SRI takes shape
The deadline for pension schemes to declare their policy
on SRI has finally arrived. Christopher Edge
takes a look at the progress of ethical
investment
The evolution of ethical investment is
now accelerating. The date 3 July 2000 was critical in the history of socially
responsible investment (SRI) as, from then on, trustees of UK occupational
pension schemes were obliged by the 1995 Pension Act to state their policy in
ethical, environmental and social investment issues within their statement of
investment principles.
Although the 'green' investment
movement has come a long way in recent years, it is still a minor adjunct to
mainstream investment strategies. However, the pace of change is accelerating
and is inexorable. According to some estimates, the sector accounts for over
$2,000bn of investment in the US, although in the UK the figure is only a
fraction of this sum.
The origins of ethical investment in
the UK lay very much within the retail and charities sectors. Retail funds have
grown rapidly recently, with the levels invested tripling in the past three
years to almost £3bn.
Within the retail sector the
introduction of new savings products such as individual saving accounts (ISAs)
is leading to greater awareness of investment in general and is providing
opportunities to promote products such as ethical funds. Indeed, over
£400m is invested in ethical and ecological personal equity plans, the
predecessor to ISAs.
Green awareness
Ignorance, however, is a problem.
Although green awareness is popular, still over 70% of the investing public
still do not know that ethical funds exist. Nevertheless, there are 500,000
unit holders in ethical and environmental savings funds, while media coverage
has been at a high level for some years.
Within the corporate market, positive
action to invest ethically has been much slower. Few occupational pension
schemes offer an ethical option despite clear evidence that there is a demand
from scheme members. However, within the major defined benefit occupational
schemes, member awareness does seem to be having an impact. The standard bearer
thus far has been Nottinghamshire County Council, which has segregated a
significant part of their pension fund within a pure SRI mandate. The county
treasurer, Roger Latham, explains that the kernel of this approach came from a
member enquiry about the fund's ethical policy. After considerable research,
Nottinghamshire believe that an SRI approach will enhance investment returns,
which is contrary to the view of most trustees.
Member pressure has also been in
evidence at the Universities Superannuation Scheme where the trustees have
responded by introducing an in-house team thus giving greater importance to
this area of investment. With several other public sector funds, such as
Norfolk County Council and Aberdeen City Council, also segregating part of
their assets into SRI mandates, it appears that we are reaching a major turning
point.
Slowly but surely
An avalanche of new SRI mandates in the
pension sector is not to be expected however. Although trustees must state
their SRI policy, there is at present no compulsion to change investment
strategy. Broadly speaking, investment consultants are adopting a wait and see'
approach which is understandable given the changing and dynamic nature of the
subject. It is impossible to avoid the fundamental issue of fiduciary duty.
Consultants and trustees alike will wish to see whether adopting SRI screening
approaches has a material impact, beneficial or otherwise, on investment
returns.
The issue ultimately revolves around
risk. In many ways by simply imposing some modest restriction on the investible
universe, the potential increase in risk is as nothing compared to the risk of
selection of an inappropriate investment style or a malfunctioning investment
manager.
What of the future? It is clear that
the Pensions Act requirements are part of a wider government drive to pursue
effective corporate governance. Pensions minister Jeff Rooker has described the
requirement as a minimal change but the government recognises that pension
funds potentially have enormous economic influence. The intention is to link
the two issues and to enhance shareholder value for fund sponsors and their
members.
Positive action
The National Association of Pension
Funds has introduced a voting issues service and has established an engagement
partnership with Business in the Environment, the Institute of Business Ethics
and FIRIS. The objective of the partnership is to help dialogue between
corporates and their investors on SRI issues. A practical application of
governance in action has also recently been seen from Pension Investment
Research Consultants, (Pirc), which has called on Vodafone Airtouch to reverse
its bonus award to its chief executive following the acquisition of Mannesmann.
Pirc says this breaches an explicit commitment by Vodafone's remuneration
committee not to award such one-off payments. While the pace of development for SRI
investment remains uncertain, its direction is definitive. In the US,
institutional investors have been at the forefront of SRI for many years and a
number of well known funds including the California and New York State Pension
Schemes have been leaders in their roles as active shareholders. Anecdotal evidence suggests that the
relative performance of many SRI funds is better than several mainstream funds.
Further, there is a positive correlation in Fortunes' list of Best Managed and
Most Admired companies, with those that outperform the market. In addition, according to Lipper and
Morningstar, 10 out of 14 SRI funds with assets of over $1OOm appeared as top
performers in 1998. Christopher Edge is chief executive
at Pavilion Asset Management Ltd in Brighton. Pavilion Asset Management is a
wholly owned subsidiary of Family Assurance Friendly Society Ltd and is
regulated by Imro.
Pensions Week
10 July, 2000
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