Ethical Performance
inside intelligence for responsible business


the next step in SRI for pension fund trustees

April 2003

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


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