issues with some of the largest UK pension funds participating in consultative forum, forward-looking projects on long-term investment risks including climate change, and research projects on the costs and benefits of SRI utilising advanced financial instruments. Further more, pension fund engagement on issues of corporate governance including proxy voting strategies aimed at encouraging higher standards of performance suggest that the practice of pension fund investment may be evolving in ways congenial to SRI advocates especially when considered in the light of a growing market for global investment strategies (Clark and Hebb 2005).
Caerlewy-Smith, E (2006) A Study of Pension Fund Trustee Decision-Making. DPhil Thesis. Oxford: Oxford University Centre for the Environment (forthcoming)
Clark, G L (2000) Pension Fund Capitalism. Oxford: Oxford University Press
Clark, G L, Caerlewy-Smith, E, and Marshall, J C (2006a) Pension fund trustee competence: decision making in problems relevant to investment practice. Journal of Pension Economics and Finance (forthcoming)
Clark, G L, Caerlewy-Smith, E, and Marshall, J C (2006b) Consistency of decision-making: the effect of education, professional qualifications, and task-specific training on the probability judgements of pension fund trustees. WPG06-03. Oxford: Oxford University Centre for the Environment
Clark, G L and Hebb, T (2005) Why should they care? The role of institutional investors in the market for corporate global responsibility Environment and Planning A 37:2015–31
Mercer Investment Consulting (2005) A Climate for Change: A Trustee’s Guide to Understanding and Addressing Climate Risk. London: The Carbon Trust
Emiko Caerlewy-Smith and Gordon Clark, Oxford University Centre for the Environment in the UK; John Marshall, department of clinical neurology, Oxford