The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

Back Issues

SRI And Pensions

By: Eugene Ellmen

The movement towards socially responsible investment is picking up speed. Eugene Ellmen, of the Social Investment Organization, examines some of the recent events which are shaping this phenomenon.

The role of socially responsible investing (SRI) in pension management is poised to change dramatically in the next few years as SRI moves from the margins to the mainstream.

With large international pension funds adopting a variety of SRI programs and pilot projects, and Canadian pension funds moving into socially responsible shareholder advocacy, it won’t be too much longer before SRI is considered a conventional screening and risk management tool.

In recent years, pension funds have become more aware of their social and environmental responsibilities.

The California Public Employees Retirement System (CalPERS) now evaluates its developing country portfolio according to social and environmental screens.

ABP, the giant Dutch public pension plan, recently launched a pilot SRI fund and is preparing to introduce a $250 million pooled SRI fund for investment by other pension funds.

Proxy Guidelines

In Canada, the Ontario Municipal Employees Retirement System (OMERS) has adopted Socially Responsible, Environmental and Ethical (SREE) proxy voting guidelines.

The OPSEU Pension Trust, serving members represented by the Ontario Public Service Employees Union, also has socially responsible proxy voting guidelines.

“A company that shows respect for its employees, the environment, the community in which it does business, and human rights is being socially responsible and tends to earn better returns,” said Rick Miller, OMERS board chair, in announcing its socially responsible investment policy.

SRI is a comprehensive risk management system that, in Miller’s words, accounts for “all aspects that affect shareholder value.” All aspects include a company’s social and environmental profile.

For example, large institutional investors are becoming increasingly concerned about their holdings in companies sensitive to greenhouse gas emissions.

In May 2002, the Carbon Disclosure Project, representing a consortium of institutional investors with $4 trillion in assets, sent a letter to the world’s 500 largest listed companies asking them to disclose information on their greenhouse gas emissions. The Carbon Disclosure Project follows a major study in this area, Value at Risk: Climate Change and the Future of Governance, released by the Coalition for Environmentally Responsible Economies (CERES). The report concludes that institutional investment portfolios contain embedded climate risks that are largely ignored by managers and trustees.

This activity has been encouraged by regulatory change.

Disclose Policies

In July 2000, the UK Pensions Act was amended to require trustees of occupational pension plans to disclose their policies on socially responsible investment in their Statement of Investment Principles (SIP). Along with the UK, similar disclosure regulations are in place in Australia, France, and Germany.

A related issue involves the manner in which mutual funds and pension funds vote – or fail to vote – their shares in shareholder resolutions on various issues.

Sept. 19, the Securities and Exchange Commission voted unanimously in support of rules that would provide greater disclosure to investors on how mutual fund companies and registered investment advisers vote proxies in a client’s name. The rules would make a clear statement that proxy voting is a fiduciary duty and should be exercised with the best interests of fund holders in mind. Mutual funds and pension funds have enormous potential to shape corporate governance and social policies. Yet, there is a noted tendency among mutual funds and many pension funds to automatically vote with management, or to avoid voting at all, diminishing the value of an important asset.

Current Atmosphere

There is a sense that many institutional investors are asleep at the switch on governance and social responsibility issues. Mandatory disclosure of voting would help make mutual funds more accountable to their unitholders on how they cast their votes.

If the SEC approves the proposed rules, there will be great pressure on Canadian regulators to adopt similar rules. While Canadian securities regulators don’t have jurisdiction over pension funds, similar rules for the pension community won’t be far off.

The regulatory and risk management environment is coming to demand social and environmental accountability by pension managers.

Eugene Ellmen is executive director of the Social Investment Organization.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Subscribe to Daily News Alerts

Subscribe now to receive industry news delivered to your inbox every business day.

Interactive issue now onlineSubscribe to our magazinePrivate Wealth Online