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Aberdeen plumps for new pension fund idea

July 1999

A new ethical investment model is to be pioneered by Friends Ivory & Sime (FIS) on a £20 million pension fund portfolio for Aberdeen City Council.

Fund managers at FIS, which was awarded the mandate to manage the portfolio in April, will use a new ‘responsible engagement overlay’ technique developed in-house.

The technique allows fund managers to invest in any company they like, but then commits them to persuade companies to behave in a more socially responsible manner.

Aberdeen is the first client to make use of the service, which represents a significant departure from conventional ethical investment techniques that tend to categorise companies as either suitable or unsuitable.

FIS has used screening in conjunction with engagement of companies since 1984, but says it has developed its engagement-only overlay technique as an extra option in a range of ethical investment approaches.

It believes the overlay idea will be particularly attractive to pension fund trustees who are worried that ethical screening of companies is a breach of their fiduciary responsibilities.

Gordon Edwards, director of finance at Aberdeen, said this had been a key factor in the decision to choose the new FIS approach.

‘As fiduciaries and shareholders we feel we have a duty to encourage companies to adopt best practice in a number of areas rather than excluding certain stocks from our portfolio,’ he said.

FIS director of client services, Neil Osborne said many pension funds ‘will greet this with a big sigh of relief because it takes away all the difficult questions surrounding screening’.

The engagement overlay approach, he claimed, ‘means funds will not be taking any investment risk, but allows them to take a position on socially responsible investment’.

Osborne said the overlay technique will engage companies ‘on pretty mainstream ethical positions such as environmental reporting, equal opportunities, child labour and marketing in the third world,’ but would adopt business arguments to persuade companies of the benefits of behaving responsibly. Voting at AGMs would be ‘an action of last resort’. FIS had the ultimate sanction of withdrawing its investment, but this was unlikely to be used, Osborne added.

‘If we’re getting nowhere with a company we have to accept that now is not the right time, and that it will come to a point in time when it will be persuaded,’ he said. ‘We won’t ever give up on a company.’

FIS says it is now in a better position to engage with companies thanks to increased investment in its seven-strong socially responsible investment team, which spends more than £1 million a year on research.

Engagement had generally proved to be more successful than screening ‘because companies would rather talk to existing shareholders than potential shareholders,’ he said.

FIS, a member of the Friends Provident group, now manages more than £1.3 billion on an ethical basis – out of £31 billion under its management.




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