Ethical Performance
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pension funds adopt investment principles

May 2006

The pressure on companies to disclose social, environmental and governance risks has increased dramatically with a commitment by institutional investors controlling more than $2trillion (£1.1tn) in assets to apply responsible investment principles to their portfolios.

Pension funds have agreed common investment principles on aspects of responsible investment practice before, but never on the scale and scope of the six Principles for Responsible Investment launched at the New York Stock Exchange at the end of last month.

The principles (see box below) commit the funds to incorporate SRI issues into daily investment practice, both in the analysis of companies and in the exercise of ownership rights. The investors will also press companies to disclose information on their ethical performance and will actively encourage other investors to follow suit.

This action is consistent with their fiduciary responsibilities, the funds say, because ‘environmental, social and corporate governance issues can affect the performance of investment portfolios’.

The principles apply to the ‘investment functions’ of the entire business, including all asset classes and product lines, not just those run along SRI lines.

More than 20 pension funds, foundations and government funds spent a year developing the principles under the auspices of the UN Environment Programme Finance Initiative. Kofi Annan, UN secretary-general, said that with ‘rare’ exceptions, companies’ efforts to embrace corporate responsibility ‘have not been recognized or rewarded by the financial community ... the predominant factor has been the absence of a set of common guidelines that individual and institutional investors can use to assess risks and opportunities fully’. The principles offer a ‘menu of possible actions’ for investors, he added.

On disclosure, for example, they say investors should ‘ask for standardized reporting (using tools such as the Global Reporting Initiative)’ and for SRI issues ‘to be integrated with annual financial reports’.

Calpers ($207billion) and ABP Investments of the Netherlands ($231bn), which are respectively the two largest pension funds in the US and Europe, are among the signatories, along with the BT Pension Scheme ($52bn).

See editorial

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