Ethical reasons Fiduciary duty

Social responsible investment, decent work and pension funds 5

2. The business case for SRI for pension funds

There are a variety of reasons for a pension fund to invest on a socially responsible basis. The OECD identifies four factors responsible for the increasing interest in socially responsible investment: “The concern over the ability of public policy national governments and international organisations to address issues such as environmental degradation and human rights abuses, especially in developing countries, coupled with an acknowledgment that international business has the responsibility and financial resources to address these issues. Empirical research showing that investors can increase their portfolio risk-adjusted rate of returns by considering ESG issues. The perception in some countries that fiduciary responsibility may and should include wider concerns than financial returns. Public opinion favouring SRI, largely as a result of intense advocacy by lobbying groups” OECD, 2007, p. 9. In a recent report, Eurosif 2011 introduces five motivations for SRI, which are quite similar to those of the OECD; these will be reviewed in the following pages.

2.1. Ethical reasons

An increasing number of institutions feel they have a responsibility to contribute to sustainable development in their business activities. Pension funds are no exception to the rule. One can believe that “investors have a unique kind of power: Their beliefs can shape markets. If they believe something is true, and invest as if it were, then it often becomes so” UNEP FI, 2006, p. 6. More and more investors believe that they can do well by “doing good”. They are convinced that they can include their values in the investment decision process. As an Allianz Global Investors report informs us, an “ethical approach is oriented towards specific moral values. These investment portfolios exclude any company whose business runs contrary to the moral convictions of its investors” Allianz Global Investors, 2010, p. 16.

2.2. Fiduciary duty

Fiduciary duty for a pension fund essentially “means that the managers […] must be guided by the ultimate imperative: paying out the pensions. […] Companies that don’t perform are of no use to pension plans” Cramer and Karabell, 2010, p. 145. Therefore, the question is to know whether a socially responsible pension fund would be in line with its fiduciary duty. In 2005, Freshfields Bruckhaus Deringer, a law firm, compiled a report for the UNEP Finance Initiative UNEP FI. It demonstrated that different jurisdictions have different interpretations of the fiduciary responsibility of pension funds. This responsibility, however, does not force pension funds to merely consider financial criteria: “…integrating [Environmental, Social and Governance] ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions” Eurosif, 2011, p. 9. In addition, the UNPRI “are based on the premise that ESG issues can affect investment performance and that the appropriate consideration of these issues is part of delivering 6 Social responsible investment, decent work and pension funds superior risk-adjusted returns and is therefore firmly within the bounds of investors’ fiduciary duties.” 4 Not only does it appear that SRI is within the bounds of investors’ fiduciary duties, but SRI principles even seem to be strongly recommended. This obviously leaves the door open for further questions, most importantly: is there a financial incentive to be socially responsible?

2.3. Financial performance and risk management