Investing with a conscience
Is socially responsible investment (SRI) really any business of pension funds? Given the wide acceptance of SRI by leading pensions funds and their asset managers, this might seem a provocative question.
Yet there are many pension fund managers who feel very strongly that socially responsible investment (SRI) is not something that they or their asset managers should become involved in.
Some believe that straight-
forward investment decisions are inevitably compromised by considerations of environmental, social and governance issues. Others feel that SRI runs counter to a pension fund’s fiduciary duty to its members.
Yet across much of the developed world, public and private pension funds are being asked to consider non-financial criteria such as environmental, social and governance issues when deciding where and how to invest. Some leading funds have joined the UN Global Compact programme.
Recently, some of the largest pension funds in Europe signed up to the UN’s six Principles for Responsible Investment (PRI).
These voluntary principles are intended to provide pension funds and other institutional investors with a framework for better long-term investment returns
and to offer a way of integrating environmental, social and governance criteria into investment
analysis and ownership practices.
For some of those who answered our questionnaire, the question clearly touches a nerve.
The manager of a Belgian pension fund, for example, deplores the modern tendency to lump together two separate issues – governance and sustainability: “I fundamentally dislike the amalgam that is made when mixing ‘sustainable’ investments with corporate governance.
“A pension fund has only two fiduciary duties, namely to provide a pension to its members consistent with the pension promises made by the plan sponsor to its employees, or consistent with the pension forecasts the fund itself promises to achieve for its members, and to protect the interests of its members as a group with regards to issues that may affect the financial interests of its members as a group.
“It is clear that corporate governance, in the form of playing a constructive role in the management of the companies it invests in, is an essential part of the funds duty to protect its own interests.
“Sustainable investment, as in environmental, social, public health, and so on, however, is something different. Whether a company conducts its business in a ‘sustainable’ fashion is very much sociologically determined, and at present almost unilaterally defined from our ‘western’ perspective.
“I agree that we may (not should!) discuss these issues, but it is not the fiduciary duty of a pension fund. Other people/institutions are much more qualified at that.”
Even respondents who support pension fund involvement in SRI have strong doubts about the way the tide is flowing. A manager at a Danish pension fund, while approving the UN PRI initiative, adds: “I have a feeling a whole new industry is gradually being built up around such programmes and their national equivalents.
“Every day consultants and companies around the world offer their help or invite us to different seminars and events. Most of it we have to just let go. Who are the serious guys?
“I’m a bit worried about this, because it may water down the good and necessary progress. Anyone may find some sort of programme which they can enter without any consequences for themselves and the results may be none.”
Most managers think the voluntary United Nations Principles for Responsible investment (PRI) is a positive step, however. Five out of eight agree that it is likely to encourage pension funds to take socially responsible investment (SRI) more seriously.
The manager of a Danish pension scheme says: “I am in favour of such programmes as long as they do not interfere with the overall objective of good pensions. A good pension with a good conscience!
“Implemented in the right way and looked at as another parameter in the investment strategy it makes sense. A company that does not know how to behave and how to act in the environment they work in will not be a sustainable investment.”
Whether the lack of a set of common guidelines on responsible investment has held back pension funds from adopting socially responsible investment strategies is open to question.
One manager suggests the lack of guidelines has made it difficult for pension funds to implement their own SRI strategies: “The Global Compact or PRI-programmes are now widespread and it is possible to implement them in the daily screening of the portfolio.”
Whether UN PRI fills the gap is also questionable. A Dutch pension fund manager observes that “the lack is only filled very partly by UN’s PRI.”
It has been argued that for the UN PRI to be really effective they should be mandatory. Yet only one in 12 managers would favour compulsion.
Others have argued that the UN PRI should have been drafted by an organisation within the financial community rather than by the UN. Here opinion is much more evenly divided, with a small majority in favour of the UN’s authorship.
The role of the financial community is to support the UN initiative, a Dutch pension fund manager says: “It would be good if important organisations within the financial community support UN’s PRI draft.”
There are few worries about a breach of fiduciary duties. A substantial majority, six in seven managers, agree that a pension fund’s fiduciary responsibilities include taking account of environmental, social and governance issues in its investment decisions.
Similarly, the proposition that pension funds should never sacrifice investment returns for social concerns draws little support. Only a third of our respondents support such a strong line on fiduciary responsibility.
Yet the question raises the issue of who takes the decisions. In pension funds, decision makers are not stakeholders, and their views on SRI may not be aligned.
An Austrian pension fund manager points out that “this decision depends ultimately on the final risk-bearer, be it the plan sponsor in a DB scheme or the plan members in a DC scheme.
“SRI investing is not a public good, since the rewards and risks are born by plan members and/or plan sponsors. Therefore it is they who have to decide – not the public opinion or the regulator!”
One of the UN PRI principles is that signatories should be active owners of shares. Two in three of our respondents felt that pension funds should actively engage with companies over environment, social and governance issues.
Yet there are doubts. The manager of a Swedish pension fund says that “most pension funds do not have enough capacity or knowledge in this field”.
Another reason why pension funds may be backward in implementing responsible SRI strategies is that companies do not provide pension funds with enough information to enable them to assess their approach to environmental, and governance issues.
This is not regarded as a problem by three quarters of our respondents. A Danish fund manager suggests that companies that cover up should be dealt with summarily: “If companies don’t give satisfying answers when asked about such matters, just exclude them.”
One of the concerns behind the UN PRI initiative was that financial markets tend to be driven by short-term considerations rather than longer term aims such as responsible investment.
A majority of our managers agree.However many feel that investors do take a long-term view, especially pension funds which are obliged to have long term investment horizons.
The instigators of the UN PRI were also concerned that the financial markets did not recognise or reward companies that take environmental social and governance issues seriously. Again, most of our managers endorse this concern.
Will socially responsible investment become a mainstream area of investment in the future?
There is still considerable scepticism about SRI, particularly about its impact on portfolio investment. A Belgian pension fund manager observes that he has “ still not seen any study which proves that SRI adds return, unless the ‘study’ comes from an institution or asset manager which promotes SRI”.
Whether the UN initiative will do anything to remove this scepticism seems doubtful.