Encouraging change in firms
Directors of the Universities Superannuation Scheme (USS) decided to adopt a policy of responsible investment in 1999. USS, the occupational pension fund for UK Universities, with assets of about £20bn (e30bn), is the second largest corporate pension fund in the UK.
David Russell, adviser on responsible investment at USS, says it began by naming a team of three specialists to address the issues as the directors believe that companies which manage extra financial issues (EFI) well will prove to be better long-term investments, not least because of better risk management.
By EFIs, USS means fundamentals that have the potential to affect companies’ financial performance in a material way, but which are generally not part of traditional fundamental analysis. There are several reasons why they are left out – they are hard to quantify, they are longer term in nature, and the worldviews and investment beliefs of many professionals in this sector also lead to them being overlooked, says Russell.
EFIs include traditional corporate governance, intellectual capital and human capital, emerging regulatory and environmental liabilities, consumer and public concerns, corporate strategy, risk management and structure.
“USS believes that corporate ability to manage these issues well is also an indicator of good overall management,” says Russell. As such, it is an indicator of likely superior performance over the long term. So it is in the fund’s interest to encourage companies performing badly on these issues to improve their performance.
From a fiduciary point of view, it can be argued that if these issues could potentially hit the value of investments and expected returns, then USS has a duty to address this.
USS focuses on specific issues and sectors rather than trying to engage with all companies. And it actively collaborates with other asset owners and asset managers on a number of projects. “Collaboration with peers adds weight to the signal that is sent to investee companies,” says Russell.
So whether it is on climate change, via the IIGCC, the pharmaceutical sector, via PharmaFutures or the international standards of corporate governance, IFAS, this alignment between institutional investors is essential, he says.
Right now, one of USS’s biggest tasks is getting the mainstream brokering business to include the information about companies that investors need to make socially responsible investment decisions.
It is working on this with the Enhanced Analytics Initiative, which is a collaboration between institutional investors and fund managers.