Ethical Performance
inside intelligence for responsible business


analysts ‘not to blame’ for lack of interest in SRI

February 2005

Investment managers and pension fund trustees, rather than analysts, are largely responsible for the relative lack of interest from institutional investors in the social and environmental performance of companies, according to the World Economic Forum.

In a study based on discussions with senior individuals in institutional markets around the world, the forum says the biggest barrier to the wider adoption of SRI is the short-term thinking of fund managers and trustees, who encourage analysts to focus on the financial bottom line to the virtual exclusion of all else.

The finding is a challenge to the conventional view that institutional investors have little interest in the social and environmental performance of companies because the analysts on whom they rely only rarely bring it to their attention.

The forum says that in present circumstances investment analysts have little incentive to consider companies’ social and environmental performance because their clients – fund managers and ultimately trustees – are interested only in short-term financial performance.

One analyst told the forum: ‘Strategic research into future social and environmental risks and opportunities got me my five minutes of fame, but there were no buyers for the work.’ There are thought to be only a handful of analysts in the institutional market who specialize in such matters.

Richard Samans, managing director of the forum’s Global Institute for Partnership and Governance, said: ‘The issue is decidedly not the personal values of these market participants but rather the framework of industry customs, structures and regulation in which they operate.’

Mainstreaming responsible investment says that although pension funds and insurance companies might be expected to have a long-term perspective, in reality they invest ‘in a very short-term manner, with results and asset management contracts evaluated almost exclusively by short-term indicators which do not incorporate social, ethical and environmental aspects of corporate performance that ... become material to financial performance only over time’.

It says the prevailing view is that ‘significant competitive disadvantage will befall any one [institutional] player that strays from customary practice’.

Fund managers often blame fund trustees for the emphasis on short-term performance, particularly through short contract mandates requiring them to deliver performance benchmarked against short-term market tracker indices.

The forum recommends voluntary measures from within the sector to:

create a set of international ‘good governance principles’ that emphasize the desirability of long-term thinking
lengthen asset manager mandates
disclose the criteria used to determine the fees paid to asset managers
increase the pay and training of pension fund trustees
cover non-financial aspects of corporate performance more fully in MBA courses.

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