The Manifest Forum:

The role of NGOs and Fund Managers in SRI

Socially responsible investment (SRI) was originally developed for the retail market so investors would not invest in companies they objected to on ethical or environmental grounds.  But the notion of corporate social responsibility (CSR) is based on  the belief that companies can change and be responsive to the demands of society. This has created the concept of engagement and working with companies as investors to persuade them to make changes. The government has sought to facilitate this through the changes in the Pensions Act which required pension funds to state in their statement of investment principles (SIP) to what extent, if at all, social, environmental and ethical factors have been taken account in investment decisions. In most cases these decisions have been delegated to the fund managers to consider.

Just as non-governmental organisations (NGOs) have tried to make consumers aware of fair trade initiatives and influence their buying decisions they are anxious to make individuals aware of their potential role as investors making changes within companies. Most investments, however, are held through institutions and NGOs have realised that engaging with them as well as with companies themselves mean their objectives of reducing poverty, improving environmental standards or human rights may be achieved.

This Manifest forum brought together NGOs and fund managers to discuss how they could work together to ensure that SRI could be developed further in the future.

Helen Wildsmith chaired the discussion. She is executive director of the UK Social Investment Forum (UKSIF) which is a membership organisation, with a diverse set of stakeholders interested in promoting the practice and positive impact of SRI.

The other participants were:-

Rob Cartridge; campaigns director of War on Want. It has run the Invest in Freedom campaign  for about five years and it is also one of the founders of the Just Pensions network.

Laverne Picart; in charge of SRI research at the CIS in Manchester.

Steve Waygood, who works in the SRI team at Insight Investment (formerly Clerical Medical).  He works with Craig McKenzie and Rachel Crossley. Previously, they worked together at Friends Ivory and Sime. Prior to this he worked at the World Wildlife Fund (WWF).

Sarah Wilson, managing director of Manifest.

Tom Powdrill, who is responsible for institutional investment policy at the Trade Union Congress (TUC).

Stuart Sweeney, volunteer advisor from Amnesty International UK Business Group, which has been working in this area for 10 years.

Topics covered in the discussion:

War on Want

Explaining engagement

Trustees and SRI

TUC

Amnesty International

Enough government action?

Engagement Issues

Role of Company Law

Moral Arguments

Disclosure Requirements

NGOs' SRI Resources

Looking to the future

Wildsmith: I thought we’d start by asking one of the NGOs to talk about their strategy in this area.

War on Want

Cartridge: I thought it would be useful to talk a little bit in terms of history and a timeline of events that we have been through. But first of all I want to say that we have approached the whole of our SRI engagement as a charity. As  a charity we work within a set of very strictly monitored legal criteria. Everything that we spend our money on has to be within our charitable purpose as set down by the charity commission, which is in our case ending poverty. So everything we do has to have that as an end. Sometimes I think that with the pensions  the SRI work you have to keep on refocusing on that and reminding yourself that that is the case. It is such an important area in its own right, but we are not allowed really to get too heavily involved in the general SRI work, we always need to make the links back to poverty.

We started looking at labour rights in multi-national companies in the 1970s. We published reports on Coca-Cola, and their practices in Guatemala and also on the labour conditions faced by Brooke Bond workers in Ceylon. This work then continued through the 1980s and companies mainly responded that they weren’t all that interested at that stage. They were doing what their shareholders were asking, which was making money and that labour rights in the third world frankly weren’t a concern. In the late ‘80s and ‘90s we made some major attempts at shareholder resolutions, we and many others, and they were often defeated by institutional pension funds and the power of institutional pension funds being brought out as a block vote out of the chairman’s pocket in effect. In the 1990s we then began to get more of an acceptance of stakeholderism, that the companies were responsible to more than just their shareholders, and then from the late 1990s onwards more rapid movement began. 

In the first instance companies and the unions starting sitting round the table with the NGOs and started making plans for what became the ethical trading initiative (ETI). This is a tripartite body committed to working together to improve labour standards around the world, all based around codes of conduct. The ETI, I think, has been groundbreaking and has taken up a huge amount of NGO time and effort and is being seen as a major way of improving the lives of the poor, but it works directly with the corporates and not with the shareholders. 

At about the same time, 1995, we had the new Pensions Act coming in after the Maxwell scandal. That created compulsory employee nominated pension fund trustees and with War on Wants historic links to the trade union movement, we saw this as a real opportunity to put SRI onto the agenda, to work through the trade unions with the employee nominated trustees to really promote SRI. So we launched our Invest in Freedom campaign in 1997. That sought to persuade trade unionists to call on their pension funds to invest in such a way as to bring about better labour conditions throughout supply chains. It wasn’t in any way as successful as ETI where the companies were prepared to sit down round the tables; we really found it quite difficult to engage with the City and with the financial institutions. 

From the outset we were proposing engagement and not stock selection, but very quickly it became apparent that we would be diverted in two ways. First of all whenever we met trustees we were constantly quoted Scargill (Cowan v Scargill). That was giving us an absolute shut the door, 'we can’t talk to you about this', reaction, even though we were only talking about engagement. Trustees were also worried that if they opened the doors to us talking about labour standards then there would be a whole series of pressure groups coming in through the door. The flood gates would open and they would be inundated with all sorts of different causes and so they felt that they wanted a one stop shop for all this information. 

Along came the amendment to the Pensions Act and the disclosure regulation. This has helped us massively by sending a strong message that government were favouring SRI or at least did all it could to send that strong signal. Just Pensions was born, looking really to become this one stop shop. It was formed by War on Want working with Traidcraft. Amnesty was in from the beginning along with UKSIF and the SRI industry. In the meantime, Traidcraft have been doing some work for DFID (Department for International Development) on pensions and poverty and we got some funding from the community fund. Last year we published a tool kit for pension fund professionals and trustees focusing on a whole series of issues all connected with international development. Again we are limited to working just on development because of our charitable status and that’s what the funding was for. Over the last 12 months Just Pensions has grown. We have an advisory group on which all main players sit and advise us. We have been commissioned to do further work by DFID and we have produced our second report which analyses just what level of engagement some of the main pension funds are really employing. 

So that’s the context. To answer more brutally your question, why are we involved? Well, because globalisation has made multi-national companies major players, whilst we are also engaging directly with them, we recognize the need to keep the shareholders up to speed. So either they don’t become a brake on the CSR process and also so that if CSR goes out of fashion at a corporate level, some sort of sustainable progress has been made in the City and that some things will be irreversible. Also as I said because of charitable law, we are doing it really because we think it will have an impact at the end of the day on poverty alleviation. 

Wildsmith: What are the main challenges you face?

Cartridge: The main challenges are, certainly working with the employee nominated trustees, Scargill and fiduciary responsibility. As a NGO approaching trustees there is an automatic assumption before you have got through the door and opened your mouth that you are going to be asking people to go into stock selection. Really you need a lot of time to explain about engagement and people will say, but what’s your ultimate sanction? 

We keep saying that stock selection is not even an ultimate sanction, and that voting at an AGM is an ultimate sanction. So that’s been very very difficult and just generally building the links with the city and being taken seriously. It has taken some time to build a lot of support, particularly as War on Want. Now with Just Pensions it has really helped us to do that I think and to overcome that. The dangers are that I think people feel that we are only interested in it for 12 months and then we will move onto something else or another campaign will come along. Those are the risks.

Wildsmith: I thought at this stage it might be quite interesting to hear from you Laverne and Steve about talking to trustees from your point of view and talking through engagement. Rob was talking about how difficult it can be explaining the engagement approach and how it works and presumably in your work you also have to do that.

Explaining engagement

Picart: I personally haven’t had to deal with any of the pension fund trustees involved with the CIS. But in engagement with companies, the things we have found beneficial of late is where shareholders link up together and either engage with the companies as a group or can actually show that there is extra support in the city over a particular issue. It may, in certain instances, be helpful if we could also link up with some NGO groups to either lobby the companies or to show that there is support from the shareholders and from the NGO groups. Therefore I think you’d have a bigger voice with the companies. We don’t actually have any experience of working with War on Want or Amnesty International, but I know that recently Jo Allen here was involved with the Burma campaign. That’s an issue where they also contacted the NGO group that’s working out Burma. So I think it could be the case that for certain issues and with certain companies, having an NGO on board will help to brief the shareholders as to what the particular issue is in a certain country or the issue is with a company and if it is a credible NGO then even better. We have been engaging recently with BP on the controversy in Columbia, but it appears as though the NGO that has been giving out some of the information there is somewhat biased and therefore it is hard for us to get a real handle on what’s happening so I think from our point of view if we can get on board a credible NGO that will help with our approach with the companies and our understanding of the issues which aren’t black and white a lot of the time.

Waygood: Similar to Laverne, I have not met a great deal of trustees in my job, its not a marketing focused job. Having spoken to those that have taken up an SRI service, my sense is that the depth of understanding of SRI very much depends on the nature of the organisation they are representing.  Local authorities and charities tend to be reasonably well informed but company pension schemes tend not to have given it a great deal of thought.  By and large, the general lack of understanding is palpable. When you talk to somebody about SRI, whether it is a trustee or a lay person, they almost always default to a negative screening version of SRI rather than a positive engagement model. So it does take a lot of time to get through the education process but it’s a question of persevering. I think that the expressed wishes of the beneficial owners are key to trustees motivations here. As the beneficial owners tend not to raise these issues to trustees it does not feature high on their list of priorities. If it’s not on the beneficiaries’ agendas then it’s not being raised at the trustee level so they are unlikely to raise SRI with their fund managers voluntarily. This means that, so far, it has generally fallen to some fund managers to lead the SRI agenda, which is counter intuitive.

Wildsmith: Certainly from my own experience of talking about SRI  I am trying to make sure that I think about how broad a term it is and talk about the fact that at one end it’s screening and at the other end it’s engagement.  I was presenting to a group of very wealthy individuals in Lucerne and a lot of them were very negative about the screening approach. But as soon as we started talking about engagement, that was something they wanted to get involved with. A lot of them said they were going to contact the Rockefeller organisation, which co-ordinates the engagement of very wealthy families. So it does seem that once people start to understand engagement, they can see what role they can play.

Wilson: I have detected a theme coming out, I don’t know if anybody would echo this. This is about getting trustees to understand what SRI is all about. I know that UKSIF has worked extremely hard over the last four or five years to raise levels of understanding of what SRI is and what CSR is all about. Do you think there is a fundamental stumbling block somewhere in the trustee education or they just don’t want to focus on it or they just keep coming up with ‘well we don’t understand it therefore we are staying away from it?' Is that something that anybody else would agree that there is an issue about?

Waygood:  I certainly would. I understand that a government department is currently looking at what trustee education is required and what training and what certification needs to take place. I think it is crucial that the syllabus has an SRI component to it.

Picart: I wonder if some of the problems have been created by ourselves. Institutions have what’s deemed to be SRI funds, but some of them screen, some of them don’t, some of them are based on engagement, others aren’t and so I think that has added to the confusion. We have tried as hard as possible to explain that our SRI philosophy is based on responsible shareholding. This  is about engaging with companies and we don’t screen out any sectors or particular companies, but that we use our shareholding to engage on particular issues. But still we get letters from some customers and sometimes just people attached to various campaigns issues writing to us asking us how can you have a shareholding in British Aerospace when they are involved in arms? Or how can you have a holding in BP, when it is an oil and gas company? I think that that confusion is still out there in terms of engagement and an ethical screen fund and try as we might I don’t know how we can get round that confusion.

Waygood: There is a real problem with definitions in this area. There are about 15 different definitions of just SRI in the UK.

Wilson: Is it sometimes the investment consultants who latch onto the relative underperformance of specialist negatively screened portfolios in comparison with say positive engagement strategies such as Clerical Medical and CIS undertake? If NGOs have bias, is there an inherent bias in the consultants because their lack of understanding of the issues as well?

Trustees and SRI

Cartridge: I think that our experience at Just Pensions is that the consultants are only just waking up to this and has certainly been a relatively conservative force on it all. It does come back to the whole Myners issue. I am deeply sceptical, personally, from what I have seen of the role that trustees play in pension funds on this issue. As soon as it becomes complex, they are reliant on their full-time professional advisors - the consultants or the managers -  and they tend to be the people who are advising them all the time and dismissing things out of hand. We tried for the last 18 months to get to address trustee boards, almost entirely without success. We are constantly given interviews with the managers and with the full-time professionals, but to actually meet the trustees, apart from doing it on the employee-nominated route, which are almost by definition going to be in the minority, we have found it very difficult to meet them.

Wildsmith: I think it’s the right stage now to hear what the TUC are doing regarding employee-nominated trustees.

TUC

Powdrill: The default set-up with pension funds is to have a third member-nominated so you are already in a minority on the board anyway, but that’s a point in itself. The TUC maintains a network of about 630 member-nominated trustees at the moment, which are spread across funds of all different sizes, different industries and so on. We certainly feel that trustee education is the way forward. I think it will create an increased demand for SRI if we get it right. One of the problems is you are starting from a very low understanding anyway. A lot of trustees are, particularly at the moment, focused far more on whether their final salary scheme is going to exist in two years than ECOtech funds or whatever, they are a long way behind that. You have got to get them understanding basic investment stuff  initially, and then take them through to SRI and then within that some of the different approaches. We basically want to kick off some specialist training for trustees on shareholder activism and SRI.

We think of activism in a different way probably as well, we are probably as interested in the Myners stuff as we are in the SRI side because we have got an industrial take on investment as well as a social one. 

We have a trustees newsletter which we send out which has historically only covered benefits information but which we have started to shifting to 50% benefits, 50% investment. That’s covered shareholder activism, some individual resolutions and recently we have suggested sources of information like Bob Monk’s books, things like that where they can find out about this kind of stuff. Our next issue is how we can get trustee education off the ground. I am personally quite keen to do this specialist activism training, not even do it within a sort of general fund management course, because we don’t want to waste any effort. We need to do investment training anyway, if these people aren’t going to be interested in doing SRI then there’s no point, we don’t think, of  bunging it in a bigger course. We want specific training on all aspects of investment activism and just hopefully create a kind of core of knowledgeable trustees who want to push this stuff forward.

Wildsmith: And are there any signs of any of the large pension funds ending up with campaigning groups like Ethics for USS?

Powdrill: There has been a small number of people who have already come forward and said they are interested in being trained. We are doing something in the  newsletter which is basically saying if you want to do specialist training in investment activism, then get in touch with us. Now we envisage doing this hopefully with some generous input from one of the fund management companies, for the very good reason is that we want to do it as cheaply as possible. Employers come up with quite a lot of  arguments against why trustees should do union training in the first place, they would rather do sort of non partisan training or whatever. But we want to basically offer something that can be done as cheaply as possible so that the trustees only pay about £25 or whatever and come and have a day learning the arguments and the law and all the rest of it so we can get as many people through the process as possible.

Wildsmith: So is that not an argument for linking the training in with the basic trustee training?

Powdrill: It may be, yes I see what you mean, it could be a way of doing it. We are looking at slightly different stuff to probably the mainstream SRI people in that we are interested in the kind of active intervention stuff with other companies as well as SEE (social, environmental and ethical) type of things. In the  long term we are looking at things like venture capital as well and labour-friendly venture capital,  or investing in property. In the US for instance they have property trusts that only use unionised workers. 

Waygood: I assume that you have got a mailing list of trustees and another mailing list of individuals with a couple of million names and addresses?

Powdrill: In terms of union members? Yes.

Waygood: Have you done anything with those individuals to encourage them to have a look at their own pension in order to encourage greater trustee interest in these questions?

Powdrill: We couldn’t really do that; individual unions would have those lists rather than us, whereas with the trustees we have got a TUC network, which includes union members from all the different unions

Waygood: And if you collaboratively adopted an information demand and supply approach?

Powdrill:Yes, I see what you mean

Waygood: Such a strategy could stimulate greater interest and demand from the trustees at the same time as supplying them the information and providing those with a latent interest in SRI with the mandate for exploring it.

Powdrill: Yes, good idea.

Cartridge: That is something we are going to try and do as War and Want. The other issue of interest is that NGOs themselves are actually now also starting to get together and say we need a bit more of a co-ordinated effort. This is moving on from USS to target another five or 10 pension funds and roll out the same sort of policies there. That is still very much in its early stages.

Wildsmith: I know that Ethics for USS are very keen to share their learning with other groups who are trying as you say to get the demand back into the supply side.

Wilson: If corporate governance is about the way that companies are controlled and managed in the interests of shareholders - what does this say about the levels of knowledge that trustees have? What does it say about their real interest in the concept of share ownership if they are not prepared to grasp these new ideas in the way that seems to be reflected from your experience? Is it something that’s almost tokenism in some pension funds? Does it need to move away from a box ticking rules based approach to a more informed debate?

Sweeney: I am sure you are right. I think it is relatively early days to be honest and I think trustees do have an awful lot to get to grips with. It is going to be a long haul I think. I think that is clear to us all. There’ll be a range of initiatives which will complement and reinforce each other to actually raise this  further up the agenda. I think that is the way I see it.

Powdrill: I think the fact the legal ground is clearer is a big step forward. Rob mentioned the Scargill case earlier on. That is one reason why we are considering trustee training because that is such a weak argument. Engagement has just got no relevance to it what so ever. We can go out and tell trustees that you just don’t need to even think about Scargill if you go down the engagement route. There is no legal problem, at all, there is no stock selection issue there either, this is pretty unthreatening stuff. It is less threatening legally, in my opinion, to your asset allocation decision. What if you get the equity bond split wrong and your fund is underperforming, no one talks about fiduciary duty then do they? It’s those sorts of things we need to get out of the way.

Wildsmith: Can we move to Amnesty now and hear what you are doing?

Amnesty International

Sweeney: We have been working in this area for about ten years. I actually see this as a fourth wave of initiatives that have come through into the corporate arena. I guess the first one was the labour standards one which has been developing over a long period. Then, from the mid 80s, I think you had three significant things happening. The first one was equal opportunities, where legislation and a change of atmosphere meant that companies had to move quickly to incorporate ideas. I can remember when I first joined a major corporation in the early 80s somebody said you could fire a shot gun in the managers dining room and you certainly wouldn’t hit a woman. So first of all equal opportunities. 

Then around 1990 you had the environment and consideration given to that and structures being introduced etc. Then from the mid 90s you had this emphasis on, and interest in, corporate social responsibility, and SRI. That’s a benefit for us because there are already structures in place and quite often the people who are now wearing the corporate social responsibility hat used to wear an environmental hat so you can latch on to procedures and things within companies which were there already. So rather than seeing it as something totally different and totally new I think it is useful to see it as another development in an ongoing situation. 

There certainly has been a remarkable change in the last perhaps three or four years. When the business group was set up it really was banging against a closed door. But with some of the things that happened in the mid 90s, which are well known, Shell in Nigeria and various other cases, suddenly this idea of, from our point of view, human rights on the corporate agenda suddenly were there. We now find almost the weakest response from UK corporates is to say that it’s on the radar, that’s almost the weakest response if we want to go out and talk. So going out and talking to companies is a key part of what we have always done basically on an engagement and educational basis. We have done that throughout the 1990s, so the recent work within the new environment of socially responsible investment and working with the fund managers follows on very nicely from that. The idea of engagement follows on very readily from what Amnesty always does. Amnesty has never been engaged in boycotts or recommending withdrawals or whatever in any context. We have never recommended to people they shouldn’t go on holiday to some of the countries with the worst human rights records and we don’t have league tables on countries with human rights abuses we just report on them, wherever they occur, whether it’s Burma whether it’s Denmark or inevitably the UK. So the engagement idea is certainly an attractive one and one that we latched on to fairly quickly with the help of the fund managers that we were talking to who explained the process to us. July 2000, with the new legislation, was clearly very important. It is interesting that some of the fund managers that we used to go round and speak to before the legislation used to tell us it would have no impact and that everyone would just say we just don’t do it and in fact the situation has been very different. I think things have moved remarkably quickly because as we have discussed the legislation is tougher here or the case example with Scargill etc is tougher than other countries. For instance, I was speaking with a Swiss fund manager and they have no problem across the whole portfolio setting up a weighted selection procedure based on how well they think a company’s performing in sort of SRI and corporate social responsibility and it would be quite nice if we could do that here but we can’t. So given the tough legislation that we have I think it is actually very encouraging that the UK fund managers are seen very much as some of the leaders in Europe in terms of taking these SRI ideas forward. So I am delighted with our progress, that we are on the first rung of the ladder, and there is a long way to go and some excellent ground work has been put in place and I think there is some very useful structures and a remarkable turn around in ideas. Just Pensions has been mentioned and we are an active member in that and I think one of the things which is a sort of coming of age of SRI is the fact that the NAPF (National Association of Pension Funds) actually contributed a foreword to its report. I think that three or four years ago that would almost have been unthinkable so things are changing but they need to change further.

Wildsmith: And do you have any plans over the next year or two to help with that change?

Sweeney: I think there are some interesting initiatives going on. To date, one of the things we have done, is go out to Amnesty members and to group activists to get them to go to their own pension funds and write to their pension funds and their trustees to ask what are they doing in this area? This was something we did a couple of years ago and it’s been ongoing since then and I think we’ll certainly be interested to continue that. Just Pensions is at a very interesting stage where it moves into a second phase and I think there is a lot of mileage in working together with other NGOs rather than doing a DIY job on this and we are certainly interested to see whether we can offer some resource to the next phase of Just Pensions and certainly some of the other initiatives going forward. My own view is that one of the things I really love about Just Pensions and this area in general is that there are a lot of good examples of fund managers and NGOs working together to actually discuss things, but also to produce materials such as Just Pensions, such as some of the papers that Amnesty produces in this area and I think that’s very positive. You could say we have got a beneficial position of government, a number of important fund managers and NGOs lined up almost with their arrows on their forehead pointing in the same direction. I know this is one of the things that UKSIF does as well. But when you have got that I think you can actually make things happen quickly and so we’ll be carrying on with our own activity but also hoping to work with other groups to actually to take forward this work.

Enough government action?

Wildsmith: And you were saying about government being lined up, does anyone feel that you need any more legislation or tighter legislation or codes of best practice to underpin the legislation or anything like that?

Waygood: I am intrigued to know, whether Opra (Occupational Pensions Regulatory Authority) has actually been raising questions around the existence or otherwise of a statement of investment principles (SIP), which complies or not with this famous 50 words that are supposed to be in the SIP. I think we are all assuming that they are and  I am not sure whether this is the case. It strikes me as likely that the existing legislation in this area is not being implemented and there’s a large question mark hanging over  the effective delivery of the spirit of the initial legislation. There is a question whether the English model goes far enough - particularly when compared to some of the continental SRI legislative models. Is a one-off policy statement enough or do we also want, for example, an annual report of SRI activity in support of a positive policy statements. I think if  the existing model were found not to be being implemented then the legislation should be tightened up.

Wilson: Is that where Myners plays its part? One could define underperformance in a whole variety of senses, not just financial underperformance. If you think of, for example, construction companies which have very high death rates, because they are clearly having difficulties implementing health and safety legislation. That has a knock on impact on shareholder value in the long term. Is Myners going to be read widely enough to actually incorporate the corporate social responsibility issues and not just the traditional corporate governance issues of board structure, executive remuneration and so forth? If we end up with too many codes will people be even more scared off from becoming involved and do we need to do more of a PR exercise to make SRI somewhat more user friendly for the trustees?

Waygood: In the sense that the quality of the media reporting on SRI differs wildly, SRI certainly does suffer from a PR problem. With SRI disclosure policy , if investors themselves are not getting the information they require, then it is appropriate for them to be encouraging reporting the directors that they nominate to act in their own best interests to disclose this information.  However, it is important to keep the influence of investors in perspective. There’s only so much influence that an investor can bring to bear with its own resources so engagement won’t ever replace the need for strong legislation on things like health and safety or pressing environmental issues.

Wildsmith: I was thinking it might be useful for the two SRI analysts to tell us how they prioritise the issues they are going to engage on because obviously there is a hundred and one things you could choose to engage on.

Engagement Issues

Picart: I don’t know if we have prioritised. Sometimes we get letters in from people asking us why we are holding certain companies and that will spark us off doing further research into looking at issues. At the moment we have been doing quite a lot of work looking at the cocoa initiative and looking at slave labour in African countries. That was sparked off by some customers writing in and also the documentary that was shown on channel 4. We have been looking at other issues to do with peat and we have been asked to look at initiatives looking at sustainable fish supplies. So I’d say that things come in maybe that we haven’t sat down and planned to have a look at but as they are raised it makes sense to continue in that vein. On a more structured approach we have sector reviews periodically where we target a certain sector for three or four months. We look at what the issues are in the sector and engage with the companies, write up a report and continue to monitor what companies are doing. So that’s the more structured approach but the issues tend to be more ad hoc. 

Waygood: It’s not a science, so it would be wrong to imply that we sit down with that kind of framework. We do try and have a consistent philosophy and there are various different factors that impact on it. Clearly, the issue itself needs to be relevant to business – it either impacts business or is impacted by business. There also needs to be a clear moral case- it isn’t always the case that there’s such a case for a particular business response. I’ve had it asked recently is there a moral obligation for an oil and gas company to be producing renewables? Now my gut feeling is that it is very clearly in the interests of the public that there are renewables being developed but what is the precise moral obligation of an oil and gas company to do that?

Wilson: To be sustainable for the long term.

Waygood: Is that more of a business case argument? There are clear reasons why it should, from it’s own business perspective, its own long term sustainability. Fossil fuels will at some point run out so, if the business model as we’ve got it at the moment is only going to last for say another 50 years, then at some point, it will be important for it to change.  However, it is not always clearly articulated  their precise moral obligation is.

Wilson: Companies are individuals in a legal sense separate from human individuals and they have rights in themselves. So arguably a lawyer might say that the directors have a legal duty towards the company to act in the company’s own interests not necessarily management’s interests. There is your moral argument that the company has a life of its own and its own life should not be threatened by the acts and deeds or misdeeds of its officers. 

Waygood: And for any business issue, like renewables, that has a social, ethical or environmental nature to that, where there is a clear business case for it do that, then that argument’s fine. Where there isn’t a business case argument but there is a moral argument then do you think that it is clear what the implications are for business?

Wilson: No we don’t have a kind of Hippocratic oath for companies to do no harm 

Waygood: Exactly.

Role of Company Law

Wilson: Should that be something that the company law review considers?

Waygood: I think it should. That said, I do like the elements of the company law review that talks about enlightened shareholder value and materiality, but I personally don’t think that from a societal perspective that will be enough.  Just because a social, ethical or environmental issue is not material to share price, it does not make the issue irrelevant to society at large.  I do not believe that corporate disclosure is just for shareholders. That said, when NGOs articulate concerns that relate to their mission, using powerful business case arguments then, ultimately they could have an impact on the distribution of capital.

I think more considerations need to be given to moral arguments in a SRI context, as well, it doesn’t if something has a clear morally unassailable case for it does it need a business case in order to do it? What is the driving force behind changing such practice? Is it investors or is it regulation? Is it customers? Do we have an informed enough customer base to be making that kind of drives? I don’t think we do.

Wilson: Do we have a problem with the word morals? Morals are subjective aren’t they? You may have extreme views in the context of a Muslim perspective on certain activities; alcohol, gambling and so forth. Quaker morals are going to be different to other organisations', so is there going to be a problem of definition?

Sweeney: You were talking about the company law review. I think it is important, I think we need to look at the legislation. In fact there is a campaign that’s been launched which is called CORE - corporate responsibility - and Amnesty, along with others, is working on this. This is gearing up for the review of the company law act etc. which will be sometime in 2003. The sorts of things that are included are for larger companies to publish reports on environmental, social, economic and financial impacts of their operations, expanding directors duties beyond financial considerations, to include environmental, social and economic impacts, consulting stakeholders before embarking on major new projects and the government playing a part in this by establishing environmental and social standards boards to develop guidance and ensure compliance in terms of the reporting. So it’s fairly radical, but we do feel that this is the next stage to build on some of the legislation that’s gone through already.

Waygood: Staying on the company law point I think clearly it is a step in the right direction from existing company law, to have a clearer pronunciation of director’s duties in this area, what they can and can’t do for the long term benefits and all of that. I also think that it provides an interesting debating forum for NGOs and investors. If NGOs can make good materiality arguments for why their particular issue is in the business interest - why it is material – and investors accept that, then there is an automatic disclosure responsibility in law now on the company. I have heard it said previously that if you have got one company, say BP, which says it reports on its climate change emissions because it is material to its share price but Shell doesn’t do the same then the NGO would be able to legitimately explore this discrepancy. NGOs have won more in the review over the past few years than they seem to have realised.

Wilson: What about Turnbull’s role in identifying risks for companies? Do you think that companies take too narrow a perspective of their Turnbull responsibilities?

Waygood: Yes I do.

Wilson: Do you think you may have a better chance of getting what you want by using existing legislation rather than introducing new legislation? Is there an argument for focusing on trying to help people understand how these, so called moral, ethical, environmental risks, translate into a business risk? Get the accountants on side, get the risk managers on side and hopefully not wait for new legislation but say you have got existing responsibilities.

Powdrill: A lot of the Myners stuff is based on the ERISA in the US. In the US they have this department of Labor interpretative bulletin - something like that would be useful in the UK - because that does that say you can look at this as an investor or you can consider this as a financial issue. We are really interested in it because it talks about training and work based practices as something investors should and can look at. Is there a role for the government or the FSA or something like that to look at these issues? So then you wouldn’t need further regulation you’d just be interpreting what already exists.

Wilson: That’s what Myners was looking into with the introduction of ERISA-type legislation. He quoted from that interpretive bulletin. I think the treasury is still working how it would be implemented. Fund managers are obviously regulated by the FSA, companies are regulated by company law, pension schemes are regulated by the Pensions Act or the local government pension scheme and charities regulated by their own respective acts and so you are going to need seriously joined up government to have an all round impact. 

What I was really thinking is, if you start from the plc level in terms of their responsibilities under Turnbull, which is part of the listing roles and if you get the FSA focused on the listing rules that might actually help forward the cause certainly in terms of increased disclosure. I don’t know what anyone’s views are on that?

Moral Arguments

Cartridge: I would agree, I think we need to be pressing forward on all fronts at the same time really. I think it is important that government is seen to be continually active.  

I think there is still so much doubt,  it comes back to what we were saying about the trustees and the fiduciary responsibility, Scargill is still being quoted and things like that, so you do still need government to continually come out there. It's got to be backed up, making statements isn’t enough, because you have to be backed up by legislation. Take the apparel industry - it’s fine for the market leaders who are doing an awful lot of work now on their supply chain. But others simply will not, until they are forced to. They won’t see it as a priority and they will see themselves gaining competitive advantage, by not by not taking on their social responsibility and this does take us back I think as well to the moral case versus the business case. 

To me it is not a moral case, it’s a long-term business case and that  is the question of time horizon. If you look at the biggest thing which happened to shares in the last twelve months, its clearly September 11^th (terrorist attack in the US, 2001). Nobody is saying that one company having a code of conduct somewhere is going to stop issues like September 11^th. But in the same way it’s clear that environmental inaction is unsustainable, keeping people in poverty is actually unsustainable now to our global economy. Therefore, if the movers behind the global economy at the moment are not prepared to do what is necessary to sustain their own future, then governments will have to act, just out of a self-perpetuation issue.

Wildsmith: I agree, I think there are natural limits to CSR and SRI, which can’t achieve anything. 

When you say the moral case, is it totally disengaged from the long-term reputational risk case? 

Waygood: Completely in an abstract sense put the business case and any reputational risk to one side, and any religious beliefs to one side, there are core moral obligations that we have as humans to each other. If a company is, as you described, a legal entity, which is a person, which of those core morals, such as telling the truth, is also a core responsibility for it? Do they have an obligation to always tell the truth? In the case of the HSE (Health and Safety Executive) example earlier, there are clear moral obligations which are distinct from business case issues. I wonder whether the debate has moved too far away from these core sets of obligations that we owe to each other?

Sweeney: I think the moral issues are important. We spend an awful lot of time, because of the fiduciary duty rules, actually talking about the business case etc. but certainly from Amnesty’s point of view the moral case is very important. Is this subjective? The useful thing is that the corporate world can now take advantage of the legislation and the international law which is in place, under the United Nations (UN) Universal Declaration of Human Rights (UDHR) and the treaties and protocols that have evolved from that, which are actually harder international law than the actual UDHR itself. The benefit is that all the members of the United Nations are signed up to the UDHR and most of them are signed up to these international treaties and protocols. It is all based on moral points if you like, moral arguments, but there is actually a pretty good international framework there and corporates can now just pick that up, and what we always say when we go out to corporates is don’t re-invent the wheel, you have got a very good definition in terms of human rights, pin your colours to the mast with the UN UDHR and the associated treaties and protocols and then go to the stage, how does this apply to me? We are not moral relativists at Amnesty, we are absolutists. The useful thing is that there is wide support from Muslim lawyer groups etc. who are all signed up to these ideas.

Wildsmith: Does the ILO (International Labour Organisation) framework play a similar role in your work?

Cartridge? Yes. I’m not comfortable with the idea somehow of making companies moral because companies are there fundamentally to generate profits and when generating profits in any way coincides with societal needs it’s up to governments to legislate. I have actually sat in a meeting with somebody from the Institute of Directors where they have said that the ILO core conventions are not relevant to our members, which simply is not true. The only moral obligation is that company’s should meet legal obligations whereas in fact through being multi-national and by moving their base appropriately, at the moment they have an ability to escape national laws sometimes, or even just to bully their way through national laws. Certainly when you see multi-nationals operating in the Bangladesh garment industry or something like that.

Wildsmith: The French are calling for a reopening of the debate on what fiduciary responsibility means, do you think that would be useful.

Waygood: It would be useful to have that same debate in the UK. I think the time is probably right.

Wilson: There is nowhere in law that says that companies must make a profit. There is nowhere in law that says companies first responsibility is to its shareholders, either, that’s something that has come about really in recent years, that a company’s responsibility is to maximize shareholder return. A company has lots of other responsibilities and many of those are to look after the interests of its employees, comply with tax rules and regulations of the land. A shareholder is exactly that. If the company is lucky enough to make a profit then the shareholders are going to share in that good fortune, risking their equity in the first instance.

So that is an interesting idea in terms of going back to that legal case that you were talking about. Perhaps you have to put it in as a legal premise for companies to comply with your fundamental moral obligations and that those should be issues that are written into company law from the outset. But in the meantime is there anything stopping, for example, the listing authority from requiring a disclosure? After all if they require a disclosure for remuneration policy and vote on a remuneration policy, why cannot companies be obliged to disclose their environmental policies? Rather than us having to go and bang on doors in order to obtain the data, often very begrudgingly, from the companies, it should just be seen as a matter of standard form to disclose the information. Have we got the pyramid the wrong way up? 

We are focusing ever so much on directors remuneration which is very small in the context of the companies wider responsibilities. We should be seeing that it becomes standard best practice that every company discloses how it has, for example, responded to the climate change levy.

Waygood: About 10 years ago there was a review of the stock exchange listing requirements and whether environmental reporting should be made a listing requirement. The response at the time was a simple, this is completely off our agenda, this is not the kind of thing that we should be looking at at all.  The very fact that Turnbull now is a listing requirement is, in terms of what’s written on paper, a huge step forwards. However for this kind of requirement to be taken credibly there needs to be a credible sanction attached to it. I don’t think we are every going to see a plc lose its listing because an NGO somewhere made a very good argument for labour standards being a significant risk in Turnbull terminology rather than material and it wasn’t doing anything to disclose what it was doing to manage those risks and whether it had a policy in place and all those kinds of things. I don’t see the stock exchange saying ok you have lost your listing.

Disclosure Requirements

Wilson: The FSA (Financial Services Authority) is now responsible for the UKLA (UK Listing Authority) and it applies to any exchange, because of course the stock exchange no longer has the monopoly, because people could, if an alternative sprung up, quote somewhere else. It is a problem with the corporate governance codes that there is at the moment no sanction against a company that produces a corporate governance disclosure which is of a very poor quality, for example. At the listings department, I’m not sure quite what their range of sanctions are, certainly they are always keen to hear from organisations like ours if they think there is a breach, but I don’t think I have yet seen somebody being fined for breaching the Combined Code because it is effectively ‘best practice’ not mandatory to do that.

But since the Combined Code was introduced, and since, for example, organisations such as ours, have written about the lack of disclosure of this and the companies are aware that we write about these things and  we have shareholders who are concerned, we have seen in the last three years a considerable improvement in the quality of disclosures, so I think we should sometimes give companies more credit. I sometimes think they have invested far more heavily in making change and progression on this front than some institutional investors themselves have done. There is a coterie of very devoted institutions who are at the leading edge who are doing a lot of work but then there are a lot of people going along for a free ride on the back of the work that you are doing for example.

Waygood: That’s kind of you to say.

Wilson: It’s true. I see it all the time, when you talk to a fund manager about what drives his or her stock selection; it isn’t because they have got ISO14001, for example. They want to know am I going to get a 10% return in the next three months, so there is this tension between the marketing need of the fund management company, but also the fiduciary responsibility that the trustee of that pension fund has as well.

Waygood: You touched on ISO (International Standards Organisation). 14001 I don’t know of any fund managers that has specified what their most significant indirect environmental impacts are in ISO14001 terminology. To me, the most significant indirect effect arises from the way they manage money. Mostly, financial institutions speak of the direct impacts of the energy we use, the waste we throw away, and what we buy - paper for example. But that’s not what I’m interested in as a representative of a fund manager; I am far more interested in the most significant environmental and social impacts, which I think are the indirect ones. It could be possible to use an ISO framework, ISO 14001 framework to drive that, but the debate isn’t there at the moment. ISO are not having that.

Powdrill: Just to get back to that what you were saying about recognising how far companies have come as well. I saw this study recently that looked at the corporate governance and SEE policies of all the big fund managers. In quite a few cases the fund managers were asking for less than the companies were already doing on some of the Combined Code stuff and its like who is the drag on the system? Maybe we are bashing the wrong target a bit sometimes.

Cartridge: You talk about the FSA. I think what is going to happen, in reality, is  that FTSE4Good, for example, is going to push these standards forward in a sort of voluntary wishy -washy way. I think that’s more likely to happen. 

Wilson: I think there is a transatlantic problem in that you have American investors looking for companies to adopt the CERES principles and over here in the UK a company will say well actually we have gone for our own EMS and we look to these other standards so I think there is this battle of the standards which could be used by the company to divide and rule.

Waygood: There are a plethora of standards, but do you think that the debate in corporate social responsibility terms has moved too far onto management systems and policies and that the structure of a report has moved too far away from the specific on the ground activity?

Sweeney: No. It had to be this way round, but it is the first rung. I think it’s just a case of inevitably first, get your systems right. I think we do need to then move on to say, what is actually happening on the ground so I agree with you to that extent.  But I think it had to be that way round and whereas quite often we go out to companies and you know they haven’t gone into this enormous detail, they might well have a number of good features in their company policy, little snapshots here and there across the whole CSR agenda are good, but what they need in place is an overall structure and perhaps a way of going forward.  I am sure we are moving forward to a stage in this discussion where we are looking forward.  I think certainly over the next couple of years we will be looking for fund managers to be probing more deeply beyond going into a company and simply saying do you have these, what structures do you have in place, and then that’s enough, but I think it had to be that way round.

Cartridge: I had a meeting three years ago with a very major fund manager, who called us and said we like to get NGOs in from time to time, can you give me a list of companies who you have problems with? If we couldn’t actually give examples, then that was fine as far as they were concerned, there was no engagement necessary. So they were putting the emphasis back onto the NGOs in effect to monitor the companies, and that is not at all a possible way forward. So we have to really work on systems first and then NGOs may well back away from the systems whether it’s this year or next year I’m not sure, and start to do a little bit more whistleblowing, saying well actually you’ve got this system so why has this happened? This particular thing that has hit the headlines, and we will be asking fund managers to ask that question.

Waygood: Within the context of whatever standard or system they have?

Cartridge: Yes, they claim to have. If they claim to have very good monitoring of labour standards, how is it that Panorama has found them with child labour in their factories in Morocco?

Wilson: It is a problem isn’t it that the standards may only apply to one division. We often see this when looking through reports and accounts. It will be one specific division only which is accredited to a certain level and it’s not necessarily from the very top of the pyramid all the way down and that’s where I think those kinds of slip ups can arise.

Sweeney: From our point of view it has to be group-wide otherwise we almost discount it. The incorporation of human rights, for instance, has to be at group level, it can’t be contained.

Wilson: Should we not give the companies credit for at least getting on the ladder and are companies possibly doing more than some investors are doing?

Cartridge: Certainly on labour standards, I mean if you look at companies in ETI they are well ahead of all but the most progressive investors. You cannot really class the whole investment community together, but there are some companies which, to be honest, are well ahead. What I haven’t heard, but I wouldn’t be surprised to start hearing relatively soon, is that companies actually start being pulled back by their investors and that is quite a concern.

Waygood: I know we should keep the buy and sell side distinct but in terms of NGO strategy I am perplexed as to why such an important constituency within the investment community - ie brokers -  has until recently been ignored. Over the past 30 years, more and more NGOs have decided to work in investment. You have got about a dozen NGOs now working routinely on the capital market, trying to change and to effect change of the sort that they want that’s related to their mission.  Over that time, I can’t think of a single occasion where a UK NGO has publicly focused on a broker in its campaign work. Brokers, obviously, are of incredible importance to the way that the market works and they should properly integrate an analysis of the material social ethical and environmental issues into their broader fundamental analysis of the company.

Wilson: Let’s take, for example, the drugs companies and the fiasco over AIDS drugs in South Africa and people trying to get round patents and so forth and the impact on drugs companies and the moral issues of selling drugs. That surely has got to be factored in somewhere into the future performance of those companies. So perhaps it is up to the NGOs to target some of those medium investment analysts for although fund managers don’t rely wholly and solely on brokers research in the way they might have done 10 or 15 years ago, the earnings estimates, the forecasts of company performance still do play a part in fund managers stock selection methodologies. It’s that reality check for the internal analyst on what the rest of the market is thinking.

NGOs' SRI Resources

Sweeney: Its an interesting idea, I think you have to bear in mind the resources that NGOs have available to them, I suspect that will be continuously a problem.

Cartridge: It is worth just doing a reality check at that point. Saying there is a dozen NGOs working in this area, is probably true. But I suspect it doesn’t mount up to more than two or three full-time equivalent people and the actual scale of the NGO campaign varies between one to another. When there is a particular targeted campaign against a company then there will be more resources put into that, but in terms of doing the general work about improving the quality of investment a lot of it comes back to what I was talking about earlier about charitability. It would be very difficult for us to justify putting time and resources, our member’s money, they give us donations to help the poor in the third world, and we are using money to engage with brokers about what may or may not be the way they work. It is quite difficult. We are looking more widely and we are getting a much better understanding of how the city operates which is something which certainly wasn’t true five years ago when we started working on this and we are starting to work with some analysts so I think that anybody may come into the spotlight from that perspective.

Waygood: You mentioned the resource constraint. If you look at the amount of resources that Amnesty have, for example, looking at countries’ performance in human rights and then you look at the kind of requirements or sets of principles that companies are setting themselves up to be endorsing there isn’t any NGO anywhere that I know of who has got anything like the resources in place at the moment that would be able to routinely monitor whether companies are implementing these specific requirements and principles that they have endorsed. I wonder whether companies’ CSR reports are read routinely by NGOs. I suspect not. I am wondering whether there are enough NGO resources devoted to monitoring honesty.

Cartridge: I don’t think there are. It is growing massively, the area which has taken an enormous amount of resources is the ETI. That has taken a colossal amount and all the people in the NGO world who are working on CSR, not anymore but up until about a year ago, were really putting a lot of effort into getting that up and running. I don’t think there are anything like enough resources for performance monitoring or for any serious monitoring. 

What you are seeing now is that there are more coming into the market. Oxfam being the obvious example having done their work with GSK is a now putting a lot of serious time into SRI. SRI is going to be built into the whole of their three-year trade campaign and you suddenly start to see that the snowball might begin to build. I suppose my question; to pass it on would be to Tom – in terms of the kind of the trade union capital side of things, as well. Because looking at the States that’s been much more significant and you don’t really feel that the trade union movement in Britain has given it the same sort of resources as we saw in the States and that would be something that would help in many ways.

Powdrill: Yes that’s totally true in the US and Canada, this kind of stuff has been in the trade union movement for ages and has been really successful, across a range of asset classes, not just equities, but its into venture capital and property and all kinds of stuff. In the UK the theory has been around for like 20 years, but it’s not really been put into practice so it is a bit of a slow process. There is some understanding from the TUC about what the opportunity is, there is less understanding in the individual unions as yet, so I am writing a report that is supposed to educate the TUC and the unions about, like what our opportunities are in here and how we can roll a process out. 

Wilson: Picking up the point about disclosure, I was thinking if NGOs haven’t got the time to read through all the disclosures to check for there veracity, that the NGOs might usefully pool their resources on what they would have expected to see from a CSR disclosure in a report and accounts. Companies could actually sign up and say when we report on our CSR/SEE, whatever acronym we are going to use in our annual report, we agree to abide these core principles in our disclosures and we won’t disclose anything that is not supportable and hasn’t got evidence. There maybe an opportunity, if NGO-collectivist activity has been so successful for that to be a way forward, to actually help companies and show them what is actually required and what is best practice.

Sweeney: I don’t think NGOs can do that, I believe it’s too big a job. I think what we can do is have an important role in terms of perhaps pointing out directions that can be followed etc. But even in terms of corporate social reporting standards etc. that is a massive job. I think we can comment on things that are presented but frankly I don’t think there is going to be the resources to actually monitor. There might be some exception reporting where you focus on one or two companies but what we need to do is get the proper procedures in place where these things are being done just as in financial reporting which is why we are keen on this corporate responsibility bill. Frankly, the people who have got the resources to actually set up the right procedures are the companies themselves and then we need the government helping with legislation, helping with guidance and initiatives and also the reporting industry setting out procedures in which it can be done. I think the key thing is going to be external monitoring but I don’t NGOs are the people to do it.

Wilson: I wasn’t suggesting that NGOs do the external monitoring I think there are plenty of people, to do the monitoring. There is the International Corporate Governance Network, which represents all the various bodies, and they came up with a set of core governance principles. The NGOs could probably come up with core principles of what they would like to see as common standards in the reporting and then that can be taken forward by monitoring organisations themselves, such as the fund manager’s own analysts.

Waygood: So you are thinking of something other than the Global Reporting Initiative (GRI), which is talking about the detailed text. You are talking more about the philosophy.

Wilson: It really is the morals of the reporting.

Sweeney: NGOs can certainly do that. We are inputting into the GRI. We could certainly do that.

Cartridge: I am not sure that NGOs would start that process. I think if Manifest, or a similar body, was keen to draw NGOs together to do that we could. The other thing that might happen – we all know the number of NGOs in the world is growing exponentially and it is quite likely – is that NGOs will form that do exactly this role. We haven’t yet decided on which way Just Pensions is going in the future but if it does become an institution in itself and it sets up then that may have that function. You always have the problem that the core activity of the NGOs is not to go out and tell the City what they should be doing. It is far more likely to be critical, in a positive or negative way, of what is being done.

Powdrill: When we have thought about this stuff internally we came to almost the opposite conclusion that from the union point of view you want to be involved, to some degree, in monitoring because otherwise we wouldn’t be confident that the right stuff was happening.

Waygood: In specific cases, or in generality across the board?

Powdrill: In a general level I think. There are different standards that companies go for. We are interested in ILO stuff. If we are not involved in the monitoring process we wouldn’t be confident even that people who say they adhere to ILO stuff actually do. We are even contemplating whether at some stage unions would actually provide information themselves rather than fund managers going to the companies because we think we have got a role to play. Trade unions are part of these companies as well; we are almost like employment analysts. We can get information from these companies that other people can’t, we reflect the reality. They might say we have got really progressive employment practices that give autonomy to the workforce but that could quite easily be words on paper.

Waygood: If you came out and said, as your organisation, that we have serious concerns about the quality of the management of this company then I think a lot of people would sit up and listen to that. There are precedents there, the anti-apartheid coalition, when it was lobbying against Barclays, did a shadow annual report Balfour Beatty last year the coalition put out a shadow annual report. I have been in meetings where shadow reports such as these have been tabled which focuses the debate on resolving the difference.

Powdrill: We think initially, at least, we ought to be involved.

Wildsmith: It’s happening in France isn’t it? Some ex- trade unionists are starting to assess companies and analyse their performance from that inside information.

Waygood: Greenpeace and WWF have attempted business case reviews with climate change, sensitive sites and BP for example. They produced investment briefings, held investor-seminars. However, in terms of their resources, I understand that they were hugely resource intensive. You can only do that for one or two companies.

Cartridge: This is where you come back to the original code of conduct and the ETI. You say it might take two meetings to draw up core value principles. It took two years to draw up the code of principles. Maybe then you have got something to build on but it was colossal. Loads and loads of resources from the whole NGO world were sucked into that and I think people would be very reluctant to get involved in that again. On the monitoring side I think the unions have got more legitimacy monitoring than the NGOs have. It’s not to say we wouldn’t have a role but it’s more likely to be whistle blowing in effect or exception reporting and perhaps setting up the monitoring systems where again we have experience from ETI. To give us a formal role in it is something I think we would all fall short of.

Waygood: There is supposed to be a formal mechanism in the form of verification but it is not widely practiced by companies, which I think is a shame. I think verification adds significant weight to CSR disclosure although the same issues as with brokers about conflicts of interest exists around verifiers and there are conflicts of interests if they have got a massive budget coming in from doing the overall audit of the company.

Wildsmith: Can we move on now to looking at what each side would like from the other side? From any aspect of the city – from membership organisations like mine, the fund management community, voting services, what would make your life easier?

Looking to the future

Wilson: I suppose I am talking on behalf of, not all of our customers as not all are switched on to the CSR message, but certainly those who are. But there are problems associated with reporting and the vast discrepancies in the quality of reporting the issues and  frequently they are buried away not just in the notes but in a dead-end part of the internet site so a consistent framework for reporting would go a long way. 

I am a great believer that if you give people the right information to make informed judgments it is going to improve the quality of dialogue, for both NGOs and companies. It should also help to resolve issues possibly faster than people skirting around the issues. Positive information campaigns are also crucial to helping trustees understand the issues in more detailed. I am not sure we are going to get to a situation as we have in the States where you see shareholder resolutions being put forward because it’s just not in the mentality of UK investors to do that. Although we have the toughest regulatory regime in the world for company law it is interesting that in America they don’t have a tough regulatory regime for companies so they have to put forward shareholder resolutions. Voting is mandatory in the US, over here voting isn’t mandatory.

Waygood: Once a vote is passed it’s binding.

Wilson: It’s absolutely binding hence there’s the requirement for a 75% majority. A lot of Americans don’t realise that you have to have this super majority. Also from NGOs educating the monitors – we would see ourselves as a monitor – so we are kept in the loop on what issues are of concern to you because we can then look out for these issues for our investors. We are saving our investors the huge amount of time it takes to read through 1200 annual reports and accounts and associated CSR reports – it’s no mean undertaking so we do appreciate that resources issue. Help us to help you help investors I think, is what we would say.

Cartridge: Reporting is obviously …

Waygood: Of us, or of companies? 

Cartridge: Reporting by companies in the first instance but then transparency. I think there is a big issue still to come in the SRI industry in terms of what it means if funds are starting to engage and there are going to be some legitimacy crises I think. Somebody is going to run a front page somewhere saying this company is claiming to engage and isn’t. There is a lot of shouting going on from some of the SRI leaders who have most to lose in all that battle and what I would hope is we go for transparency rather than absolute standards because it is important that the big pension funds do do a little and are encouraged to take on the first rung of the ladder and that they can do it gradually. From what I have understood over the last five years it is a very slow process and its got to be gradualist. There is a big issue that if you are looking towards us to do exception reporting  I am not sure how we resource that and don’t take our information as being absolute. If War on Want issues a press release on BP in Columbia you can’t always vouch for it. We can’t afford to put people on planes to go and look and see what’s actually happening you are always reliant on southern partners and they will pass the information on. So don’t have too high an expectation of NGOs it is not our job to do this monitoring. 

Powdrill: We would like some of the SRI fund managers to look at union issues properly. If unions are going to have a serious role in this one of the things we have got to do is demonstrate it because we represent, as well as the trustees, the scheme members. We have to demonstrate to them that it’s worth doing not just to feel nice but because we can make possibly make the financial argument as well. I think, perhaps, SRI fund managers have tended to look at labour standards and employment practices in an international context rather than looking it in a UK context as well. We are interested in the international labour standards as well but we would like to get a buy-in from the unions nationally and employees and scheme members nationally so why not look at some of these things on a UK level? Unionisation is obviously a key one for us, but employment practices generally.

On Myners, our line on mainstream shareholder activism, is what is wrong with this duty to intervene? We thought it was a totally acceptable requirement and that it should apply to trustees as well. It seemed like there was a collective effort from the fund management community to go against that –  saying make if voluntary which is what it is at the moment and it’s not happening.

Wilson: Would you like to see better training of analysts in CSR? In the other exams, the back office exams, they do actually have in the syllabus, corporate governance, as an issue. Would you like to see the FSA include corporate social responsibility issues as an examination syllabus issue, just so that as people are coming into the industry they get at least a basic grounding of what those issues are because five years ago corporate governance was not on the syllabus, but it is now.

Waygood: Absolutely. Yes.

Wilson: The FSA securities representative exams, corporate finance exams and IAQ (Investment Administration Qualification) and there is also people like the AIMR, the Investment Management Research Institutes. They all set the framework for professional development and professional education in the industry and so they can have quite an important influence on, certainly new people coming in, so even if there is resistance amongst existing senior players then as people come in a new generation will come in with a different perspective.

Waygood: It’s the same argument for the MBA programmes - integrating corporate social responsibility into them is important because the management and businesses of tomorrow need to know how these issues apply to their business just as the trustees of investment funds should appreciate the importance too.

Powdrill: Just one point I really want to make actually is, all the time when you talk about this stuff, either mainstream activism or corporate governance or SRI, you quite often hear this argument, that it would just be a burden on trustees and less lay people would want to become trustees and I have got absolutely no examples of that happening.  We did ask, when we put our response into the Myners review on active intervention, whether anyone had any examples of trustees saying ‘oh no not another regulation I won’t be a trustee anymore' and we asked not just within the TUC but we also asked the Northern Pension Resource Group, which is a member trustees network and no one came back with anything of that nature. So I just think that’s a myth and that I just don’t know who these trustees are that a, read this stuff in that much detail, and b, worry about it. Like I say I would be far more worried about the decision of picking the right manager rather than whether to put in a SRI strategy.

Helen: Anything from Amnesty?

Sweeney: I think in some ways underlying some of the things that have gone before. Yes reporting, very important, and transparency and I think the external verification. I am delighted to hear that you feel that there are the people around who can do it, but my goodness an awful lot of the reports that we see do not have external verification, I think that is something that we really want to encourage. 

I think that we mustn’t all rest on our laurels, if you like. Although there have been some excellent initiatives, and I think I am actually very heartened by the way things have gone, in this country, I think that we can see that there is a huge amount of education to be done with trustees and with the bulk of the fund management industry. There is an awful lot of work still to be done that needs to be tackled. 

What would make our life easier? I think, in terms of the fund managers, one of the things that we will be increasingly saying to fund managers over the coming year is what about your group policies? Do you have the universal declaration of human rights at the group level?  You may be doing very well in your particular area, but it would actually be a big help to us and perhaps to you as well to actually do that. I think that would be an increasing focus, so yes I think fund managers have done well in this country to date, and I think that the way that NGOs and fund managers have found common areas to work together on is beneficial but I think there will be a need to scrutinize what is actually happening and what seems to be working and what’s not. Initially perhaps on a private basis, talking about various things, but we’ll see after that. 

Cartridge: We did talk briefly earlier on about redefining fiduciary responsibility. We have a very interesting quote in the front of the Just Pensions from Yve Newbold who did chair a NAPF voting enquiry, I think, and was chair of the ETI at the time, saying that actually fiduciary responsibility includes having SRI that almost we are going to move in that direction.  I think there is a very interesting court case to be brought at some stage against a group of trustees who don’t act on advice and who don’t engage. Take, for example Railtrack, that may not be the best example, and I am no analyst, but the people who owned Railtrack were not managing Railtrack, they were not engaging with the management of Railtrack why were they leaving their investment there? Were they engaging? Were they trying to do something? It was clearly a critical company that was going down the swanney. If my pension fund had lost money by leaving its investment in Railtrack I would be interested to know whether or not there had been any engagement. I am sure there are better cases, you probably know what they are, you might like to tell us and we might like to think about raising them.

Wilson: In the same way that certain pension schemes have recently sued certain fund managers regarding variation from risk targets and benchmarks?

Cartridge: Yes, its clearly getting to be a litigious kind of area. I know we all say Scargill’s gone and everything else, but we haven’t got new case law to absolutely determine that and it is a fascinating one to be brought there. The other thing, which I think I would say and I would word quite carefully, but I would like to see the bodies, like the NAPF (National Association of Pension Funds), being more progressive or seeing the fund managers putting a little bit more emphasis on SRI. I mean we were very glad that they did give us a little bit of support for Just Pensions, but I think it’s just first steps and I think there is a long long way to go really and they need to engage because they are they are a conservative element within the industry, which is sort of inevitable.

At the end of the day the NAPF only represents its members, probably, so if the members are unhappy with what the NAPF is saying then the members should be raising something with them, if on the other hand it is the members who need to be more positive, then so they should be.

Waygood: I was interested in the quality of engagement discussion that started, we didn’t really have that properly, and maybe this wasn’t the time to have it but there needs to be that kind of debate around what makes good quality engagement, that very much needs to happen. In the same way as disclosure and transparency and so on is incredibly important for companies, and such disclosure adds value to their business fund managers too can benefit from transparency to their stakeholders. What would help us here? Laverne mentioned the need for good research. I have had a number of times when I have been contacted by an NGO about a particular matter and approached the company to discuss it.  More than once it has turned out to be factually inaccurate  and they have been able to produce credible evidence that counters the NGO. This can put us in a potentially difficult situation.  More than that it also affects the reputation of the NGO and the value we place on their information going forward. It helps if the NGO has raised their concern with the company in question.  Their was a  a case last year where Balfour Beatty was being confronted by an NGO who had not met the company to to raise their specific concerns.

Language is important in how documents are written. If NGOs use inflammatory language, then they will lose some of their ability communicate effectively with investors.

There also should be a clear recognition that the role of investors and NGOs is quite different. Also, NGOs should recognise the different investment approaches – for example a lack of understanding of how index funds work led to Norwich Union being accused by an NGO of having huge investments in various companies.  Some of their holdings, were small holdings in tracker funds representing a small fraction of the market cap of the company. Criticism of these holdings undermined their broader claims.

Cartridge: I agree with that in terms of selling the shares, but that is no reason not to engage though is it?

Wilson: In fact it makes the argument stronger.

Waygood: It does. The point is that is should effect the kind of call to action that you make. It’s predominantly an engagement issue because you can’t sell the holding until it falls out of the index.

Wilson: Even non-index funds find it increasingly difficult to move large blocks of stock in the market these days.

Waygood: Extremism, of course, doesn’t help. You have got problems - people like SHAC (Stop Huntingdon Animal Cruelty) don’t help you. 

I think in the longer run as well, if you look in the US and how big the market is in the SRI market place, you have got fund managers who have come into being, relevantly recently, whose sole purpose is to manage their clients money on an activist basis. For example, Trillium, if you look at its clients, have got some super rich rock stars who have effectively said, "we care less about how much money you make and care more about what you are doing with our money by way of activism”. There is no fund manager that exists in the UK that does this.  In a purely corporate governance context Hermes is activist but it does this from the basis of sound fund management.

Wildsmith: Having spoken at that conference for really rich people, there is a market in Europe I think.

Wilson: I think there always has been hasn’t there? The idea of being a philanthropist when you get to a certain age, but it doesn’t seem to be well rooted in the British culture.

Waygood: It would really help if all NGOs managed their own money in a way which accorded with their principles – not all do.  Further, the individuals that make very large endowment donations to them could be asked to invest this money along similar lines. I haven’t done the research, but let’s assume that there are 100 large NGOs in the UK, I’d say that 20 of those have got a socially responsible investment policy full stop for their own assets and their management and only five of those are actually doing anything in a concerted way.

Wilson: How do NGOs select their fund managers?

Waygood: They use lots of advice but the advisors don’t routinely factor these things into the advice.

Sweeney: I think it would be foolish of an NGO not to have at least half its act together.. One of the interesting things from a pension point of view is that the Amnesty UK Pension Fund is fully insured scheme so it is actually exempt from the SIP regulation but voluntarily they have included it in their own statement. We advised them on what they ought to include. It would be interesting to know what the position was across the board.

Waygood: The final thing that would really help us is, where an NGO has a concern about a particular company, producing one piece of paper that specifies what, in their opinion a responsible investor should do, including the business and moral case. We don’t need a 30-page report on Sudan if there are only a couple of companies to actually affect the kind of change that you want to see. A briefing sheet is all-important.

Wildsmith: From an UKSIF perspective, don’t forget that we straddle the two camps. For example, at a board meeting we agreed to support the call within the CORE campaign for mandatory disclosure even though a lot of our members said that they would not actually be able to do that themselves. On Myners we got permission from our members to be much stronger than they knew their institutions were being themselves or through the ABI. So even though our response wasn’t quite as strong as Just Pensions', we can play that middle role at times and keep up the openness as well. I know there are discussions between us, Just Pensions and the TUC because I think going forward we can work better collaboratively.

Waygood: And I wouldn’t underemphasize, at all the massive achievements that NGOs working in this area, thus far have achieved. I think that it has been extraordinary to watch the legislative change and the practical change. It’s just the scale of the task that is daunting.

Cartridge: Could you add on calls to NGOs not to stop? NGOs, traditionally in all areas, we get bored. There are demands from our supporters to move onto a new campaign and the pressures that we all feel internally I suspect. It is important to keep on asking us to do this really.

Waygood: In a modern capitalist economy, it is the capital market that has the most influence.

Wildsmith: Far more than government.

Waygood: : Far more than government, because it's got far more ability to be proactive. Legislation is by its very nature reactive, and sometimes the emerging SEE issues are exactly that, they are forward looking. For example, think of what is going on in science and technology at the moment.

Helen: And the wider NGO campaigns are very useful, linking into reputational risk as well. 

Waygood: Using business case arguments has helped.

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