Ethical Performance
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SRI practice within a mainstream investor

April 2003

How does a mainstream investor take account of social and environmental considerations within its investment process? EP asked Standard Life

Analyzing the social and environmental policies and practices of companies remains of marginal interest to mainstream investors. In the UK, one of SRI’s strongholds, only a handful of large investors have taken techniques initially developed for niche ethical investment portfolios and modified them for general use. Surveys confirm most analysts think social and environmental issues unimportant.

But there is evolving interest, driven by new disclosure requirements, corporate governance concerns, and pressure both from clients and from companies with CSR strategies. SRI analysis is happening in pockets of the mainstream investment community.

Standard Life Investments, which controls around two per cent of the UK stock market, is one of those pockets. Last autumn, the investment arm of Standard Life began formally applying SRI guidelines to UK equity investments, which made up 45 per cent of its £75billion ($119bn) equity holdings, and expects to extend them to other equity asset classes later.

Before joining Standard Life in 2001 as SRI research manager, Julie McDowell spent much of her career as a Wall Street lawyer and in the State Department.

‘The purpose of our SRI work is to maximize returns for investors and policyholders,’ says McDowell, who reports to the head of corporate governance. ‘It is designed to support the investment process by picking out companies that are leaders in managing CSR issues.’

The guidelines state Europe’s largest mutual life assurance company ‘will take company policies and practices on environmental and social matters into consideration in the investment process’ and lay down what the assurer expects of companies in terms of the environment, employee relations, business ethics and human rights (see box).

‘The first thing I look for is company reporting,’ says McDowell. ‘Companies need to produce CSR reports with as much data and as little PR as possible. CSR reporting shows the company is communicating with its stakeholders.’

McDowell also reviews other information, for instance from industry associations and pressure groups. ‘The aim is to do original research and come up with our own conclusions. We are looking at the impact on long-term company performance.’

Each company is then rated within its sector either as leading, average or laggard and the data integrated with financial information in the stock selection matrix used by in-house analysts. ‘It’s another research tool for them, rather than being determinative,’ says McDowell. ‘Good management of corporate social responsibility issues tends to minimize risk. We analyze these issues in a risk management framework.’

SRI is part of the corporate governance team, which meets around 150 companies a year. ‘If there are concerns, one of the team can raise them,’ says McDowell, who does not send questionnaires. ‘Our policy is to encourage best practice standards among companies, including transparency on key issues. For example, I frequently see companies doing more than you would expect.

‘It’s incorrect to assume a lack of published information reflects lack of attention to CSR. But it does reflect a lack of understanding of the value of reporting. In meetings with companies we point out the importance of public reporting.’

McDowell does not think SRI research will be standardized in the foreseeable future. Nor does she think this is a particular problem. ‘The analysts’ job is to assess the information available and make judgements. The only standardization efforts so far attempted that are useful for our approach are sector-specific such as Forge [for financial services companies].’

Why is Standard Life doing all this? Its interest appears to be driven by three factors: risk management considerations, insight into a company’s long-term strategy capabilities, and commercial opportunity. Half of its £2.4bn UK investment sales last year were pension fund mandates, including £450million from two local authority pension funds. Both are members of the Local Authority Pension Fund Forum, a body noted for SRI campaigns. In May 2002, Standard Life itself set up a corporate social responsibility committee which reports on the policies and performance of the group. Like the companies in which it invests, the assurer is not immune to a changing market.


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