By July 2000, trustees of pension funds are required to incorporate their policy on socially respons...
By July 2000, trustees of pension funds are required to incorporate their policy on socially responsible investment (SRI) in their Statement of Investment Principles (Sipp). Pensions minister Jeff Rooker has defined socially responsible companies as those "with sensible corporate governance policies, environmental policies, mission statements that respect the rights of workers - whatever country they operate in. Companies that welcome engagement by fund managers and provide the sort of information that will enable trustees and their agents to determine and verify factors that are important to them."
Despite the appointment of three pensions ministers so far, the Government is likely to continue to embrace SRI: using the market to achieve social ends is very much in accordance with New Labour philosophy.
The Government's approach to SRI involves engagement, corporate governance, sustainability and the environment, and does not focus on negative screening. Rooker encourages trustees to adopt a positive stance towards SRI because companies adopting progressive environmental, ethical and social standards are likely to perform well in financial markets.
He warns that trustees who ignore SRI may fail in their fiduciary duties and expose themselves to legal action if a link between good performance and socially responsible investment is established. Supporting SRI and implementing a corresponding policy is expected to limit the likelihood of any legal action. However, the primary responsibility of trustees must lie with their fiduciary duties to scheme members and employers who incur the costs of managing the pension scheme.
One of the leading promoters of SRI, the UK Social Investment Forum, defines it as combining "investors' financial objectives with their commitment to social concerns such as social justice, economic development, peace or a healthy environment". The screening methods used by managers to achieve this may fall into four types:
l Negative - ruling out any company that is not socially responsible.
l Positive - choosing the "best of breed", assuming equal forecast financial returns.
l Positive - integrating social and environmental factors into the stock screening process.
l Engagement through voting/meetings and so on to influence companies positively.
The UK Social Investment Forum expects many defined benefit schemes to adopt an engagement policy with the results of this approach feeding into stock selection.
The positive selection of certain stocks where socially responsible criteria have been considered will provide scheme members with both financial and non-financial performance benefits. However, the onus is on fund managers to prove in their investment process their support of the SRI policy outlined in the Trustees Statements of Investment Principles.
A number of organisations such as INVESCO subscribe to PIRC research which provides a clear view of how closely companies are following best practice. INVESCO attends PIRC's discussion forums and is in contact with the organisation on its Corporate Responsibility Service. PIRC's approach to corporate social responsibility is based on monitoring five factors - environment, employment, human rights, community policy and corporate governance.
The NAPF's voting issues service (VIS) plans to extend its corporate governance service into an 'engagement partnership'. This service covers 350 UK companies and addresses environmental engagement and social responsibility issues.
We have now begun to see the first expressions of SRI policies adopted by pension scheme trustees. Recently, the trustees of BT's pension scheme made public its proposed amendments to its statement of investment principles which now incorporate its stance on socially responsible investing. We think the changes, outlined below, will provide a useful benchmark for trustees in the industry in compiling their approach to SRI.
The letters of appointment of every investment manager of the scheme instruct the appointee, in its investment policy, to consider the following when selecting the shares in which they invest the scheme's assets: a company run in the long-term interests of its shareholders will need to manage effectively relationships with its employees, suppliers and customers, to behave ethically and to have regard for the environment and society as a whole.
The letter of appointment also requests that the fund manager should endeavour fully to exercise their voting rights as associated with their shareholdings.
This announcement by BT follows the Universities Superannuation Scheme's (USS) decision to commit itself to adopt an ethical, social and environmental investment policy. The USS aims to follow an active engagement policy to encourage corporate bodies to behave in a socially responsible manner.
In addition, the USS has decided to publish all of its holdings on its website, implying that knowledge of individual holdings is the providence of the beneficiaries. They have also made two appointments to monitor how closely their managers are adhering to their SRI commitments.
The trustees of another large pension fund have decided that to achieve the optimum return no restrictions in terms of countries and companies should be imposed on its investment managers.
In exercising their voting rights, the trustees require their fund managers to act in the best interests of its shareholders and to be actively rather than passively involved.
INVESCO's policy is to work with our clients to implement their SRI policy rather than to provide our own rigid policy. We think SRI is likely to have a greater impact if there is a recognisable degree of commonality in the approaches adopted by trustees throughout the industry.
Our present statement on corporate governance states that our voting policies have three main
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