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5 October 2008
Financial Times: Pension funds can make a difference
Source: www.ft.com
By Gill Wadsworth
Published: October 5 2008 10:09 | Last updated: October 5 2008 10:09
After years on the fringes of mainstream portfolio management, responsible investment is making its way to the top of the pension fund agenda. Largely driven by a greater appreciation of the impact of climate change on the global economy, trustees are taking a closer look at how an environmental, social and governance (ESG) policy can help secure the long-term future of their funding positions.
Pension funds are certainly in a position to drive the responsible investment agenda, given that the world’s top 300 funds control an estimated $12,000bn (£7,000bn, €8,000bn) in assets.
Duncan Exley, a director at campaign organisation Fair Pensions, says responsible investment is no longer seen as a contravention of a trustee’s fiduciary duty.
“The debate has moved on from simply negatively screening out unfavourable companies. Lots of schemes engage with investee companies, and trustees understand that responsible investment is not a choice between profits and principles, but rather it can provide long-term financial benefits for the fund,” Mr Exley says.
Active engagement is at the core of many pension funds’ responsible investment strategies and allows trustees and their fund managers the opportunity to shape the behaviour of the companies in which they invest.
Howard Pearce, head of environmental finance and pension fund management at the £1.5bn Environment Agency pension fund, which has one of the UK’s most active responsible investment policies, says his fund has adopted a “best in class” approach. “We pick the best companies and try to engage with them if they are not where we want them to be on environmental policy. We do not have a negative screening policy.
“Instead we select the best companies and positively influence their behaviour and hopefully their financial performance.”
Mr Pearce argues that failure to take a positive stance on “financially material environmental risks and opportunities” represents a failure to adhere to fiduciary duty, and his view is increasingly common among his fellow institutional investors.
A survey of UK pension funds conducted by the UK Social Investment Forum last year found that three-quarters had a responsible investment strategy and two-thirds believe ESG issues have a material impact on investments in the long term.
According to Rory Sullivan, head of investor responsibility at Insight Investments, for a responsible investment strategy to stand any real chance of success, investors must adopt a long time horizon and ditch the emphasis on quarterly results.
Mr Sullivan says: “Risks and opportunities need to move beyond quarterly performance and trustees need to think about longer term structural issues. For example what is the future for coal? How will climate change affect investment in global companies? Investors need to engage in the long-term philosophical issues around investment.”
On the whole, it is the very large, multi-billion pound pension schemes that are the most vocal on responsible investment. Many of them are able to employ in-house teams to drive ESG research and policy.
However, Mr Exley argues that a scheme’s assets under management should bear little relation to its stance on responsible investment.
“It is quite dangerous to assume that because you aren’t a multi-billion pound scheme with the resources to employ lots of analysts then it’s not worth dipping a toe into responsible investment. Smaller funds can make sure the fund managers they hire are capable of looking after their interests and thinking outside quarterly targets.”
The Environment Agency and the £30bn Universities Superannuation Scheme have called on asset owners across the world to put pressure on investment managers to sign up to the United Nations Principles on Responsible Investment (UNPRI).
Mr Pearce says: “There is a bunch of quite large fund managers out there who don’t seem to have latched onto the importance of the UNPRI. We want to see if other asset owners like us feel it is worth working together to persuade these very large fund managers to rethink their position.”
This latest initiative from the Environment Agency followed its announcement in September that it would only hire UNPRI signatories for future mandates, a decision that will see non-signatories such as Capital International and State Street Global Advisors left out in the cold. Missing out on new business may persuade asset managers to change their approach.
News
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17 October 2008
SocialFunds: Sustainable Investment Strategies Earn Respect in Aftermath of the Financial Crisis
14 October 2008
SRI-Adviser: Investors Focus on Presidential Candidates'' view on US Energy Consumption
13 October 2008
Financial Standard: EAI merges with PRI
10 October 2008
SRI-Adviser: Investor Initiatives Call for ESG in Investment Research
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Environmental Finance: ESG investor initiatives to merge
8 October 2008
SocialFunds: Carbon Disclosure Project Publishes Sixth in Annual Series Detailing Corporate Emissions
5 October 2008
Financial Times: Pension funds can make a difference
2 October 2008
Financial Standard: UN launches PRI think tank
2 October 2008
Environmental Finance: Europe SRI market doubles in two years – Eurosif
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