Although it is clear that pension funds and institutional investors across Europe are more and more concerned about socially responsible investing (SRI), there is still no consensus regarding the best way to approach these issues.
Cultural reasons, different legal frameworks and, especially, different points of views on whether to engage with companies which are not acting correctly in order to change things from inside or screen this corporations out of institutional portfolios, were the main issues discussed during the Triple Bottom Line Investing 2000 conference held in Rotterdam last month.
The conference dealt with the links between companies’ social and environmental criteria and their financial success, and the way investors are looking at these issues.
The way European pension funds trustees and fund managers address SRI depends on how these investments fit in their overall strategies. During the last few years plans sponsors have showed an increasing interest in including social, ethical and environmental criteria in their portfolios, forcing fund managers to respond to this approach.
“The demand for SRI from scheme members is set to increase,” said Kevin Sullivan, client service adviser at UK firm Ethical Investment Research Service (EIRIS). “And if it becomes clear that investing in a socially responsible is linked to financial performance, trustees would be failing in their duty of achieving the best returns if they didn’t look at these issues.”
Sullivan, who participated in a seminar on pensions at the conference, added: “SRI is becoming a big issue for pension funds and consequently it is also a big issue for fund managers. If you take into account that for instance in the UK the pension fund industry accounts for £800bn (e1,336bn), representing one third of the stock market, you will realise that this is something fund managers can’t afford ignoring.”
Geof Pearson, pension manager at the Sainsbury pension fund and vice chairman of the UK’s National Association of Pension Funds (NAPF) believes in the engagement process as being the most effective for embracing SRI policies. “We think it’s better to work from inside the companies and tried to change things,” Pearson said. “Our pension fund invests in every single company within the UK and in the top 3,000 US companies. We believe in having a complete universe of companies to engage with instead having some screened out that probably need our investments most.”
Engagement is not something new, it’s been around for a while but it’s now becoming increasingly important among institutional investors. It’s essentially based on using the influence that institutions have as stakeholders to encourage changes inside corporations and it’s an easy way for fund managers who are new in the field to get involved in SRI. “A lot of fund managers have used corporate governance as a starting point into SRI,” said EIRIS’ Sullivan. “However, I don’t think engagement should be the only way forward. The best thing is to have a tool box with different strategies to use as the occasion or the client require.”
Whatever strategy they choose, fund managers are more aware that their clients know they are approaching the subject properly, setting up the right monitoring systems to evaluate companies and being ready to report to trustees and their advisers. In order to achieve that, fund management houses are developing systems to understand better the SRI impact on investment portfolios.
Geneva-based asset fund managers Lombard Odier, another sponsor of the conference has been developing a model to improve their research capabilities. “We knew that SRI makes a difference in portfolios and we wanted to find out more,” said Dominique Habegger, head of qualitative analysis at Lombard Odier. “We wanted to now how, why and when SRI investment influence portfolio performance and we developed a model integrating economic, social and environmental criteria. From our analysis our clients get all the information they need and they can react to them taking into account their specific requirements.”
During the last couple of years more SRI funds following social or environmental criteria have been launched all around Europe. According to Matteo Bartolomeo, project manager at sustainability consultancy firm Avanzi in Milan, the size of the SRI funds market in Europe is over e11bn, with an average fund size of e72m.
Being index-trackers with a long-term horizon, pension funds have to make money by not loosing it. According to delegates at the conference the long-term nature of the SRI approach the most reasonable way of achieving this.
However, and despite the increased interest in the subject, getting more pension funds to invest in a more socially responsible way still means a lot of work in terms of stimulating trustees and scheme members to take a more active role. During the different sessions participants discussed the best ways of making SRI policies more popular. Most of them agreed that tax incentives and, especially, more and better information, could make a big difference.
“One might think , taking into account the obvious benefits of sustainable investments, that investors not following this approach are stupid,” said Craig Mackenzie, head of ethical investment at Friends Provident. “But the truth is that investors are stupid because there is a lack of information. Shareholders don’t take more interest in SRI because they don’t know how it works.” Mackenzie added: “This is a huge problem. If investors stay stupid, capital markets will stay stupid.”