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Growing
green money
Ethical
investment is on the rise – a business estimated to be worth
£300 billion. Shifa Rahman finds
out why green money is becoming fashionable
The
future of Socially Responsible Investments (SRI) lies in the recognition
that appropriate reporting of ethical, social and environmental
concerns are necessary to protect the branded product. Recently,
information about a company’s environmental and social performance
has become just as important as data on its financial performance.
The question of transparency, monitoring how well fund managers
follow ethical parameters, does not yet seem to have been tackled
by most trustees.
The UK Social Investment Forum surveyed the top 500 pension funds
and their Statement of Investment Principles (SIP), part of the
trustees’ statement of disclosure require-ments, and found
that the extent to which engagement and reporting took place remained
unclear. The survey showed that accountability mechanisms were not
in place.
The Social Investment Forum further found that of the top pension
funds surveyed 48 per cent of the fund managers consider the financial
impact of an organisation’s social responsibility. Only 14
per cent of funds specifically stated that concerns about social
responsibility will not be taken into account.
With the passing of the Statement of Investment Principles legislation
effective 3 July 2000, trustees have an obligation to state their
investment principles. This statement sets out in broad terms the
investment policy, indicating the extent to which social, environ-mental
or ethical considerations are taken into account in the selection,
retention and realisation of investment principles.
Penny Shepherd, the executive director of the UK Social Investment
Forum concludes that industry interest in SRI products is there,
but it is now time for: “the fund management industry to respond.
Fund management needs to develop greater expertise in assessing
companies’ social and environmental performance.”
Friends Provident launched the first ethical fund in 1983 as part
of its stewardship range. Since then the number of ethical funds
on the market has grown considerably so that today the 55 ethical
funds available are worth £300 billion. Henderson Global Investments
estimate that ethical investments account for about 1-2 per cent
of the retail market, with the potential to grow by as much as 15
per cent as seen in the US market.
The terms SRI and ethical investment, for the most part, are the
same as far as they both aim to consider social and environmental
factors in their investments in addition to financial criteria.
But, Rachel Crossley, senior analyst on the governance and SRI team
at Friends Ivory & Sime makes a distinction between the two
terms: ethical investment is associated with the screening process
and SRI with engagement.
Crossley explains: “Ethical investment is associated with the
older process of screening, where, for example, fund managers are
prohibited from investing in tobacco companies. SRI is commonly
associated with the engagement process which is the inverse
of screening. Here fund managers have intense discussions with companies
to encourage good practice.”
Engagement refers to areas where a company can improve its record
on ethical, social and environmental issues. The encouragement to
make and sustain improvements is derived from producing a quarterly
environmental management report.
Crossely says that about £200 billion is invested in engagement,
and only £3 billion is involved in screening. So as the engagement
process is increasing, many have raised concerns over the level
of regulation in this area.
So who does the regulating? No one as such. The Association of British
Insurers (ABI) is conscious of the need for new types of information
about company performance as investors become more aware of ethical
issues. Peter Montagnon, head of investment affairs, says: “We
want to promote engagement and avoid the blacklisting of companies.
We believe that the way to achieve this is is by introducing more
transparency in reporting. This will help everybody understand the
issues better, lead to a greater focus on the nature of risk involved
and help raise standards.” The requirement is not to prescribe
specific behaviour but to ensure that risks affecting both companies
and shareholders are recognised and managed. It is increasingly
accepted that a failure to take these risks into account can lead
to long-term loss of reputation and company value.
The position most commonly found in pension schemes is that trustees
delegate their voting rights to the investment managers, normally
with the proviso that if they wish to vote on any particular issue
they can direct the investment managers. With SRI, most believe
it will be necessary for trustees to establish what the investment
manager’s attitude to corporate governance is, to obtain a
statement from them and incorporate suitable words from them. Trustees
have a duty to exercise their investment powers in the best interests
of the beneficiaries of the trusts.
Julia Dreblow, SRI development manager, at the Ethical Unit at Friends
Ivory & Sime says: “It doesn’t work to have one standard
for everyone, as different fund managers have different ethical
agendas. However, we have been campaigning for the last three to
four years for an increase in the reporting for larger companies
providing a statement of their progress in environmental issues.”
Dreblow finds that investors are increasingly asking for more information,
so that they have a range of investors to match different clients’
ethical opinions.
But is progress in ethical issues connected to financial performance?
Dreblow says: “The model is quite complex. We are convinced
that the ethical side of SRIs drives share value. It is however,
difficult to track exactly what is the driver for share value change.”
She adds that the future of SRI, is heading towards increased pressure
on trustees to develop greater reporting criteria, especially from
larger companies who have a substantial impact on the environment.
Consistent
reporting required
Research conducted by Science and Technology Policy Research at
Sussex University shows that reporting on environmental performance
is extremely patchy. EU and national level policy play a critical
role in encouraging and mandating better reporting. The variations
in environmental performance within sectors is often as much as
ten-fold. The report on corporate governance reporting shows that
environmental performance management was greatly strengthened by
benchmarking between companies but the evidence linking better environmental
performance to enhanced profitability was mixed. The relationship
is strongest where the environmental impact has direct financial
costs, such as waste generation.
It is widely held that the best use of indicators is to benchmark
performance, set targets and measure progress toward greater eco-efficiency.
Common standards will enable more rapid diffusion of best practices.
Duncan McLaren, policy director at Friends of the Earth says that:
“This new research emphasises the need for Government action
to ensure that environmental reporting happens and creates a driver
for improved performance. These new findings clearly show that voluntarism
alone is not working, and adds yet more urgency to Friends of the
Earth’s call for consistent mandatory environmental reporting
by companies.”
Morley Fund Management, in response to the issue of reporting standards,
has revised its voting policy to introduce a requirement for large
UK companies to publish environmental reports. Toby Belsom, an analyst
on the SRI team at Morley Fund Management says that from the FTSE
100, 41 companies produce reports, 30 have no intention of publishing
reports, and 26 have no statement of intentions.
“Legislation and ethical directives are driving the world of
corporate business to its knees. It is no longer seen as taking
the moral high ground, with a negative screening process which excludes
companies, but is looking at rather at a strong robust form of investment,”
says Paul Moody, head of business development at SRI Morely Fund
Management.
The benchmark, the FTSE4Good, set to go live this month, has been
designed to provide steps toward setting a global standard in the
growing area of SRI. The benchmark works in such a way that it provides
a best practice standard, where each company must meet selection
criteria and SRI principles.
Regulation for reporting, bench-marking and trustee transparency
all lends weight to improving mandates on how ethical investments
can be regulated. Current research by FTSE indicates that over 50
per cent of constituents within each region may not be included
in the FTSE4Good indices due to a lack of publicly available SRI
information on company performance.
Friends of the Earth’s McLaren thinks this is far from adequate.
“There is a lack of consistency in reporting which results
in a difficulty to make judgments on relative strategies and performance,”
he says. Corporate strategies and the company’s actual performance
are the two issues that are critically important for McLaren in
reducing the impact of environmental and social damage in the future.
Going
forward
Targets vary greatly. In the next 50 years, Friends of the Earth
say they would like to see a 60-90 per cent reduction in emissions.
According to their research, approximately 15 per cent of companies
have a target of ten per cent reductions and 64 per cent of companies
have no targets whatsoever. Ways of addressing the problems of standardisation
could be having a Co2 indicator, encouraging wide-scale corporate
monitoring of omissions.
There is a need for more information, and the right type of information.
The next step for SRI will be an increase in the number of published
reports with the aim to raise awareness on a larger scale in the
SRI field. Companies are also going to have to take the long-term
view of proving that they do succeed in the environmental and social
sectors, which will mean making public the research they diligently
compile.
–
Pensions Age June 2001–
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