UK pension fund trustees are taking a cautious tack on new rules – effective from July 3 – that require them to disclose their policies on socially responsible investment (SRI). Most are choosing to defer to their investment managers, which have developed a range of responses to the new regulations, rather than adopt proactive SRI policies, consultants and investment managers say.
“Most trustees are quite sensibly addressing this quite slowly – given the complexity of the subject, this is a pretty responsible approach,” says Geoff Singleton, a consultant with Hyman Robertson, a consulting actuary.
From July, pension funds must include in their statement of investment principles their policies on how social, environmental and ethical considerations are taken into account in their investment decisions, and their policies on how they exercise rights – such as voting rights – attached to their investments.
A handful of pension funds have stepped forward with policy statements: notably two of the UK’s largest funds, the BT pension fund and the University Superannuation Scheme, which manage £30bn (E51.3bn) and £19bn respectively. Food retailer Sainsbury’s has had an SRI policy in place for more than three years, which was recently amended to cover how it would exercise its voting rights. Some local government pension funds have also been committed to some degree of SRI before the announcement, last summer, of the new regulations.
But the majority of trustees are adopting statements prepared by their investment managers. These usually incorporate two aspects: firstly, that the managers take social and environmental issues into consideration in the investment process; and, secondly, that the investment manager practices ‘engagement’ with the companies in which they invest, using their equity holdings to encourage companies to improve social and environmental performance.
This solves the problems that trustees face regarding SRI – that they simply do not have the time or expertise to adequately address SRI issues. “It’s beyond the scope of most trustees to set out in detail what they mean by ‘socially responsible’,” says Nick Fitzpatrick, a partner at actuaries and investment consultants Bacon & Woodrow, in London. “They have to rely on their investment managers to help them with voting policies, building portfolios and setting out general SRI principles.” Because investment managers take the view that their first responsibility remains to maximise financial returns for their clients, most have taken a conservative approach to incorporating SRI into asset allocation. Most claim that they already take social and environmental issues into consideration, where there is a risk of financial underperformance.
In a recent briefing note to clients, for example, Deutsche Asset Management, which manages £366bn worldwide, says that ethical and environmental issues make up part of a range of non-financial criteria which can impact company performance “which we already take into account in our analysis where relevant”.
This satisfies most trustees, says Crispin Lace, of consultants Watson Wyatt. “They can take comfort in the fact that investment managers are telling them that they’re taking these issues into account in their investment decisions.”
But a few investment managers have gone a step further. Schroders Asset Management and SG Asset Management, for example, have both appointed individuals with responsibility for SRI issues. At Schroders, with £89bn under management in the UK, associate director Charles Price has recently been charged with SRI issues, and is building a team to both ensure that fund managers are fully appraised of SRI issues when selecting stocks, and to identify underperforming companies to engage with on SRI questions.
And in March, SG Asset Management – which was set up in 1998, and now has £5bn under management – appointed Carole Arumainayagam to add an SRI element to its existing research capability. Her role, she says, is to look at companies from an environmental perspective, both in terms of risk, and, to a lesser extent, longer-term environmental opportunities. SG’s intention is clear: to use this additional analysis to generate higher returns for SG’s clients, she says.
In the first instance, however, most investment managers feel the most straightforward way of putting a socially responsible sheen on their activities, with the minimum of expense or disruption, is to pursue engagement strategies. This allows them to address pressing environmental and social issues in the course of normal meetings with company management.
Phillips & Drew , for example, with £41bn (E686m) under management, has stated that “we suggest that focused engagement is the best strategy for our clients” and “where a company has not met expected SRI standards, we should use our influence to seek an improvement”. This will be done through its regular meetings with management, and by exercising voting rights.
Perhaps surprisingly, one option for pension funds – investing in dedicated SRI products, such as those offered by Friends Ivory & Sime and Henderson Investors – has not proved popular on the institutional level.
Hyman Robertson’s Singleton says that this is partly because it is difficult to see how pension funds could develop such an approach into a broader SRI policy. “If you move 5% of a fund into ethical products, that will likely be seen as tokenism. In the long run, it could be a blind alley.”
But for all the caution, most observers believe that trustees and investment managers will develop more ‘activist’ approaches as time goes on. “What’s not come out yet is the extent to which trustees are going to do more than simply delegate SRI_issues to their fund managers. Over the next 12 to 18 months, the more the issue is discussed, the more ideas will emerge,” says Watson Wyatt’s Lace.
Mark Nicholls is a London-based financial journalist