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Special Report

ESG: The metrics jigsaw

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Is this the business of pensions?

At the end of 2001, the development charity War on Want (WoW) launched what it dubbed the ‘Invest in freedom’campaign – a strategy aimed directly at UK pension contributors and their fund trustees to lobby the companies they invest in to respect workers’ rights.
The headline figures for their campaign made explicit where WoW felt campaigners could make an impact. Trailing the fact that the UK pension fund market was worth £800bn (e1,305) and that half of this was invested in the UK stock market, the report added: “Many of the companies that abuse workers’ rights are multinationals that enjoy huge levels of investment from multi-billion pound pension schemes. Twenty million Britons own £800bn in pension assets…but few people know where their hard-earned cash is being invested.”
From WoW’s perspective the chain of responsibility was explicit. If companies are to be held accountable for abuses of workers’ rights, then the institutions that invest in them can be guilty by association. More than that though, culpable corporations can be hit in the pocket where it hurts if their largest investors, pension funds and insurance companies, can be lobbied to invest their money with ethical criteria in mind.
As Nick Dearden, WoW’s campaigns officer, made clear at the launch of the ‘Invest in Freedom’ campaign, pensions money is scheme member’s money – and members are being urged to have a voice as to how it is invested: “The power of our pensions has been ignored for too long. ‘Invest in Freedom’ tells ordinary people that they can help build a better world and combat some of the worst workers’ rights abuses.”
Sadly, pension funds haven’t always helped themselves to deflect such criticism. WoW has done its homework. The organisation points out to campaigners that only 40-45% of pension fund trustees voted at the shareholder meetings of big companies, adding: “This leaves massive potential for British workers to act to ensure that their money is promoting sound workers’ rights.”
Supporters of WoW were urged to write to their local newspapers and fund-trustees to expound the message. The suggested lobby-line linked social responsibility to future economic prosperity: “It protects your pension because decent working conditions are more productive, less susceptible to negative campaigns and, therefore, a better investment.”
While WoW is by no means the first Non-Governmental Organisation (NGO) to target institutional investors for their link to specific corporate activities – activists in the US during the 1970s first versed the
language of SRI on the back of anti-apartheid protests against business connections to South Africa – the organisation’s language reflects the broader ethical brush being employed by activists to target institutional investors.
In recent years a number of European pressure groups have mounted postcard campaigns to encourage members to lobby their pension funds into adopting SRI policies. Last year, Friends of the Earth went a step further by announcing that it would start scrutinising large pension funds to see whether their SRI policies matched the employer company’s own policies on corporate social responsibility.
One reason for this rise in pensions ‘stakeholder’ activism is almost certainly the growing public attention being paid to such issues. In recent years global economic policy has been played out on the streets, with protesters voicing their concerns about the actions of multinationals, governments and international financial institutions such as the World Bank and IMF.
The combined pressure of press articles drawing attention to controversial companies in which some pension funds have invested has increasingly brought such debate to the attention of social partners and scheme members. What is more, surveys show that the vast majority of the public would like their pension fund to have an ethical investment policy. Friends of the Earth quotes in its literature an August 2001 poll by investment manager, Friends Ivory & Sime, revealing that 75% of UK citizens want pension companies to take social and environmental issues into account – as long as the financial performance of their savings is not affected.
Fortunately, the message has not been lost on some pension funds. Indeed, a growing number are at the forefront of shareholder action to remind companies of their social and ethical responsibilities. Many are working with NGOs in formulating their approaches.
WWF, formerly the Worldwide Fund for Nature, will shortly table a resolution at oil giant BP’s April annual general meeting. The resolution is expected to call for the company to report on how it analyses and minimises risks to its business from operating in sensitive areas – with an eye to BP’s exploration plans in the Alaska national wildlife refuge. Significantly, the motion will be supported by a number of institutional investors, including leading US ethical funds and continental European institutions.
In January this year a group of European financial institutions, including the £21bn UK Universities Superannuation Scheme (USS) and the e48bn Dutch superfund PGGM, formed an action group to raise concerns about investment in Myanmar – formerly known as Burma.
Collectively, the group, which represents around e650bn, issued a position document entitled: ‘Business Involvement in Myanmar (Burma) – A statement from institutional investors.’
The statement outlines the concerns raised by the presence of a military dictatorship in Burma and highlights the risks to shareholders in investing in companies that have interests in the country.
In such cases the idea is that institutional investors can work with NGOs towards many of the same goals. Human rights organisation, Amnesty International, along with The Prince of Wales International Business Leaders Forum (IBLF), collaborated earlier this year to produce a series of seven detailed world maps. These show where human rights abuses and violations are occuring and where leading North American and European multinational companies are at risk of being associated with them. The set of maps covers the extractive, food and beverages, pharmaceutical and chemical, infrastructure and utilities, heavy manufacturing and defence and the IT hardware and telecommunications sectors.
If activists can persuade institutions that ethical investment is in their long-term interests, so much the better. Some are convinced of the arguments already. Alfred Kool, spokesman at PGGM, says that while the fund hasn't really experienced much external lobbying activity on such issues to date, the PGGM board felt it hadn’t needed any pressure to see the value of an ethical approach to investment. “We have the strong belief that SRI is going to add value to our investments. High yields and creating a better world go hand in hand. More and more the results prove that.”
Kool notes that the fund has had constructive contact with organisations like Amnesty, which he says helps define the fund’s policies. The fund also plays an active role in corporate governance and was a co-founder of SCGOP (The Dutch foundation for pension funds and corporate governance).
To date, the fund’s ethical endeavours have led to the introduction of three pilot mandates with external managers – SNS Reaal manages e25m, Banque Sarasin e100m, and Friends Ivory & Sime employs its REO ethical overlay programme on the European portfolio of an e5.5bn PGGM brief. Moreover, the fund now has an SRI-policy for all its investments.
A further striking example of a proactive pension fund approach was the June 2001 decision by Sweden’s e2.6bn national premium pension fund Sjunde AP-fonden (AP7) to blacklist 30 companies from its equity portfolio. This was following a scathing report on their environmental and ethical records. Peter Norman, managing director of AP7, said at the time that the reasons for excluding the stocks ranged from allegations of discrimination against women in a company’s workforce, to manufacturing landmines. “We have decided to have the UN’s international conventions signed by the Swedish government as a base for our SRI policy.”
According to the fund, its decisions were based on court judgements, official investigations or direct admission on the part of the companies’ management after investigations of their record regarding violations of human rights. “The underlying, the only, reason for excluding companies is the hope that they will be persuaded to change their production, employment policy or whatever it was that led to their being excluded,” Norman added. In particular, “we have decided that the UN itself decides when a corporate violates these conventions”.
The AP7 fund did not exclude investing in arms companies on the grounds that the Swedish government is active in the area. Norman says that the Swedish Peace and Arbitration Society had lobbied it regarding the policy on arms. “The NGOs in Sweden generally focus their activities directly on corporations rather than investors.” Those lobbying activities that are aligned with the fund’s analysis criteria are incorporated indirectly, but not as a decisive factor.
Another factor in the trend towards corporate engagement by pension funds is that legislation is beginning to catch up with reality – albeit slowly in some countries. Since July 2001, the UK’s Pension Act has required schemes to disclose the extent to which social, ethical and environmental issues are taken into account in investment decisions. Similar legislation has been enacted, or is under consideration in other parts of Europe.
Proof that all the talk is starting to translate into action came in a report last year by Cerulli Associates, entitled ‘Investing for the future’. The report claimed that while Europe still lagged behind the US by a long way in the number of institutional portfolios screened for SRI criteria, ($28bn (E31bn) worth of assets in Europe compared to $1,336bn in the US), the continent was beginning to “lead the way” in SRI, particularly in the area of sustainable development.
Encouraging words indeed. However, a crucial aspect of such legislation in Europe is its tendency to focus, for obvious reasons, on fiduciary responsibility. Pension scheme trustees are generally only required to intervene in companies and investment decisions if it is in their beneficiaries’ best interests.
While the argument runs that superior corporate governance in turn leads to superior long-term performance, there is a marked difference between corporate governance and socially responsible investment.
If SRI funds perform well everyone is happy. But how tolerant will pension fund managers be after any sustained fall in performance? The crunch will undoubtedly come and the response from European pension funds will be crucial. How committed are they to SRI and how clear are their policies? Today’s highly professional and organised activists are not going away and they will want to know the answers!

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