When an ethical stance is not just academicFebruary 2009
Mindful of its client base, the giant TIAA-CREF pension fund for teachers is trying to incorporate corporate responsibility issues into its investment decisions. Mike Scott talks to one of its advisors.
Environmental, social and governance issues should be core to the decisions investors make when evaluating companies, says John Wilcox, an advisor to TIAA-CREF, one of the largest institutional investors in the US.
TIAA-CREF, of which Wilcox was once head of governance, is a fund primarily for teachers, college professors and other academic staff. It’s a universal investor with more than $400billion (£288bn) in listed companies, covering most of the world’s publicly traded companies. As such, it’s one of the highest-profile advocates of SRI and corporate governance reforms. ‘Our ability to deliver value for our participants depends not just on the strength of individual companies but on the efficiency and health of the capital markets where their securities are traded,’ the organization says.
The pension fund’s approach to investment includes the world’s largest screened fund, the Social Choice Account, which had $9bn (£6.5bn) in assets at the end of 2007. It selects companies by using the Broad Market Social Index (BMSI), a group of companies screened by KLD Research & Analytics, a leading independent provider of social research.
The popularity of the fund is a reflection of the concerns of TIAA-CREF’s clients. ‘This audience is unusually sensitive to environmental and ethical issues,’ says Wilcox. ‘They don’t want their retirement assets invested in companies they disapprove of.’ The exclusions include tobacco, firearms, alcohol, gambling and nuclear power.
Because it has other, broader-based funds, TIAA-CREF also takes a slightly softer approach to ESG issues, ‘looking at them in economic terms as part of a set of issues in the context of long-term performance and risk’, as Wilcox puts it.
Recent events in the financial markets highlight the importance of such an approach, he believes. ‘I see no reason for these issues to take a back seat in the years ahead. Governance failures were part of the problem in the credit crisis – those who advocate focusing only on the bottom line are promoting the kind of short-term thinking that got us into this crisis in the first place.’
While many funds that engage with companies are reluctant to discuss the process, TIAA-CREF publishes details on its website of companies that have withdrawn or committed to withdraw from operations in Sudan as a result of its engagement, for example. Among those that have responded to its request are Siemens, Marathon Oil, Rolls Royce and ABB. It has also encouraged a number of Chinese companies to review their investments, but says a ‘cultural lack of awareness’ and a lack of history of shareholder dialogue among Asian firms means this effort is likely to be a longer term exercise.
Wilcox, who is also chairman of the European corporate governance consultancy Sodali, says that while there has been a big focus on corporate governance thanks to the financial crisis, there has been less of a spotlight on the way investors themselves operate. This will change, Wilcox believes. ‘There’s a lot of concern about how funds are governed, how people are paid and how they look after investor interests, if at all,’ he says. ‘From now on, we’ll see a lot of discussions about how fund managers are rewarded to ensure they don’t gamble with people’s retirement savings.’
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