The rainy Bank Holiday was an opportunity to embark on some financial housekeeping, ISAs, company pension plans, children’s trust funds. All the details in a blur of paper, opaque usernames and complex passwords. For many years I have taken an interest in where my savings and pension are invested, though the available information is often limited. It takes patience and tenacity to reveal which actual companies underlie the many branded wrappers of the funds. But, I am not alone in wanting to do so.
According to a survey published in July 2014 by the National Association of Pension Funds, which represents workplace pension schemes, there is a latent interest amongst pension scheme members to know where their savings are invested. Of the 1064 respondents, 63% said they were interested in knowing where their savings were invested, including the types of companies, sectors and countries. A large proportion of respondents (70%) felt it important for pension providers to invest in companies that avoid unethical practices, such as poor working conditions. When presented with a choice, nearly half (49%) of respondents would prefer their employer chose a provider who invests ‘ethically’ despite this fund likely achieving a lower return on investments and being more volatile. Interest was particularly high amongst those with a personal income over £50k p.a. (82%) and those aged 18-34 (74%). Other recent surveys show similar findings with a survey conducted for Abundance, finding 71% of people wanted to know where their money is being invested, and 75% of people would be unhappy knowing that their money is invested in companies that damage the environment or are unethical. Similiarly research by the Defined Contribution Investment Forum found 77% of respondents preferred a social investment fund over a conventional fund. When respondents were told that they would receive an 8% smaller pot at retirement, 44% still preferred the social investment fund.
Activities such as the Green Light campaign, organised by ShareAction and Christian Aid, and Push Your Parents are further raising awareness of the £3 trillion currently invested in UK pension funds, and the powerful role this confers on investors as stakeholders. With the introduction of auto-enrolment, there will be 6-9 million more savers in the UK’s private pensions system, and the appetite for greater transparency and choice is only likely to grow. It is not just individuals whose interest has been piqued. There are many trusts, foundations and other institutions with significant endowments that are reappraising their portfolios in line with responsible or impact investment strategies. Widespread media coverage of the BBC Panorama investigation that found millions of pounds donated to Comic Relief had been indirectly invested in tobacco, alcohol and arms, and more recently the Church of England’s indirect investment in pay-day loan provider Wonga highlight the associated reputation risks of not auditing investments.
Prudent investment selection can also provide further support for an organisation’s strategic aims, hence the phrase impact investment. A number of large educational endowments have committed to fossil fuel divestment in the US. Stanford University’s $18.7bn endowment fund is divesting from all publicly listed companies that focus on coal mining for energy generation by September. Dayton University and San Francisco State University have also begun divesting from fossil fuels. In the UK, University of Oxford is consulting on fossil fuel divestment, and in June the British Medical Association voted to end its investments in fossil fuels and focus on energy companies providing renewable energy. Pensions, trusts and endowment funds by their nature have longer, often intergenerational, time horizons and duties of stewardship. The beneficiaries of these funds have every incentive to support industries that combat climate change and support sustainability as they will be exposed to the risks of not having done so.
However, the decision to align investments with values can be difficult to implement. ShareAction, a charity that promotes responsible investment, published a ranking of 20 of the UK’s biggest ethical funds providers, Ethically Engaged? in December 2012. Nearly half of the providers surveyed do not publish the fund’s full holdings. The survey scored providers on transparency, screening processes, and stewardship and ethical engagement. Five providers (Co-Operative Investments (now part of Royal London), F&C Investments, Jupiter Asset Management, Standard Life, and WHEB Asset Management) were reported as demonstrating a strong commitment to ethical engagement with robust internal processes to ensure they respond and engage with current ethical concerns. While some providers have moved beyond simplistic ‘screening’ approaches, traditional screening tends to be focused on excluding ‘sin stocks’ such as alcohol, gambling, tobacco and weapons whereas human rights and environmental concerns are generally higher priorities for people. For example, 63% of providers surveyed by ShareAction screen out alcohol, and only 11% screen for child labour. The EIRIS guide gives an overview of funds’ policies on particular issues.
The most recent UN Global Compact- Accenture CEO Study on Sustainability found that two-thirds of the 1,000 CEOs surveyed think business is not doing enough to address sustainability challenges. Writing in the RSA Journal, Peter Lacy, Director of Strategy and Sustainability Services for Accenture and CEO Study Lead, cited investor resistance, as well as consumer apathy and regulatory uncertainty, as slowing progress. In the 2013 survey, just 12% of CEOs regarded investor pressure as a major motivator on sustainability, as one respondent put it, “We still find it challenging to convey to mainstream investors why and how sustainability can drive value creation, but they’re starting to appreciate the risks of working in an unsustainable system.” Speaking at the RSA in June, Lacy said investors say they are interested in sustainability but, “are unable or unwilling to factor performance into assessment and valuation”. There is a gap an information gap.
Since the Principles for Responsible Investment (PRI) initiative, supported by UN, was launched in 2006 with 20 institutional investors representing $2tn assets under management (AUM), it has grown to 1,260 signatories representing $45tn in AUM. A PRI equity ownership study found that PRI signatories hold, on average, nearly half of all the shares held by asset managers,
in a sample of 379 listed companies with a combined market capitalisation of $19tn. The challenge is to effectively convert sizeable ownership into collective influence in favour of responsible business practices and long-term strategies. PRI’s collaborative platform, the Clearinghouse, is one example of a digital platform providing a forum for collective action. The Clearinghouse is a private forum for PRI signatories, but one of this year’s SustainRCA finalists developed a digital app to help consumers to make informed choices that reflect their concerns. Marion Ferrec and Kate Wakely’s Disclosed, developed in partnership with a supermarket retailer, captures and displays information such as whether the product was organic, fair-trade, non-GM or low in salt, for example. Disclosed empowers consumers to vote with their money, aligning their purchases with their values.
In the UK, as automatic enrolment brings millions of new savers into workplace pension schemes, surely the technologies are available to us to provide greater transparency and choice so that savers, and investors can align their investment preferences and best serve their long-term interests. A richer information set which enables investors to support transformational companies, that are driving value creation through innovative responses to global challenges, would close the loop of market capitalism and allocate increasingly scarce resources more efficiently.