The move by CalPERS, the US’ biggest pension fund, to pull out of four emerging markets on ethical grounds has met with a mixed response from European pensions funds.
CalPERS investment committee recently decided to withdraw investment in public companies in four Asian countries – Indonesia, Malaysia, the Philippines and Thailand.
The move is the result of a new ‘permissible country review process’ that takes into account broad financial factors as well as transparency, political stability and labour practices and standards.
CalPERS says it believes the review process of the emerging markets is the first of its kind ever done by a public pension fund because it looks beyond traditional economic factors and considers basic democratic principles.
Some large European pension funds with ethical investment strategies have welcomed the fact that CalPERS has nailed its colours to the mast of socially responsible and sustainable investment (SRSI).
Raj Thamotheram, senior adviser, SRSI at the UK-based Universities Superannuation Scheme, says: “We welcome the fact that of one of the world’s largest pension funds has entered the debate about how to encourage companies to behave responsibly.
“We also think the criteria they are using are right because they all have fiduciary relevance – indeed there are other criteria, like bribery and corruption and gross human rights abuse which should also be considered for the same reasons .”
He says that the USS scheme did not operate complete bans on countries with poor human rights records or other problems because there could be companies trying to behave ethically within their markets and because there could be value in encouraging the others to achieve better practice.
“We have taken an engagement approach, engaging companies company by company and sometimes sector by sector – for example, encouraging the pharmaceutical industry on the issue of affordable HIV treatment, ” he said.
However, others are worried that a blanket ban on investment will do little to encourage errant countries to change their ways.
Peter Norman, president of the Swedish AP7 pension fund, which introduced its own SRSI policy, says: “These countries are in desperate need of capital so excluding them from capital is not going to be very helpful.
Norman says that AP7 might consider “withdrawing investment in individual companies in Indonesia, but not in the market as a whole”.
CalPERS says the elimination of some countries and the addition of others (Poland and Hungary) to the permissible country equity list would result in some transaction costs to the fund.
“We now have in place a blueprint to examine which emerging markets can support institutional investment,” says Michael Flaherman, chair of CalPERS investment committee.
“It is a screen and an important entry point for investments into our portfolio that will help to protect our pensioners assets in the emerging markets.”