Ethical Performance
inside intelligence for responsible business


defining the limits of investor responsibilities

May 2005

CSR lies in the realm of investment, and not governance, analysis, argues Christine Farnish

Some people argue that institutional investors should take account of social, environmental and ethical considerations in their investment decisions on a par with corporate governance. We believe this is a mistake. Corporate social responsibility is an important internal company discipline, but is part of investment, not governance, analysis.

This winter the National Association of Pension Funds reviewed its stance on socially responsible investment and corporate social responsibility. We think there is a distinction to be made between SRI/CSR and corporate governance.

Corporate governance addresses the possibility that managers of public companies might abuse their position as agents of the owners. We believe that UK codes, coupled with a ‘comply or explain’ regime, help protect investors in this regard without inhibiting entrepreneurial flair.

CSR, on the other hand, suggests that company boards have responsibilities to various stakeholder groups and society at large. These responsibilities are of two kinds: those that a board needs to fulfil in order to succeed in business and/or are imposed by legislation, and those that go beyond these requirements. Unlike corporate governance, CSR is part of the normal running of a business and should be delegated to management, to be held accountable for its actions in that as in other areas by the shareholders.

This is in line with the recent Company Law White Paper which enjoins directors to promote the success of the company for the benefit of its shareholders, in the long as well as the short term, taking into account wider factors such as employees, environmental effects, suppliers and customers.

As such, the NAPF believes that all boards should develop CSR policies and disclose them to investors. Such policies should be relevant to their business and its long term financial success. Similarly, the NAPF believes that SRI should be seen as part of the normal investment management process to the extent that it encompasses matters that a board needs to address to be a successful business and comply with the law. Occasionally, there is a problem of timescale because the horizon of mainstream analysts is often shorter than potential adverse CSR outcomes. Hence the NAPF urges trustees to ensure their investment managers take long-term risks into account.

Our main concern must remain the performance of pension fund investments, so that all participants benefit from well-managed, well-funded pension schemes. Pension funds have clear legal duties to discharge on behalf of their members. Political preferences, sentiment, or a desire to change the world do not sit easily with those duties. A long-term view of investment in successful businesses does.

Christine Farnish is the chief executive of the National Association of Pension Funds, which represents about 90 per cent of UK pension funds by size of assets and membership


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