Pension
funds need to disclose not just their SRI policy, but also how they are
putting it into practice, says Emma Howard Boyd
Despite miserable stock markets, the shareholder activism agenda
continues to move forward – driven by a number of investor and
regulatory initiatives. Last month, the financial secretary to the
Treasury, Ruth Kelly, on behalf of the UK government welcomed the
Institutional Shareholders’ Committee statement on shareholder
activism, but stressed that the key test would be how the statement
alters shareholder behaviour. This effectively put the City on notice
that it has only a limited period in which to sharpen its act.
The ISC statement, which is part of the City’s response to the Myners
Report on corporate governance, advocates early investor intervention
and a greater readiness on the part of investors to vote against boards
of directors which persistently ignore shareholder concerns.
On the face of it, regulators have brought about substantial change in
the financial sector’s approach. Since July 2000, pension fund trustees
have had to disclose their policies on SRI. By the following October,
research published by the UK Social Investment Forum suggested most
trustees were incorporating SRI principles into their investment
process. Yet two years after the regulation came into force, a more
sobering picture emerged. Research by Just Pensions, the body that
encourages SRI in the industry, found poor practice still common within
pension funds and that most were either reluctant or simply unable to
monitor the activities of their investment managers in assessing
social, environmental and ethical issues. Had the SRI policies written
in 2000 been filed and forgotten?
There seems little point
in any organization putting in place a policy which it is required to
disclose if it does not then implement the policy – and also disclose
how it is doing this. In the case of pension fund trustees, consistent,
regular review and communication of SRI processes would help close the
gap between policy and implementation.
The argument for
extending disclosure is not simply a matter of logical consistency.
Failure to do so increases reputational risk both for individual
trustees and the body that employs them. This is demonstrated by the
experience of organizations such as the UK’s Environment Agency
(responsible for flood protection), whose substantial pension fund
holdings in oil companies, which are implicated in adverse climate
change, received wide publicity earlier this year. So what can trustees
do to minimize the risk of similar publicity? Disclosing not only their
SRI policy, but also their processes of implementation, would enhance
the risk management procedures of pension funds by ensuring that
social, environmental and ethical issues are indeed taken into account.
Emma Howard Boyd is a director and head of SRI at Jupiter Asset Management
