The demand for fund managers to offer SRI has existed for more than 20 years, driven largely by churches, charities and high net-worth individuals with segregated funds. Pension funds have started offering SRI options more recently, and the pensions bill which is currently in the UK parliament should stimulate this development.
So how is the SRI scene developing? A survey published in July by Thomson Extel in partnership with the UK Social Investment Forum (UKSIF) provides some answers. It is based on responses from over 100 UK-based fund managers to questions about their involvement and interest in SRI and their opinions of providers of SRI investment services.
The survey’s findings are encouraging. It shows that 85% of the leading fund management firms expect their involvement in SRI to increase. Furthermore fund managers voted HSBC Securities and Dresdner Kleinwort Wasserstein as the leading providers of SRI investment brokerage services.
“HSBC and Dresdner Kleinwort should be praised at this early stage in the development of the market for hiring people whose job it is to work out what the buy side needs in terms of information on social, ethical and environmental issues,” says Helen Wildsmith, executive director of UKSIF.
This is good news indeed for pension funds seeking to offer an SRI option, but the results of the survey also raise some important questions.
Firstly, given that SRI usually entails a sacrifice in terms of the expected return, how deep does the industry’s commitment run? “There are some fund managers whose interest in SRI is restricted to where it may have an effect on shareholder value in the medium-term; they are not really driven by the ethical agenda,” she says. “Obviously the shareholder value end of the continuum is quite different from the ethically driven end.”
In addition to the question of commitment is the degree to which traditional investment practice meets the specific requirements of SRI. “The sell side is better at analysing things over a one to three year timeframe, but a lot of the social and environmental issues are likely to play out over the longer term,” says Wildsmith. “So perhaps we need to see more tools and techniques that focus on that timeframe; these will be very different to those used now in terms of portfolio construction and stock selection.”
The challenge for pension fund managers is greater than for fund managers as a whole given the long-term view that pension funds take. Wildsmith agrees: “The fund manager has to rise to the challenge as do the sector sell side analysts that are feeding the buy side the information.”
Given these issues, it is likely that the ultimate driver for the development of SRI options in pension fund management will come from the end-user. And this raises further questions about the end-user’s ability to perform this function.
Wildsmith notes that recent issues of funding and the move from defined benefit to defined contribution schemes has “distracted” pension funds from the task of regularly assessing fund managers on social and environmental issues. But she believes that most funds have now dealt with their distractions and that they may now be turning the corner: “We are picking up signals that a few funds are tightening up on their statement of investment principles and starting to ask more questions at fund manager assessments.”
But such questioning on its own will not be sufficient. “Regulation of reporting needs to be tightened up, so that when a pension fund says that it is following a certain strategy in terms of SRI there is some way for members and others to make sure that they are doing that,” says Wildsmith. “That in turn would lead to pension fund trustees being much more careful in assessing the performance of their fund managers in this area, all the way from stock selection through to shareholder activism. This will drive the statement of investment principles through to action by fund managers.”
She adds: “We do know that there is an implementation gap among defined benefit pension funds. Quite often they have a SIP pointing to engagement but we do know that assessment is lagging behind, and reporting might be the key to closing the gap.”
While the role of the end user in driving the development of the industry, there will be no progress without knowledge. UKSIF operates programmes that are working with individuals, charitable foundations and pension fund trustees each of those groups the demand for products all the way from screening to investment.