Responsible investment is a nice title and a growing industry, but how much difference does it really make to the way our pension funds are invested?
Courtesy of the excellent Nordic Horizons programme I was in Edinburgh City Chambers last night to listen to Zaiga Strautmane who heads up responsible investment for the Danish pension fund Unipension. They joined three corporate pension funds together covering a range of professions to create a stronger fund with 100k members an assets of £10.5bn.
It is important to emphasise that 'responsible investment' is not the same as 'ethical investment'.
After a particular investment row they developed a responsible investment code. There are no statutes in Denmark on this issue other than a requirement on large firms to produce social responsibility reports and some guidelines on responsible investments, which usually followed.
They started with a member survey, repeated every three years. Interestingly, the first question was 'How much money are you prepared to give up?'. The answer was £50 to £100 per month. I would be sceptical about the premise of the question, but the commitment of these Danish workers is impressive.
After identifying the views of members they scanned the sort of world issues that concerned them e.g. Bangladesh clothing factories, child labour, corruption etc. They also looked at good socially responsible companies in Denmark as a benchmark, but discovered not all were as good as they thought.
They started with the UN Principles for Responsible Investment (PRI). Then developed an active owner, vote and engage strategy. They cooperate with other investors to give scale and clout and are transparent about their approach with regular reports on their web site.
Their list of issues comes from the UN Global Compact including human rights, labour rights, environment and anti corruption. Then they added controversial weapons, sanctions, and good company governance. They have a legalistic, not political approach, following international conventions on these issues. For example, they have not excluded firms involved in Israeli settlements because they regard UN resolutions declaring them illegal, political not legal decisions.
The plan covers all asset classes - equities, properties and bonds. They focus on engagement before exclusion, although some 30 companies have been excluded. This doesn't include fossil fuel divestment despite members wanting them to exclude. She argued that there are no financial reasons to exclude and even if they did, other shareholders would take up the slack. They don't have to follow AGM decisions and have a similar concept to our fiduciary duty.
To give a Scottish contrast, Marianne Harper Gow from Baillie Gifford set out their approach to responsible investment. They focus on company culture and governance. She illustrated this by describing the BP Gulf of Mexico oil spill as an environmental disaster, but the cause was governance failure. Pension funds are long term investors and BP's cost cutting and outsourcing should have been a warning sign.
They do responsible investment through research, proxy voting, engagement and reporting. Building long term relationships with companies rather than exclusion.
I am usually inspired by the different approaches taken by the speakers in the Nordic Horizons programme. Sadly, not this time. The Danish approach taken by this pension fund does have some improvements over practice in Scotland. A long term investment approach, greater transparency and in practice they appear to have carried out responsible investment, including avoiding hedge funds.
The Baillie Gifford approach was even less impressive. On their long term (10 yrs) list of companies was Amazon. That company's aggressive tax avoidance and poor employment standards, clearly passed them by!
My concern is that change is at best incremental in this approach. They don't appear to be listening to members and hide behind legal and political classifications. it seems largely cosmetic. Phrases like it will 'stay on the agenda', doesn't inspire confidence that action is on the cards. The track record isn't very good either. For example, for all the engagement over board remuneration, pay ratios continue to rise.
I'm afraid I was left with the impression that responsible investment approaches both here and in Denmark leave much to be desired. It will need pension fund members and civil society to take a more aggressive stance on this issue. We certainly can't rely on the fund managers.
If we don’t invest in this company someone else will and they could be less responsible!
ReplyDeleteI was also left with the impression that ESG seems to be primarily cosmetic and that it will be down to civil society and pension members to force any changes towards responsible investment.
The key shocks for me … that these were ESG practitioners who considered that they were doing a good job, yet…
1. Marianne Harper Gow from Baillie Gifford appeared to be unconvinced by the climate science.
2. Zaiga Strautmane stated that Israeli settlements in the occupied territories are not illegal i.e they are legal?! Her reasoning was that only UN resolutions uphold this claim and they have, in her view, no legal weight. UN Resolutions can add weight to customary international law and the concept of sovereign territorial integrity is the corner stone of customary international law, and the basis for the illegality of these settlements. The Fourth Geneva Convention and the Rome Statute, which is one of the primary legal instruments of the International Criminal Court, both prohibit the transfer by an occupying power of parts of its own civilian population into the territory it occupies. Almost all states including the USA appear to consider these settlements to be illegal, and an United Nations "International Fact-Finding Mission on Israeli Settlements in the Occupied Palestinian Territory" filed a report stating that if Israel did not stop all settlement activity immediately and begin withdrawing all settlers from the West Bank, it might face a case at the International Criminal Court. I therefore find her analysis to be unconvincing.
3 That the members of Uni Pension had voted to divest from fossil fuels and the pension fund was opposing this initiative.
4 Amazon is a good company in ESG terms!?
I am sure that ESG analysis can be difficult and that engagement can be effective in certain situations, but another principal of international law is that provisions should be interpreted in good faith, that words should be given their ordinary meaning and that unintended overly literal interpretations should be avoided. It would be nice to think that the spirit and intension of environmental, social and governance considerations within the pensions world will be given due weight, but I fear I will be disappointed if the approach taken by these companies is representative.