In a study last year, Eurosif, the European sustainable and responsible investment forum concluded proudly that the institutional SRSI market had reached some e336bn with a great portion of the money sourced from European pension funds.
Yet, despite these impressive figures, talk to a representative sample of European pension funds and it is less than clear how far the debate has moved forward. The perennial clash of fiduciary vs. social responsibility is still the main sticking point for schemes, which still tend to opt for a hands-off approach on SRSI; be that in stock selection or share voting.
Bert Vanbaelen, financial controller at the Brussels-based VKG Amonis pension fund, says the fund discussed the issues internally in tandem with suggestions that the Vandenbroucke law in Belgium would stipulate some form of socially responsible investment criteria for pension plans.
“In the end the law said nothing abut this and I think this was because of the same questions that everyone keeps asking. Does it add value and what is socially responsible and what isn’t? This can depend on what country you’re coming from!”
“At the time when we thought this might come into legislation we had a good look at it and decided not to do it because of all the practical problems involved.
“We asked our asset managers about their views and their experiences with other clients, etc. Most of the answers we got were like this: ‘well, if you want us to do it, no problem, but just tell us what you mean by SRSI…’
“For managers it is like any other investment guideline and if we said no arms manufacturers then they wouldn’t invest in them.”
Vanbaelen says the investigation that VKG carried out, while not extensive in itself, left the fund with a plethora of problems where it was unable to make a decision: “We couldn’t play god and say what was wrong and right in any meaningful way,” he notes.
“If you look, for example, at a company like Barco, they make televisions in Belgium, but at the same time they make screens that can be used for military applications. The question then is whether they are an ethical company or not? They have given us good returns on investment. At the same time we don’t want to put our head in the sand and say we don’t care where companies make their profits either. Every consumer good could also potentially come from third-world countries where companies might be doing things that are not ethical by western standards, but not by their own standards.”
Aside from the ethical dilemma, however, Vanbaelen says the main problem is a continuing lack of empirical evidence that SRSI adds value: “Those who say it adds value are 99% of the time the ones that are selling it!”
“I can understand corporate governance issues for long-term returns of equity and better shareholder value, but I don’t see why a company might not perform because they make military applications.”
The area of corporate governance and share voting is one where VKG was previously active, using shareholder voting group Deminor to vote on its European holdings.
Nonetheless, the fund has scaled back what it does in this area to save money: “We don’t do it anymore for the one and only reason of cost! It is expensive and we could have two fully employed staff from that money. You have to make a decision somewhere and this is one of the first things to go if you look at costs. It’s nice to have though.
“We are a member of the Dutch SCGOP though and we do get a number of reports from them and have contacts there, but in terms of exercising proxy votes, we don’t really do it anymore, except in some cases in Belgium.”
Sandy Flight, principal treasury and investment officer at Dundee City Council pension fund, says the fund has an engagement strategy focusing on environmental and labour rights issues, above and beyond the required UK statement of investment principles (SIP): “We request all our managers to do this and we get regular reports back as part of their quarterly performance submissions. We then prepare a formal report for our investment sub-committee on what our various managers have been doing.”
The problem to date, he says, is that the fund has had difficulty in finding clear outputs and results from the process: “It tends to be that these issues are raised and then not progressed much. It’s hard to link the two and we haven’t seen a way forward on that yet.”
Dundee also asks its managers to act as proxy for voting its overseas share holdings. However, Flight says the fund does not use specific SRSI mandates, arguing that this calls into question the “ultimate obligation” of the fund regarding financial return risks: “It’s difficult to get clear data that proves this one way or another.”
Pat Ferguson, administrator of the Irish e490m Construction Federation Operatives Pension Scheme (CFOPS), says the approach is similarly discretionary: “We don’t actually specify what our managers can and can’t do, but they have certain in-house rules themselves and their quarterly reports would have a valuation showing all the stocks.
“The only time this issue really arose was going back 20 or so years to South Africa where it was an issue and we instructed managers not to invest there. Generally though in recent years there has never been an issue where we’ve said that we don’t like a particular stock and don’t invest. Similarly, the fund’s shares are generally voted through the managers.
“This question has come up a few times in recent years and managers have been quizzed as to how they have voted at particular shareholder meetings. “We are an industry scheme so half of our trustees are trade union members and so they will be putting pressure on fund managers regarding companies with labour issues.”
In Denmark, Steen Jörgenson, chief executive officer at the DKr16bn (e2.2bn) Finanssektorens Pensionskasse (FSP), explains that while there are no legal requirements for SRSI/corporate governance, a report published by the respected Noerby Committee containing 31 recommendations for good corporate governance has profiled the issue.
“This means there is a Danish ‘guideline’ in some sense, but it’s a group of outstanding people from the Danish business community that have published these guidelines in respect of the Danish stock exchange, rather than any legal requirement.”
Jörgensen concedes that the fund is not particularly ‘proactive’ in the SRSI arena, but says they do have a policy: “We acknowledge that we have a responsibility and we do care about this issue but we do this on a case-by-case basis and don’t engage in screening the market or hiring managers to do so. Instead, if we become aware of problems anywhere then we look at the issues and take action where necessary. In our fund management agreements we have clauses that give instructions to our managers regarding which investments might be prohibited for a certain time. These guidelines are reviewed when we meet every six months, but we tend to follow the UN and ILO guides, as well as discussing issues with other pension funds and looking at the international press for information.”
As a rule, however, the fund generally does not vote its shares: “In certain cases where there are corporate actions or socially responsible issues we may then ask our managers to act on our behalf. Our managers may also call us and say that according to our guidelines they would like to vote, which we can then discuss with them.”
Nevertheless, the FSP chief believes that scandals like Parmalat and Ahold mean that the pension fund community should speak more regularly on issues of governance and discuss how more pressure can be put on companies to raise reporting standards: “I support the efforts of the largest pension funds in doing things in this area and I think it is a route we all need to follow. However, I think the case for value added is at the moment unproven. You have statistics saying you can add value and others saying you can’t. Intellectually we support the argument though because if a company has strong governance then it should be in business in five or 10 years time.”