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New reporting rules will ensure that Denmark's pension funds continue to push out the boundaries of social responsiblity in a country that's already a world leader in green energy development, finds Rachel Fixsen

It leads the way in windpower and next month it will host the huge UN Climate Change Conference. Surely Denmark's international reputation as a promoter of sustainable development is complete. But far from resting, the country's government is keen to push the responsibility agenda still further with a new reporting law.

In Denmark, where some 20% of domestic electricity production comes from the wind, and the country's wind turbine industry has a 40% share of the global market, according to the National Laboratory for Sustainable Energy, the Copenhagen Climate Change Conference in December is set to link the capital's name with environmentalism years to come.

Building on its green credentials, the government now aims to improve international competitiveness in this area by requiring large companies to take a position on corporate social responsibility (CSR) in their annual reports.

The new rules were passed by the Danish parliament at the end of last year in the ‘Act amending the Danish Financial Statements Act (Accounting for CSR in large businesses)'. The law applies to mutual funds, except those used by professionals, other listed financial companies as well as life and pension companies.

Denmark is already proactive in the field of SRI, signing an agreement in May with the UN-backed Principles for Responsible Investment (UN PRI) to promote and support applied academic research within the investment field.

Back in May 2008, Denmark's then minister of economic and business affairs, Bendt Bendtsen, presented the government's Action Plan for Corporate Social Responsibility. One of the plan's four key areas was propagating business-driven social responsibility, with the government stating that it wanted to strengthen the reporting on CSR by large businesses.

The pensions and investment sector in Denmark has taken some blows over the last few years, with funds found to be investing in ‘sin' stocks pilloried in the press. The watchdog Danwatch has proved formidable in exposing and publicising controversial investment practices, and publicly accountable investment professionals are now understandably nervous of falling foul.

In November 2008, a group of investment industry participants founded the Danish Social Investment Forum, Dansif. It has 20 members which are pension funds and advisers, and is still in the process of being set up.

Alhough inspired by European organisation Eurosif, the Danish body is being run along different lines. It is envisaged as a forum for discussing the issues around SRI, but is not an umbrella organisation and does not make statements on behalf of members. Its chairman is Henrik Franck, former investment director at Denmark's DKK227bn (€30bn) pension fund PFA.

So what will it take for pension funds to comply with the new disclosure law?
Speaking in his capacity of a director of one of the country's largest pension funds, Franck says that most Danish pension funds do already adhere to SRI principles. "The majority of Danish pension funds have signed the UN PRI, and we have to report anyway, but this is yet another place to report," he says.

In practical terms, pension funds can save on administration in complying with the new law by making a reference in their annual report to what they have already reported to the PRI. "They have accounted for the fact, so they don't have to do the job twice," Franck points out.

Open commitments to SRI are growing among pension funds, he notes, and predicts that signatories to the UN PRI are likely to increase over the next few years. To date, 13 Danish pension funds have signed up to the UN PRI.

Hasse Nilsson, chairman of Alcifor Advisory Associates in Denmark, does not see the new legislation presenting much of a challenge to the country's pension funds, given Denmark's role in leading the sustainable future agenda.

"Most of the pension funds have already established their attitude to SRI, but now they have to do it in a more structured way," he says. "Many of the pension funds already have an SRI overlay; typically the professional third party organisations are involved in their SRI."

Jesper Kirstein, director of consultancy Kirstein Finans, says pension funds will take different degrees of action to comply. "Some will take the attitude that they have signed up to the UN PRI, and that's enough, and some will engage a screening agency to comply."

There is an increase in integrated SRI available from investment managers, he says, citing global investment manager Generation as an example. It specialises in sustainable investment and has high-profile environmentalist, Al Gore, as its chairman.

Nilsson sees the current formalisation of pension funds' SRI stance as a parallel process to the requirements surrounding corporate governance a few years ago.

To meet the new Danish requirement, funds will have to go further than making a bald statement about SRI, says Franck: "You also have to write how you are transferring this policy into action, and state the consequences of what you have done.

"There are very few organisations that have not at least made a conscious decision to do something, so the fact that you have to report it will not make a huge amount of difference. It is sometimes presented as something new, but it's not, it's something that has been going on for a number of years. We are more advanced in our procedures than some people believe."

Documenting the policies and processes that will take an entity's CSR stance from statement to action is important, and if they have not done so already, Franck says pension funds will need to have discussions in order to define those processes.

"What is the action to be taken if something is found to be going on in your company?" he asks. "We have policies in place, but we are not under the illusion that we will never have problems in this area. The important thing is that it is something you have a focus on, and it is not just empty words on a web page."

According to Franck, it is precisely when such problems come up that the opportunity for change presents itself: "Sometimes it is expected from the media, the public and politicians that if you have an SRI policy you will never have a problem. But the only way you solve these problems is through ownership"

In the words of the the Danish Commerce and Companies Agency (Erhvervs- og Selskabsstyrelsen), the rules aim to: "inspire businesses to take an active position on social responsibility and communicate this." And Carsten Ingerslev, head of the Danish government centres for CSR - part of the agency - expects success.

"I expect two things," he explains. "First of all, they will have to take an explicit decision if they want to engage in the CSR/SRI agenda and they will have to inform the rest of the world about their decision. So there's a form of pressure in that. Secondly, we will see this evolve over the next few years. They will get increasingly ambitious. In year two, they will want to do more than in year one. There's an internal logic about this which is not written in the law."

Kirstein is confident that the new law will indirectly force pension funds to invest ethically and sustainably. As an example of change coming about, he cites a recent example of how public pressure forced a major player to roll out an ethical investment policy following repeated criticism of its investment in businesses linked to the manufacture of cluster bombs.

"It showed that you are no longer in a position to go out and say we won't do it," he says.
But is the legislation in danger of hampering funds' ability to produce the best returns for their clients and scheme members by reducing their investment universes?

Ingerslev thinks not: "There have been several hundred academic studies on whether SRI impacts returns, but it hasn't been proven conclusively either way. There seems to be evidence that the companies involved in CSR are doing better than those who are not, so I can't see a conflict.

Certainly many of the pension funds which invest along socially responsible lines seem to feel the need to make it clear to their members that SRI will not result in a bad deal for them in purely financial terms.

Sampension was one of the first pension companies in Denmark to formulate a code of ethics for its investments back in 1997. On its website, it states that it assumes that businesses which operate in a social and environmentally responsible way will produce better profits in the long term. "For example, businesses which have a bad reputation find it difficult to attract and retain the required labour force."

Similarly, PensionDanmark states on its site that its fiduciary obligation to a large degree accords with social, environmental and ethical considerations.

"Public opinion and consumerism have added a further dimension to corporate life such that companies which act irresponsibly may run serious reputational and other risks, which could have a significant impact on their earnings and the value of their shares."

Jesper Kirstein acknowledges there is a still variation between stated opinion on how SRI affects the bottom line. "Some people will say SRI is positive for returns, others are saying it won't hurt returns, and some - the most realistic - say it won't hurt returns more than a little bit."

In any case, the new legislation is in line with prevailing mood in investment. Interest among Nordic investors in SRI has increased noticeably in the past two years alone, according to a survey conducted by consultancy Kirstein Finans. In Denmark, where investors polled were asked to indicate their level of interest in SRI on a scale from one to five, the average response has risen to 3.1 in 2009 from 2.6 in 2007.

Although it has gone this far with the CSR agenda, the government is unlikely in the near future to take things further by forcing companies to behave responsibly. "There are no current plans to strengthen the requirement in any way," says Ingerslev.
 

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