It is very easy to criticise the ESCC Pension Fund’s investment practices, but what solutions are we proposing? (*) Members of the Pension Fund, politicians as well as the general public could campaign for the following proposals:
1) Education and awareness raising
Rather than rehashing what many academics, journalists and activists have written about, there is a page with links to useful papers and articles on Socially Responsible Investment (SRI). The Fund Managers and Councillors on the pension fund – as well as everyone else – could further educate themselves on Socially Responsible Investment by reading them.
The Pension Fund could also organise (hopefully public) workshops with leading academics and NGOs on Socially Responsible Investment to deepen their knowledge of the issues and to help them decide where to go next on the issue. Organisations the Pension fund could work with include Fair Pensions, EIRIS and UKSIF.
It took a few different Freedom of Information requests to get the minutes from the Pension Fund released. There is, however, a page of questions which remain unanswered after reading through them. The Pension Fund could aim to be as transparent as possible in its investment activities. It could release the list of what corporations it invests in, how it votes at the Annual and Extraordinary General Meetings (AGMs) of different corporations as well as all of the other ways it takes an ‘active shareholder approach.’ This would enable its investors – and the public – to see exactly how it is investing their money, how it is voting at AGMs on their behalf and what other ‘active shareholder’ approaches it is taking in their name.
Specifically there should be:
– Disclosure regarding Socially Responsible Investment policy implementation and performance monitoring
– Disclosure of full voting records and summary voting analysis
– Disclosure of detailed environmental, social and governance (ESG) engagement initiatives and outcomes
– A detailed section on socially responsible investment in the Scheme’s annual report
There already exist funds which release the record of their votes at the Annual and Extraordinary General Meetings of all UK and Overseas corporations in which they invest. The London Pensions Fund Authority and the Strathclyde Pension Fund makes public its voting and engagement activities.
The ESCC could work with these pension funds – and the NGO Fair Pensions – on how it could be more transparent.
3) Review of investments and new investment criteria drawn up
There needs to be a review of all of the pension funds investments and positive and negative screening criteria should be developed for all investment. A serious attempt should be made to ensure that the Pension Fund invests its money in businesses, infrastructure or community projects which benefit the environment and/or the community.
There is much work which already exists on different positive and negative screening criteria which pension funds can adapt, some of which is on this page. Many Pension Funds already exist which have screening criteria for their investments. The ESCC could review different screening criteria and choose which ones they want to adopt, in a transparent manner, with the help of academics, NGOs and Pension Fund Managers who already use investment screening criteria.
Pension Funds can use the excuse that it is beyond their remit to develop investment screening criteria and that it can inhibit returns on investment. After all, the aim of the Pension Funds investment policy is “to maximise available funds within an acceptable pattern of risk and within any statutory limitations imposed on specific investment areas.”
However, many Socially Responsible Investment (SRI) funds with positive and negative screening criteria, contrary to popular belief, have as good returns – or sometimes better – than non SRI funds.
“In fact, the majority of SRI funds in each class outperformed their respective benchmarks, with the exception of the U.S. mid cap and international equity-EAFE class. Of course, not all SRI funds are going to outperform their indexes every year, but the myth of socially responsible funds being lackluster performers is simply that – a myth. Investors are realizing they can get solid returns while also investing in line with their values.”
There are many academic reports which compare the returns from SRI-funds and non-SRI funds, some of which are on this page. As the 2012 Responsible Investment for Pension Funds report by EIRIS points out:
“There have been many studies on what the financial implications of responsible investing are. It is important to note that most of the studies have been carried out on restricted universes (e.g. an index “ex an issue” – especially for “sins” or social issues – such as FTSE 100 excluding alcohol) or for specific approaches so more general or uniform assumptions should not be made from their findings.”
“A couple of interesting meta-studies have been carried out in recent years, which pull together results from many of the individual studies. These meta-studies provide robust arguments that sound integration of ESG factors does not compromise investment performance, and in many cases even enhances returns. Shedding Light on Responsible Investment: Approaches, Returns and Impacts was published by Mercer in November 2009 and analyses 16 academic studies; ten of which showed a positive relationship between ESG factors and companies’ financial performance, four showed neutral association and two showed negative-neutral relationship. It follows on from Demystifying Responsible Investment Performance, published by UNEP FI and Mercer in October 2007, which reviews the results of 20 other academic studies on the relationship between ESG factors and portfolio performance. This report found evidence of a positive relationship in half of the studies, with 7 showing neutral effects and 3 showing negative association, concluding that there does not appear to be a performance penalty from taking ESG factors into account in the investment management process.”
There are also definite risks associated with damaging and unsustainable investment. If current investment practices continue, they will further contribute to climate change, species extinction, deforestation and finite resource depletion. Pension Funds will find themselves in a much more riskier investment climate with many more liabilities. There is a very strong case for investing responsibly to ensure a safer and more risk-free future.
Finally, it can be in the Pension Fund’s interest to have a diversified investment portfoilio. By not just focusing on short-term returns, but diversifying into SRI funds which are also concerned about long-term environmental and social returns, the Pension Fund could reduce some of its long-term risk.
The ESCC Pension Fund Managers should bear these arguments in mind before dismissing positive and negative screening criteria.
4) Sign up to the UN Principles for Responsible Investment
As a public commitment to Socially Responsible Investment, the ESCC Pension Fund could sign up the UN Principles for Responsible Investment (UNPRI).
According to the UNPRI website:
“The Principles reflect the view that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios and therefore must be given appropriate consideration by investors if they are to fulfil their fiduciary (or equivalent) duty. The Principles provide a voluntary framework by which all investors can incorporate ESG issues into their decision-making and ownership practices and so better align their objectives with those of society at large.”
In its 2011 Statement of Investment Principles, it is mentioned that the ESCC Pension Fund “is considering signing up to UNPRI.” Hopefully it will sign it. Many Funds have already signed up to it, including Strathclyde Pension Fund and the London Pensions Fund Authority, who release annual reports on their progress in implementing it.
Both Pension Funds give the UNPRI Principles to their fund managers to use as guidance for how they invest. The ESCC Pension Fund could do the same.
The pension fund needs to divest from certain very damaging corporations, such as arms and tobacco corporations. No amount of writing letters or voting at their AGMs will change the fact that their main aim is to make cigarettes and weapons, both extremely damaging to humans and the rest of nature. A list of corporations to divest from should be drawn up based on negative screening criteria.
There is precedent of the ESCC Pension Fund having restrictions within its policy guidelines for investments. In the late eighties till the early nineties (see minutes from 5th Feb 87, 25th June 87, 27th Oct 93, 27th Jan 94) restrictions were in place on investments in South Africa, in protest of the system of apartheid (although the minutes do not reveal what kind of restrictions were in place). It is very feasible that similar – but more comprehensive – restrictions be made for Socially Responsible Investment today.
Many other Pension Funds enforce negative screening criteria. Norway’s national pension fund has divested from tobacco corporations as well as many others. See here for a list of the corporations it has divested from and more information on its ethical guidelines. Many public sector Pension Funds in the United States already have divestment policies.
The main focus should not just be divestment. It is also very important to develop positive criteria for where the Pension Fund should invest its money.
Ideally, the focus should not just be on moving investment from one corporation to another, because of the problems that the very structure of the corporation creates (read Joel Bakan’s book The Corporation for more discussion on this). However, if the Pension Fund was only to do this, it would still be better than its current policy of investing in corporations whose very aim is to pollute, damage or kill humans and/or the rest of nature, such as tobacco and arms corporations.
There are some alternatives to just investing in corporations. Co-operatives, small businesses and community projects, because they are not legally obliged to profit maximise on behalf of their shareholders at whatever cost, often have more ethical policies and practices, and can give good returns on investment.
Investing in very different asset classes, such as co-operatives and housing – even if headline returns are lower – can be justified if the returns are uncorrelated with major indices, which they probably are. These investments would provide portfolio diversification to minimise risk – especially in bad economic times – and potentially provide more steady, long-term returns.
The Pension Fund could do a review of existing potential investments which are not just corporations, from co-operatives to community shares. For example, the Pension Fund could invest in:
* Creating new jobs in the local area. In December 2011, Strathclyde Pension Fund, which is administered by Glasgow City Council, confirmed it had created a £100 million New Opportunities Fund to be invested in local enterprises that are ready to create new jobs.
* Creating new affordable housing in the local area. Newham Pension Fund has already invested in a residential real estate fund and the ESCC Pension Fund could do something similar. The focus could be on creating new genuinely affordable housing as increasing amounts of people can not afford to buy their own home. Homeslessness rates have also been going up as repossession rates and unemployment rise. The ESCC Pension Fund could play a valuable role in helping to solve this problem. David Rogers, from CDS Co-operatives (which is the largest co-operative housing service agency in England) has written a report looking at how Pension Funds could invest in affordable housing in the UK. It explains the mechanisms for developing a new form of co-operative housing tenure (which they have called Mutual Home Ownership) with pension fund investment, which would deliver safe, guaranteed yield investments. David Rodgers has also written an interesting policy paper on the housing problems we face, which again argues the case for pension fund investment in co-operative housing.
* Investing in community/co-operative energy projects. In February 2013, Lancashire county council’s pension fund invested £12m in the UK’s first community-owned solar development in South Oxfordshire. County Councillor David Westley, Chair of the Lancashire County Council Pension Fund, said of the investment:
“There’s been a lot of discussion about local authority pension funds investing in community infrastructure. I’m pleased that Lancashire has been able to put this into practice with this £12m investment. Our first responsibility is to secure the best returns for the people in our pension fund, but I think many will be interested to know that their pension investments are helping fund worthwhile and sustainable schemes such as this one.”
Clearly there is room for similar projects across the country and the ESCC Pension Fund could invest in them. More info about this on the Lancashire county council’s website.
Another example of renewable energy investment by a pension fund is Danish energy company SE and the PFA pension fund paying EUR 102 million for 272 wind turbines with a total installed capacity of 196MW across around 80 sites. Again, this could be replicated by the ESCC Pension Fund.
* Various Co-operative Development Funds which exist around the world. Here are details of a couple in the United States. The Global Development Co-operative Fund, which has been recently set up, aims to support co-operative businesses in developing countries. For co-operatives to play a greater role in the economy – from housing co-operatives to workers’ co-operatives – they need to have more financial investment. The Fund could work with Co-operatives UK on how this could be best done. Tom Webb, Alan J Robb and James H Smith have written an interesting paper entitled Co-operative Capital: What it is and Why Our World Needs It. This goes into much more detail about mechanisms for financing co-operatives. – Community Shares, which attempt to bring money back into the community and/or small business and co-operatives. Find more info here
* The Pension Fund could also invest some of its money to support other infrastructure projects such as energy efficiency and other schemes which benefit the community and/or environment. There are a lot of different ways that the Pension Fund can invest its money and get a good – and safe – return without relying on just investing in corporations.
For the corporations that it continues to invest in, it should take advantage of its ability to influence how those corporations operate. It could work together with organisations like Fair Pensions to try and change their behaviour. There have been some successes with shareholder activism over the years, albeit often quite limited. For example, some corporations have committed to paying their workers ‘living wages‘, partly after pressure from shareholders. Co-operative Investments tabled a resolution at BP’s AGM calling for a review of tar-sands extraction in Alberta. It lost, but a significant number of voters swung behind the resolution.
The Pension Fund could ask – in an open and transparent process – how its investors want it to engage with many of these corporations. If asked, many investors would say that they want the Pension Fund to push these corporations to have good working conditions, decent pay for workers and be respectful of the environment as well as much more.
Bakan, Joel (2004) The Corporation – The Pathological Pursuit of Profit and Power, Constable, London
(*) This website focuses on proposals for what the pension fund could do within current legal and fiduciary rules.
There is work which is going on to reform the law around corporations, so that they are not just legally obliged to profit maximise at whatever cost but also have to take into account social and environmental considerations. Ultimately, for the economic system to become more sustainable and responsible, the rules that govern it need to change. This is beyond the scope of this website, which focuses more on what the ESCC Pension Fund itself can do within the existing corporate, financial and legal system.
For more information on this side of things, have a look at Fair Pensions work on trying to change Pension Fund’s fiduciary duties to incorporate environmental and social goals. Their report, Protecting our Best Interests: Exploring the Future of Fiduciary Obligation, is especially interesting. Joel Bakan, in his book The Corporation, also makes interesting – and further reaching – suggestions on how corporate law could be changed.