Once the sole domain of providers like the Co-Op, over the past decade, the concept of socially responsible investing (SRI) has come to the fore as investors of all sizes consider the ethical credentials of their portfolios. It then begs the question, what level of SRI do we want in our own pension funds, which for many are their only contact with the equities market? Can we afford the ‘luxury’ of meeting minimum ethical standards when we face an upcoming pensions crisis, or should the primary concern be yield at any cost to prevent the next generation living in poverty? Moreover, as stewards of what is effectively large sums of public money (although not in the literal sense) do the largest pension schemes have an implicit duty to bring about positive change?
Last month, I was fortunate enough to chair an event hosted by the Young Fabian Finance Network at Portcullis House to explore these issues, joined by the venerable Dame Anne Begg MP, ShareAction, the National Association of Pension Funds, Green Alliance and the Association of British Insurers.
While there was broad agreement that pension funds can be a force for good, there lacked a consensus on how this might be achieved and whether it should be a priority for pensions funds.
The duty of a pension fund is to pay out to stakeholders at retirement –for most it is not in their mandate to discern between different investments dependent on their ethical values. Indeed, people’s perception of what is right and ethical can vary so greatly, what a scheme considers SRI and what their stakeholders do may diverge considerably. A persistent and vocal call for change needs to be sounded from stakeholders to push schemes towards SRI to bring this about – indeed schemes cannot act without that mandate.
It is true to say that responsible investment can be a close relative of responsible business practice. Neglect of health and safety by oil companies for example, can cause major environmental pollution (such as the Deepwater Horizon incident), so these companies are best avoided until they tighten standards. However, it also punishes their share price, so companies with better practices could prove to be both a socially responsible choice and a more reliable source of investment returns.
Institutional investors are in a unique position to act as catalysts for change in the companies they hold shares in, given their clout, and this introduces a new strand to the debate. In the so-called ‘shareholder spring’, investors showed there were many practices they would not stand for, such as inflated executive payouts in the case of poor company performance, which could be interpreted as a socially responsible approach to investing in a company.
However, as highlighted in the lively floor discussion which followed our panel debate, the role of changing investment trends could impinge on these efforts. Fixed income has come to represent an ever-greater share of investment as uncertainty has persisted in equity markets. However, a bondholder within a listed company cannot impact company policy like an equity investor – hence there is no such thing as an “activist bondholder”.
In reality, aside from a committed few, young people are unlikely to push for policy change in pension schemes in the near future. Most people, if they are fortunate enough to have a private pension, do not closely follow what is in it and where it is invested, let alone scrutinize the ethical credentials of those investments.
But with the advent of the National Employment Savings Trust (NEST) auto-enrollment scheme, pension investment will be coming into the financial world of many young people over the next decade for the first time. Perhaps with it will come a greater scrutiny of the social consequences of how retirement is funded and the potential good that the capital can achieve in addition.