Pensions Intelligence

Transcription

EQUITIES | FIXED INCOME | PROPERTY
Pensions
Intelligence
Environmental, Social and Governance
White Paper
www.aberdeen-asset.com/pensionsintelligence
September 2010
Aberdeen's latest Pensions Intelligence White Paper explores the growing importance UK and Continental European pension
schemes are placing on integrating Environmental, Social and Governance (ESG) into their investment strategies. I hope you find
the results of our survey interesting.
The fieldwork for the Report was undertaken between June and September 2010. It included analysing 400 Requests For
Proposals (RFPs) sent to Aberdeen Asset Management by European institutional investors since 2008. We also conducted a
telephone survey of almost 200 pension schemes across Europe, as well as many one-to-one interviews with other pension
professionals. A list of companies and schemes who took part can be found at the back of this Report. We are most grateful for
their support. I would also like to thank the authors Brendan Maton and Cindy Rose for their thoughtful and practical analysis.
Finally, please note that our Pensions Intelligence service is not just for clients of Aberdeen. It is free and open to all UK pension
scheme professionals, as we believe many solutions derive from the widest possible participation.
So please take part, join us and sign up to future seminars at www.aberdeen-asset.com/pensionsintelligence.
Dominic Delaforce
Head of UK Pension Funds
Aberdeen Asset Management
September 2010
Foreword
Following a meeting in London earlier this year, I was in a
hotel having a night-cap when I got talking to two fellow
guests. They were meteorologists, who of course knew a
lot about weather patterns and climate change. When they
found out that I was a pension fund trustee, they became
quite animated. “You pension fund trustees should be at
the centre of things,” one said. “If you lot got together, you
could seriously change the way the world is going. I’ll bet you
haven’t even heard of ESG……”
To have had that conversation with perfect strangers, who
were weather experts and not pensions professionals,
demonstrated just how far environmental, social and
governance issues have become part of the mainstream, not
just in investment finance, but in the public perception.
But of course, with awareness, comes responsibility. Since
2006, Principles for Responsible Investment (PRI), with
the support of the UN’s Environment Programme Finance
Initiative and the Global Compact, has endeavoured to
promote the need for institutional investors to factor in
ESG considerations through good stewardship. PRI has six
aspirational Principles which provide a platform on which
ordinary trustees, investment professionals, and fund
managers can meet, discuss, learn and organise ourselves to
take more responsibility for the way our beneficiaries’ assets
are invested.
As this White Paper shows, PRI is no tick-box exercise and
Responsible Investing is not merely a label. In pursuit of
investment objectives in the long-term interests of our
beneficiaries, we seek genuine understanding and evaluation
of all the factors which affect our portfolios, from weather
shocks in Russia to workers’ rights in China.
With pride, I can say that more than 200 pension funds in
four years have signed up to this cause. With hope, I ask you
to consider joining us for the benefit of all.
Donald MacDonald
Chair
PRI
Contents
Introduction
1
Report Summary
3
Legal Insight
5
ESG Behaviour Across Europe
7
France
9
Germany
10
Italy
11
Netherlands
12
Nordic Regions
13
Switzerland
14
UK
15
Consultants' Influence 17
Looking Forward
19
Introduction
Environmental Social and Governance (ESG) issues are
increasingly taking root in global mainstream investing. Often
defined as the extra-financial aspects of a company, ESG is
increasingly recognised as being at the heart of the myriad
of functions that go together to form a company’s business
and which have a direct - but poorly defined - impact on the
bottom line.
Aberdeen Asset Management is a signatory to the United
Nations Principles of Responsible Investing. As an asset
management group for which engagement with investee
companies on financial and ESG issues is a fundamental part
of our equity investment process; we sponsored this survey
for Pensions Intelligence to see how pension funds around
Europe are embracing the concept of ESG in the management
of their assets. The downfall of surveys of this type quite
often is that respondents reply in aspirational terms, saying
that their money is invested with ESG considerations, rather
than admitting that, in fact, ESG is rarely hard-coded into the
requirements for managers.
This survey aims to get to the truth of the matter, with
regards to pension funds and other large, long-term investors,
by asking investors around Europe the extent to which ESG
criteria are taken into consideration in the tendering process,
when investors are seeking a new manager for their assets.
Our assumption is that if pension funds are asking about and
requiring the integration of ESG into investment strategies,
then investment managers will be increasingly interested in
supplying them.
We found from the survey that a growing minority of
institutions around Europe now require managers to disclose
their approach to ESG and, in many cases, their commitment
to ESG through a signatory status to bodies like the UN PRI.
Not only does this requirement, hand-in-hand with relevant
legislation, reinforce the idea that ESG strategies are in
increasing demand from investors with the clout to demand
them, it also marks the impetus for wide-reaching changes
in the investment management community: investments
can no longer be pure financial plays, they must also be good
corporate citizens; and managers must factor this in to their
investment decisions.
Cindy Rose
Head of SRI Research
In addition to the RFP data analysed for this survey, we
interviewed 200 pension and retirement schemes and other
institutional investors across Europe. In total they have in
excess of e292.7 billion in assets under management.
Pensions Intelligence ESG White Paper 2010
1
2
Report Summary
Key Points
•
Almost half of pension funds surveyed are positive
on ESG.
•
Nearly two-thirds of funds surveyed have an ESG
policy in place.
•
17% of funds are already PRI signatories.
•
Asset managers to 11% of funds surveyed are already
PRI signatories.
•
In 2010 17% of RFPs asked whether managers were
PRI signatories.
•
Another 14% of pension funds are seriously
considering becoming PRI signatories.
Source: Pensions Intelligence Research 2010
Every chief executive is familiar with the phrase ESG,
Environmental, Social and Governance criteria. These extrafinancial factors seem to be more and more influential in
commercial life. In countries such as France, ESG disclosure
by listed companies has been mandatory for nine years.
Although it is widely accepted that Responsible Investing
will grow in popularity, in this survey we find real evidence
that the percentage of mandates requiring information on
ESG has been rising in almost all categories, but notably
in equities. From the RFP data supplied by Aberdeen Asset
Management, in 2008 just over one-quarter of equity
Requests for Proposals (RFPs) asked specifically about ESG.
In the first half of 2010, the proportion had risen to one-half
(see Table 1).
In other words, European institutional investors are on the
brink of making ESG a majority concern. If this occurs, then the
conclusions of a major study by Mercer from 2004, in which
asset managers predicted that positive or negative screening
would become a mainstream activity within ten years, would
have come comfortably true, with some years to spare.
Not all of the mandates in our study were identical.
Some placed greater emphasis on corporate governance
while others were more concerned about environmental
sustainability. ESG is not a homogenous philosophy. The
variety of stances possible on ESG, make the search for a
simple rationale for the growing popularity of its elements
unwise.
Nevertheless, this Report has paid special attention to the
importance of UN PRI among Europe’s asset owners. Begun
in 2006, the PRI provides all kinds of investors around the
world with a code of conduct. Because this code contains
principles and is not prescriptive, it does not reduce the
variety of stances on ESG. The PRI does, however, aim to
draw more assets into the general ethos. UN PRI is described
as the most important mechanism in promoting ESG by
Emma Hunt, Head of Responsible Investing at investment
consultancy, Towers Watson.
In the first six months of this year, seventeen per cent of
the RFPs examined for this Report, issued by European
institutional investors demanded to know whether the
candidates they were seeking to manage their money, were
UN PRI signatories. This amounts to 40% of all equity RFPs
and more than 80% of all RFPs containing any ESG criteria.
(see Table 2 overleaf).
Table 1: RFPs for Equities and Fixed Income that include
specific requirements on ESG (%)
50
40
30
20
10
0
Equities
2008
Fixed Income
2009
1st Half of 2010
Source: Aberdeen Asset Management data as at June 2010
3
REPORT SUMMARY
The UN PRI guidelines
Table 2: RFP question:
Is the prospective manager a PRI signatory? (%)
1.
We will incorporate ESG issues into investment
analysis and decision-making processes.
2.
We will be active owners and incorporate ESG issues
into our ownership policies and practices.
3.
We will seek appropriate disclosure on ESG issues by
the entities in which we invest.
2009
4.
We will promote acceptance and implementation of
the Principles within the investment industry.
1st Half
Year 2010
5.
We will work together to enhance our effectiveness
in implementing the Principles.
6.
We will each report on our activities and progress
towards implementing the Principles.
2008
0
10
20
30
40
50
Source: www.unpri.org
The significance of this criterion is that pension funds are
increasingly prepared to shut out commercial asset managers
which have not signed and complied with UN PRI. Some
institutional investors are prepared to accept that successful
candidates will be working toward PRI status. For others the
question is a non-negotiable demand.
signatory. Parties that do not meet standards, ie are not
following the spirit of PRI, are encouraged to increase their
efforts or be delisted.
PRI compliance is not a formality. It requires a genuine
commitment and cannot be achieved cosmetically. As the
final principle above suggests, each signatory has to undergo
an annual investigation of their commitment. The PRI’s own
administration conducts this process at the expense of the
4
For this reason, PRI is taking root as the global standard for
Responsible Investing. UN secretary-general, Ban-Ki Moon
declared in 2008: “It is time to create market incentives that
reward long-term investment.”
Signing up to PRI as a pre-requisite to winning new business
is perhaps the greatest market incentive imaginable for the
asset management industry.
Legal Insight
It is all too easy to see Responsible Investing as ‘doing good’,
and therefore a form of charity tacked on to the original
purpose of saving for retirement.
But any pension fund in Europe could only arrive at such
a conclusion by their own endeavours. For example no
legislation forces pension funds to act on global warming.
This view is inaccurate but persists. One Italian respondent
dryly remarked that “ethics can be looked for in Church”.
Most national legislations make clear that the board of
a pension fund must look after members’ best financial
interests and not apply their own ethics to the scheme’s
fortune.
The range of views among our survey respondents is proof
that the amount of thought dedicated to ESG varies greatly.
This separation is evident in the UK as far back as 1887, when
Lord Halsbury judged: “The goodness of a trustee’s motives
cannot justify the propriety of an investment.”1
Or as a UK pension fund manager in our own survey put it
one hundred and twenty-three years later: “The fund needs
to make money even if it is not socially responsible.”
So far, so clear! Considerations have changed this decade,
however, since the introduction of laws requiring pension
boards to look at issues of ESG. First created in the UK in
2000, this obligation has been applied in a similar fashion to
pension schemes in many other countries around the world.
At a stroke, legislators have imposed consideration of the
wider world on investors. This is very different to Lord
Halsbury’s prohibition on trustees bringing their own ethics
to the table.
The new legislation is deft because it does not direct schemes’
investment strategy. This would risk supplanting the board in
its duty. The law says that schemes have merely to consider
ESG, and ESG is another way to analyse the value of an
investment, not an end in itself.
In applying ESG, boards and their agents might well form
an opinion on these so-called ‘extra-financial factors’ that
bolster the primary duty of maximizing returns (or averting
major losses) for members.
One survey respondent from a large engineering company
said that financial considerations have to predominate, but
the scheme’s view on ESG is becoming increasingly positive
as financial and environmental considerations are beginning
to correlate. “The BP spill in the Gulf of Mexico proves the
worth of investing in clean energy stock,” he said.
If one believes the correlation between financial and
environmental considerations is rising, then Responsible
Investing - which pays more attention to environmental
matters than conventional investing - is not about ‘doing
good’ for others but a practical aspect of looking after
members’ interests.
1
2
The finance director of one French energy giant told us
that two years' ago he had created a committee for the
company’s internal Responsible Investing policy comprising
economists, philosophers and financial specialists.
In contrast, the pension fund manager from a chemicals
multinational said they had done the minimum to comply
because ESG was not a current investment priority.
Pension boards have a great amount of latitude in the
importance they accord ESG issues. “Behaviour has
shifted because the general consensus is that Responsible
Investing is ‘a good thing’,” says Andrew Bradshaw, partner
at Sackers, a UK law firm. “But there remains a great deal
of discretion and it is extremely difficult for boards to be
sued based on the ‘wrong’ investment decisions. I suppose
if all the money went into a tin mine in Guatemala which
failed, then cause for complaint would be obvious. It is
hard, however, to challenge any board that has acted
reasonably."
If pension funds remain free to choose their investment
strategy so long as they act prudently, what is the legal
status of the UN’s PRI? The UN’s pronouncements are not
binding under any national law. The Principles as we list
them on page 4 are not at all specific. It is quite permissible
for different signatories to take different approaches in their
interpretation of the Principles.
“PRI stands on the shoulders of the UK Statement of
Investment Principles,” says Penny Shepherd, Chair of the
UK Social Investment Forum.
National law falls on schemes individually. Several
respondents to our survey said they did not have the
resources to investigate ESG. PRI however emphasises
the power of pooling research efforts in order to discover
where and when ESG does matter. Therefore, PRI acts as an
information exchange across national borders between asset
owners. The majority of PRI board members represent notfor-profit pension providers. “It’s important that the board
retains this composition to avoid commercial pressures,” says
its Chair, Donald MacDonald.
Learoyd vs. Whiteley
Ellison, Pension Fund Investment Law, 10.12
5
LEGAL INSIGHt
In conclusion, it would be woefully naïve to presume that
consideration of extra-financial factors began with the first
branded Responsible Investment product or the UK’s reform
of pension funds’ Statements of Investment Principles 10
years ago. At the same time, the investment industry’s
love of quantification means that is possible for pension
fund fiduciaries and their advisers to analyse Responsible
Investment vehicles against conventional peers in terms
of risk and return. A number of the larger consultancies
are trying to avoid such compartmentalision by taking a
more holistic analysis of asset managers (see Consultants'
Influence, page 17).
Such changes are welcome because ESG is all about taking
such a view. This is evident in the matter of legislation. Legally,
pension fund boards are directed only to consider ESG factors.
This is not the case for many of the organisations to which
they lend or invest in. New regulation on ESG issues is
reaching further and further into all commercial activity and
throughout society. Investee companies and local authorities
around the world are facing a growing burden of obligations
from stricter controls and tariffs on waste disposal to labour
rights in emerging markets and disclosure on executives’ pay.
The significance of ESG issues for those who look after other
people’s retirement savings is thus determined far more by
indirect legislation than the actual rules governing pension
schemes.
Corporate Governance
In 1980 the Wilson Committee, led by former Prime
Minister Sir Harold Wilson, reported to the UK Houses
of Parliament on the functioning of financial institutions.
Among such institutions were bond investors who had
forced interest rates to 17% the year before.
The record rise was described as the consequence of a ‘gilt
strike’, a phrase which captures how financial institutions
were seen at the time to be as unhelpful as militant labour
unions to the country’s functioning.
The Thatcher government was soon to liberalise financial
markets but a fear of being seen to be aggressive haunted
institutional investors for longer. In the UK as the rest of
Europe, the voice of bondholders and shareholders remained
quite deferential to sovereign and corporate issuers.
Legally, it was the US which started shareholder activism
in its current form. Individual pension funds had used their
investments for political and moral purposes – ranging from
protest against arms manufacturers supplying the US army in
6
Vietnam to gay rights – from the 1960s. Such campaigns had
been ad hoc. But in 1994, the Department of Labor decided
that pension fund fiduciaries ought to take care of their
equity assets on three counts: The capital, The dividend and
The vote.
As Robin Ellison, Head of Pensions at law firm, Pinsent
Masons observes: “It was the reference to the vote,
hitherto mostly ignored as a trustee asset, that eventually
led to the creation of the corporate governance ‘industry’.
Henceforth, pension funds had to demonstrate as part
of their management of assets that they had where
appropriate considered how to vote their shares.”
Some European pension funds have recently begun to take
advantage of US legislation as members of class action suits
against US corporations. But the greatest influence of the
1994 changes can be seen in legislation on both companies
and shareholders to disclose more on their policy on
governance.
These laws are worth mentioning because unlike other
aspects of ESG, they introduce a sense of compulsion.
Institutional investors in France, the Netherlands and
Portugal, for example, must disclose their shareholder voting
record. The Swiss Parliament is still mulling over whether
to oblige institutional shareholders to vote on all company
resolutions.
The European Commission’s original intention would have
forced all EU-domiciled investors’ to disclose their voting
policy and record. Although this plan has been softened, it is
evident that the world is heading into a far more concerted
period of investor activism than the ‘gilt strike’ and antiVietnam protests of the previous era of the 1970s.
Back in 1980, the Wilson Committee had some revolutionary
ideas, including a £2bn national investment facility jointly
funded by pension schemes and North Sea oil and gas
revenues. It would have been one of the first sovereign
wealth funds.
The Committee tussled internally on whether such a facility
would improve capital financing. One dissenting group
believed it would be better “to encourage direct contacts
between the life assurance and pension funds and the
individual users of the finance they provide”.
The UK sovereign wealth fund never happened. But thirty
years on, after the Cadbury, Greenbury, Hampel, Myners
and Walker Reports in the UK alone, it is fair to say that
greater contact between pension funds and corporate boards
certainly does take place.
ESG Behaviour Across Europe
More and more pension funds in Europe want ESG issues to
be considered by the managers of their wealth. This is our
conclusion from analysing 400 Requests for Proposals7 issued
during the last three years.
We find that since 2008 more than one-quarter of the RFPs
we analysed ask for some information on asset managers’
policy on ESG. Moreover, when segmented by year, we see
a positive trend. In 2008 only one in five RFPs saw fit to
mention ESG. By June 2010 that ratio had risen to more than
one in three.
The second cause is the exemplary behaviour of some of
the largest pension funds. By means of their influence as
investors and national champions; their transparency and
willingness to communicate their policies, these funds are
encouraging others to follow suit.
Table 4: Investors with an ESG policy (%)
UK
Italy
Norway
Table 3: Rising popularity of ESG
(Percentage asking for information on managers' ESG
policy)
50
Denmark
Netherlands
France
Germany
Spain
40
Sweden
Switzerland
0
30
20
40
60
80
100
20
The pension funds of British Telecom, UK universities, the UK
Environment Agency, Unipension8 of Denmark, the Dutch
Healthcare Workers and Civil Servants are one part of this
vanguard.
10
0
2008
2009
1st Half Year 2010
Pension funds’ demands on asset managers reflect the fact
that ESG policies are already well-established at their own
organisations. From our conversations with 200 pension
funds, we find nearly two-thirds of them have an ESG policy
in place (see Table 4). Practice is almost ubiquitous in Nordic
countries, whence more than 90% of respondents declared
they had a publicly available set of guidelines on how they
approach responsible investing.
Two major causes present themselves in explaining this
growing popularity. The first is the pressure of legal codes
and regulation, (see page 5). More and more countries are
demanding long-term investors to consider ESG criteria in
their policies.
Alongside them stand new national buffer funds, many of
whom are governed by legislation unique to them that
recognises ESG without the complicating layers of historic
rules and liabilities. Such funds include France’s Fonds de
Reserves des Retraites, Ireland’s National Pension Reserve
Fund, Sweden’s AP funds and Norway’s two Government
Pension Funds.
Both groups are influential. Arguably the former have had to
work harder to accommodate Responsible Investing within
the increasing national regulations on pension schemes. Here,
by contrast, is the very easy-to-follow first ethical principle of
one of the buffer funds.
Folketrygdfondet, appointed manager of Norway’s
Government Pension Fund: Folketrygdfondet shall engage
in ethically sound asset management, and contribute to
sustainable development and the long-term creation
of value, in order to thereby increase financial returns
over time.9
7
Data from Aberdeen Asset Management
Legally, Unipension is an umbrella fund for three separate industrywide pension schemes. We include it here as it acts as their common investor.
9 http://www.ftf.no/en/c-227-Ethical-principles-relating-to-the-investment-activities.aspx
10 As at 31.3.10
8
7
ESG BEHAVIOUR ACROSS EUROPE
Funds in the vanguard of Responsible Investing manifest their
policies in different ways.
Norway’s domestic Government Pension Fund’s more famous
brother, the Government Pension Fund - Global, (GPFG) uses
several across its NKR2,763bn (€345bn)10 portfolio. These
range from unambiguous exclusion – of tobacco producers,
nuclear weapons manufacturers and bonds issued by the
state of Myanmar – to co-funding research into climate
change; engaging in dialogue on child labour abuses in the
cocoa industry; and backing environmental technology in
Emerging Markets.
Developments in Responsible Investing evidently are
occurring all over Europe. The trend is not uniform and
national differences manifest themselves even with the
single-currency bloc. On the following pages, we look at how
pension providers and regulators in major European countries
are behaving.
To begin, we asked pension funds for their attitudes to ESG
and specific associations in this field, notably PRI but also the
Institutional Investors’ Group on Climate Change (IIGCC).
In Spain, there is an overwhelmingly positive attitude (75%)
but barely any corresponding policies (9%). In most other
countries, investors are more phlegmatic: the number of
policies tends to outweigh the positive attitude. This suggests
that investors are cognisant of ESG but not necessarily keen
to invest more time or effort understanding the issues (see
Table 5).
Table 5: Investors with a positive view of ESG (%)
Table 6: Percentage of funds and asset managers who are
PRI signatories
Germany
Spain
Netherlands
France
UK
Denmark
Switzerland
Sweden
Italy
Norway
0
20
Pension Funds (%)
40
60
80
100
Asset Manager (%)
It is worth noting that some funds considered themselves
to be signatories as they were contracted to an insurance
company that abides by PRI.
On service providers per se, asset managers to 11% of fund
respondents are already PRI signatories. We find that the
score rate is low in countries such as the Netherlands (5%),
which is surprising given Responsible Investing’s general
acceptance here.
UK
Italy
Norway
Denmark
Finally we asked respondents whether they were considering
joining PRI themselves or requesting that their asset
managers do so. Here we find that almost 14% of pension
funds are thinking seriously about this commitment. It is
worthy to note that all our respondents from Spain who
expressed an opinion were positive on this idea.
Netherlands
France
Germany
Spain
Sweden
Switzerland
0
20
40
8
If we turn attention to PRI, we find that 17% of European
pension funds surveyed are already PRI signatories. Denmark
is far and away the most ardent country, with 85% of
respondents saying they are PRI signatories. Norway comes
second with 33% while the Netherlands comes third with
32%. We found no PRI signatories in Italy (Table 6).
60
80
100
• Pension Assets: €120bnA
France
• In brief: In the last 10 years French companies have
embraced Personal Savings Plans for employees. The
country still, however, relies on pay-as-you-go benefits
and private pension products..
• RI Status: ESG is well-established in corporate French
life but there remains room for Responsible Investing
to grow.
A OECD
Our survey shows French pension schemes and their sponsors
are cognisant of ESG issues. Three-quarters of survey
respondents said that they had a suitable policy in place.
This makes sense as French companies have been required to
produce a Corporate Social Responsibility report since 2001.
We find 15% of respondents mention the importance of
ESG to their organisation’s image – Sweden is the only
other country in our survey where image is mentioned as
frequently.
“We have had good results and returns since the policies
were implemented in 2001,” said one respondent within the
nationwide Arrco system. “It is very important for the image
of the group.”
The pension fund manager of a luxury goods manufacturer
also believed ESG improved clients and partners’ perception
of the company. He emphasised that SRI policies encouraged
stable, long-term investments.
The finance director of a major utility said that he had
established two years ago a special commission for internal
ESG policies. The commission is comprised of economists,
philosophers and financial specialists.
Only 10% of respondents from France had a negative view
of ESG, which reflects familiarity with the subject. However,
France is down the list of ESG search activity by RFP in
recent years, behind the UK, Netherlands, Italy and Germany
– only just ahead of Norway. Large segregated Responsible
Largest five French pension funds
Fund name
AUM
€bnA
UN PRI
signatoryB
CDP
memberC
FRR
28.9
Y
Y
ARRCO
11.1
N
N
ERAFP
6.5
Y
N
ANEP
6.0
N
N
UGRR
5.9
N
N
A IPE Top
1000 European Pension Funds 2009
B www.unpri.org
Investing mandates are concentrated within a few long-term
investors. But France retains an international profile thanks to
the communicative nature of these institutions, notably FRR,
the €33.1bn National Buffer Fund, and ERAFP, the €4.6bn
Civil Servants’ Top-up Fund, both of which invest their entire
portfolios responsibly.
For ERAFP this is not a legal requirement but an
agreement of the unions and employers who comprise the
administering board. “ERAPF believes that companies that
are well-managed and cognisant of ESG risks will deliver
better performance over the long term,” says Olivier
Bonnet, Head of SRI Strategy at the Fund in Paris.
The key phrase is “long term”. For ERAFP, the truths of
Responsible Investing are not self-evident and will not
materialise without effort; they require financial and vocal
commitment from asset owners. Bonnet believes it will
take 10 -15 years to achieve. “It’s the responsibility of
investors to make ESG improve,” says Bonnet.
So, for example, of the BP Deepwater disaster he frankly
admits: “No one saw it coming.” Given that ERAFP
spends money on research agencies, this is phlegmatic.
But Bonnet is not angry; he believes it shows greater
investment and willingness is needed.
To this end, next year the Fund will create responsible
investment indices for European equities. “There are many
Responsible Investing asset managers in France,” explains
Bonnet, “but asset owners are not yet able or willing to
commit resources. ERAPF will show itself as a leader by
putting its name to these indices, based on a methodology
created in conjunction with the business school, Edhec and
research agency, Vigeo.”
The room for growth is indeed huge. Figures from Eurosif
suggest that the broad SRI market in France is just over
€70bn. The country’s total asset management industry is
estimated at €2,554bn, second in Europe only to the UK.
With the caveat that a chunk of the total comprises money
market funds, Responsible Investing equates to just 2.7% of
France’s assets under management.
C www.cdproject.net
9
Germany
• In brief: German companies are funding their
retirement obligations at an unprecedented rate. This
is the fastest-growing occupational pension market in
Europe.
• RI Status: In spite of established 'Green' politics and
energy, responsibly investing assets has yet to flourish.
A OECD
Positive but not policy
Germany is not in the vanguard of Responsible Investing
despite of fast-growing occupational savings and a global
reputation for 'Green' politics.
In the data analysed for this Report over the past three
years less than 5% of RFPs issued by German pension funds
mentioned ESG criteria.
The table below shows that none of the top five pension
funds belong to the most renowned international
associations in ESG. Our own survey finds only 15% of
German funds are PRI signatories, but these are indirect. One
route for multinationals is via corporate parents elsewhere;
the other via insurance company signatories.
Similarly, only one in 20 of our survey respondents was a
member of the Institutional Investors’ Group on Climate
Change (IIGCC).
What can explain this low level of interest? Since 2005,
Germany pension funds and relevant insurance companies
have been required to state their policy on ESG in annual
report to members. For some respondents, these two sets of
laws are sufficient.
They perceive UN codes as superfluous, confusing the truth
that PRI, CDP, IIGCC and similar associations are each a
voluntary commitment beyond national regulation.
“I am not familiar with any of those regulations and believe
they do not apply to a German pension fund,” said the
pensions manager of one aerospace manufacturer.
“As a Pensionskasse we fall under the regulations for
Largest five German pension funds
Fund name
AUM
€bnA
UN PRI
signatoryB
CDP
memberC
BVK
44.0
N
N
Siemens
20.2
N
N
SV Sparkassen
19.4
N
N
BVV
18.6
N
N
VBL
13.0
N
N
A IPE Top
B www.unpri.org
C www.cdproject.net
10
Versicherungsvereins auf Gegenseitigkeit", said an asset
manager from an insurance company. “Under this regulation
we are insured against irresponsible investments and have
our own ESG policies. Therefore, we do not have to be
signators of ESG or UN PRI.”
The VAG laws governing Pensionskasses are interesting. With
regard to investing they define ‘profitable’ as ‘sustainably
profitable’ – a unique legislative definition which reminds
us that Responsible Investing can be defined many ways.
But it is unfortunate that here as in other German-speaking
countries, the voluntary nature of PRI has not been wellcommunicated.
A report three years ago by Axel Hesse for Sustainable
Development Management, found that only about one
in 20 German pension funds claimed to have a very good
understanding of Responsible Investment. In spite of the
comments above, PI data suggests that this situation has
improved to some degree.
Already organisations as diverse as the state of Hessen, the
metal industry fund and Lutheran Church funds run pension
assets by sustainable criteria. The investment manager at one
regional Church said: “We have not signed anything officially
but are examining our companies and only invest in those
which are regulated and respect all the requirements as laid
out in UN PRI, IIGCC and ESG.”
There remains some way to go. By the end of 2007, only
€11.1bn was invested in Responsible Investments, according
to EuroSIF. Much of this money, however, was from retail or
other types of institutional investors, not pension funds.
One explanation is that German corporations manage
themselves by co-operation in the Vorstand between labour
representatives and executives. Shareholder activism is a
rather foreign concept.
Having said this, funding retirement obligations used to
be strange to German businesses too. The demand of
international accounting standards to calculate these
obligations by market value has changed all that. For this
reason, as the pension funds of DAX-30 companies grow,
Responsible Investing is bound to find itself a greater
consideration.
• Pension Assets: €57.4bnA
Italy
• In brief: Occupational pension plans are now
widespread in Italy. As in France, however, most
retirement income comes from state benefits and
private forms of saving.
• RI Status: Italian plans are keen to learn more about RI
but the majority do not consider it imperative.
A OECD
While schemes for occupations such as architects, engineers
and travelling salesmen, are long-established; the rest of the
workforce had to wait until the late 1990s for the possibility
of a similar employee benefit.
The obligation on these funds to declare whether they have
considered ESG came into law only five years ago.
Perhaps it should be no surprise then that Italy’s institutional
investors have been cautious in changing their habits. A 2009
study by the Italian pension fund association, Mefop, found
that only one in five funds invested according to ESG criteria.
Asked what would raise this number, risk control or extra
returns scored low; the wishes of members and the social
purpose of the fund scored highly.11
From our RFP research we find a similarly cautious outlook.
Only 4.5% of RFPs issued in the last three years to Aberdeen
Asset Management asked for information on managers’
capabilities in Responsible Investing.
According to our research, Italy is one of the few countries
where a majority of respondents’ attitude was either neutral
or negative to ESG. 38% of respondents were concerned that
these criteria were merely marketing gimmicks. “Ethics can be
looked for in church, not in investments,” was the quote from
one small open fund.
We also uncovered doubts which reflect nervousness after
the market slump of 2008-9. Some Italian pension plans were
preparing initial allocations to Responsible Investing two to
three years ago, but cancelled the move when the economy
worsened.
PI research shows, however, that a minority of Italian schemes
take ESG very seriously, with quarterly evaluations to test the
compliance of their portfolios with the stated ESG policy. As
Davide Dal Maso, Secretary-General of the National Forum
for Sustainable Finance, observes: “The few funds that have
experimented in the field of Responsible Investing are neither
the biggest nor the richest nor the most integrated. The
motivation to change resides instead in the wish to confront
an important question.”
PensPlan Plurifonds, an open fund based in Bolzano,
is among these innovators. It now offers an ethical
‘compartment’ to individual clients. Michael Atzwanger
and Armin Weissenegger, Managing Director and ViceDirector of Investments Respectively, say: “We are
convinced that this type of management will become
more important as the financial crisis of 2007-09 has
shown the current dissatisfaction of investors with
conventional portfolios and companies, not only for their
performance but also the sectors in which they operate.”12
Largest five Italian pension funds
Fund name
ENPAM
AUM
€bnA
UN PRI
signatoryB
CDP
memberC
8.5
N
N
Enasarco
5.7
N
N
PREVINDAI
4.5
N
N
Cometa
3.5
N
N
Inarcassa
3.4
N
N
A IPE Top
B www.unpri.org
C www.cdproject.net
11
12
Study published in Quaderne, part of the Mefop Newsletter No.41 Autumn 2010
p.67 Quaderne, part of the Mefop Newsletter No.41 Autumn 2010
11
• In brief: Widespread occupational pension provision
due to quasi-mandatory enrolment and highly
successful industrywide arrangements for every
profession from hairdressers to dentists to the boatsteerers of Rotterdam harbour.
Netherlands
• RI Status: Keen to re-assert credentials after the
Zembla TV show (more details below) shocked the
Dutch public.
A OECD
Dutch pension funds have been notable evangelists of
Responsible Investing. PZFW, the €90bn pension fund
for healthcare workers, issued Europe’s first institutional
mandate for responsible engagement more than 10 years ago.
The mandate was significant because it showed how passive
investors can and should behave responsibly. PZFW scotched
the idea that only active management can incorporate
environmental and social guidelines.
While the healthcare workers’ fund continues to be a pioneer
in responsible passive investing, other funds have developed
their own answers. The €2bn scheme of financial services
provider, SNS Reaal, employs responsible index-tracking
vehicles for markets it deems to be efficient, such as Asia,
Europe and the US. In Emerging Markets and High-Yield
Bonds, however, it employs active management.
Mariëtte Simons, Pensions Director at the SNS Reaal
Fund, says it is difficult to follow corporate governance
standards in some Emerging Markets because
transparency levels are low. At the same time, she
recognises that lower levels of information generally are
the source of higher returns for better active managers.
Simons takes the pragmatic view that the fund is a
net if not total responsible investor. “We are big fans
of microfinance funds,” she says. “Allocating to active
microfinance in poorer countries compensates for the
Emerging Markets mandates.”
Such a practical, forward-looking approach is shared by Dutch
PI survey respondents. More than one-third believe that more
can be done in terms of ESG by pension funds.
“The UN PRI guidelines are there but they aren’t being
used enough. I would like to see more being done,” said
the administrator of one small scheme. No other country
expressed such zeal to improve the reach of Responsible
Investing. One respondent feared that the pensions industry
itself was acting fast enough but that investee companies do
not want to keep pace.
“I don’t believe companies are prepared to put up more
money to cover the costs involved,” he said. Occupational
pensions cover roughly 90% of the working population in
the Netherlands. Schemes generally communicate very well
12
to their members. Thus, the revelation in a TV programme
three years ago that many funds invested in manufacturers
of cluster bombs caused a wave of protest.
The affair sheds light on why Dutch pension funds now are
so sensitive to ethical issues around how they invest. In
countries with lesser coverage, there may never have been
the interest even to commission such a programme. But
now the Dutch parliament has banned investment in such
companies by pension funds; and they have become more
aware than ever of participants’ scrutiny of where their
money goes.
This partially explains the support for PRI and the Carbon
Disclosure Project by large schemes (see below) some signed
before 2007). Their good work is not, however, in isolation. In
the VBDO Benchmark Study on sustainability, the industrywide fund for the media and journalists is rated more
accountable than either ABP or PZFW.
“In the longer term, ESG integration into the investment
processes must result in an improved risk/return ratio,”
said one major provider. Another emphasised that greater
guidance in this area from pensions regulators would be
more welcome.
Largest ten Dutch pension funds
Fund name
AUM
€bnA
UN PRI
signatoryB
CDP
memberC
ABP
180.5
Y
Y*
PZFW
78.5
Y
Y*
PMT
29.0
Y
Y*
BPF BOUW
24.2
N
N
SHELL
19.2
Y
N
PME
18.7
Y
Y*
PHILIPS
13.8
Y
N
DOCTORS
12.9
N
N
RABOBANK
11.9
N
Y
ING
10.0
Y
Y
A IPE Top
B www.unpri.org
C www.cdproject.net
* indirectly, via Fiduciary Managers
Nordic Region
• In brief: Quasi-mandatory pensions insurance ensures
that the Nordic workforce has healthy retirement
provision. According to the OECD, Denmark leads the
way. The other three major countries have substantial
buffer funds.
• RI Status: Rooted commitment to environmental
and social issues has seen Nordic funds champion
development in universal standards for investors.
A OECD
The Nordic Region has been recognised for a long time as
home to many vanguard responsible investors.
Reputations are so renowned that in 2006 the Italian
insurer, Generali, decided to abide by the investment policy
of Norway’s Government Pension Fund – Global for its
sustainable investments. Given that Generali is 136 years
older than the Norwegian fund, this is an accolade.
The influence of the Global Fund, Europe’s largest institutional
investor with €345bn assets under management, is felt at
wider. “We follow the guidelines of the fund too,” says Heidi
Finskas, adviser on Responsible Investments at mutual insurer,
KLP. She explains that even though KLP has been a responsible
investor for longer than the Government Fund, its size and
resources mean that there are few occasions when KLP would
take a different policy: “The Government Fund’s analysis
is so thorough that if they have withdrawn from active
engagement with a company, as a smaller player what could
we achieve?”
This approach reflects a spirit of pragmatism not mere
imitation. Nordic investors, including Norway’s Government
Fund, believe in collaboration for the common good.
Largest ten Nordic pension funds
UN PRI
CDP
signatoryB memberC
Fund name
Country
AUM
€bnA
Government
Pension FundGlobal
Norway
277.9
ATP
Denmark
57.7
Y
Y
Alecta
Sweden
40.1
N
N
Danica
Denmank
31.3
N
N
PFA
Denmark
29.5
Y
Y
Varma
Finland
25.1
N
N
KLP
Norway
22.4
Y
Y
AMF
Sweden
21.9
Y
N
Ilmarinen
Finland
21.8
Y
Y
Keva
Finland
20.0
Y
Y
A IPE Top
B www.unpri.org
C www.cdproject.net
Y
Y
KLP has formed the Nordic Engagement Cooperation with
Folksam of Sweden and Ilmarinen of Finland to campaign
collectively as shareholders. The venture was explained as
following Principle 5 of the PRI, working together to enhance
signatories’ effectiveness in implementing the Principles.
There are also plans for the national Social Investment
Forums to collaborate further. Gunnela Hahn, Head of
Responsible Investments at the Swedish Church and
Swesifboard member, believes this will happen in 2011.
Our survey reflects the strength of Responsible Investing
in the Nordic region. The number of funds with an ESG
policy was 87%. Although negative comments were entirely
absence, conversely not all respondents were entirely positive.
The finance director of one Swedish municipality said that
Responsible Investing was not a priority.
There were more PRI signatories from Denmark alone than
the UK, Europe’s largest pension fund market. This may be
no surprise as the Danish government now views PRI as
tantamount to a Corporate Social Responsibility report. (It is
certainly a surprise, that there is no Nordic representative on
the PRI Board.)
One example of a responsible investor in Denmark is
Unipension, a DKK80bn umbrella fund for vets, architects
and academic lecturers, whose investment policy states:
“We require our new external managers either to have
signed UN PRI and/or UN Global Compact or to have
similar guidelines and processes in place. Our managers are
also asked to update us on status for their implementation
of the Principles.”
This trenchant statement surprised some commercial
asset managers when it was introduced two years ago.
The managers were confronted with a sense that without
a serious commitment to responsible investing, their
opportunities for new business might be fewer.
But Unipension’s decision merely embodies another tenet
of PRI: to promote acceptance and implementation of the
Principles within the investment industry.
Such boldness is not necessarily easy to enact or emulate,
however. The managing director of one industry-wide fund in
Denmark said that asking asset managers in the US to abide
by ESG policies was still too difficult to achieve.
13
Switzerland
• In brief: The Swiss have more saved per capita in
occupational pensions than any other country in
Europe. However, there is no legal requirement to
consider ESG factors.
• RI Status: Domestic corporate governance has become
a hot issue but many plans remain to be convinced
that Responsible Investing fits with their prime
fiduciary duty.
A OECD
Swiss law on occupational pension funds does not foster
Responsible Investing. There is no requirement of schemes to
consider ESG issues.
This situation is increasingly rare in Europe but may explain
why none of Switzerland’s biggest pension funds or largest
commercial asset managers is yet a signatory of UN PRI (see
opposite). Similar scores can be observed in Germany and
Austria.
On the other hand, the Swiss parliament has followed
Belgium and the Netherlands in banning investments in
cluster bomb manufacturers. There is a further amendment
under consideration to insist institutional shareholders can
no longer abstain at Swiss company AGMs. And several of the
country’s largest private bank asset managers have adopted
the PRI.
Much of the credit for advances in Responsible Investing in
Switzerland rests with the Geneva-based Ethos Foundation,
headed by Dominique Biedermann, former head of the
Geneva Canton Fund. With vital backing from public sector
pension funds, Ethos has challenged the giants of Swiss
industry, including UBS and Credit Suisse, on corporate
governance and executive pay.
The head of one cantonal pension fund said that Ethos had
shaken up the cosy gemutlich world of domestic institutional
investing. More than 15% of our survey respondents
mentioned Ethos by name; an incidence unrepeated in any
other country for a specific agency.
“We welcome the recognition,” says Vinzenz Mathys,
Corporate Communications Manager at Ethos, “but
there is still a long way to go for Responsible Investing in
Switzerland. We hope that more of the major banks will
adopt PRI but are doubtful that the obligation to vote at
AGMs will be passed.”
From our survey responses, it is evident that there is still a
long road to travel. The number of PRI signatories is close to
14
10%, below average for Europe and symbolized by remarks
from respondents such as “we are ‘old-fashioned’ and have
not looked at these policies yet” or “the investment decisions
are outsourced and we don’t have any influence over them”.
A sense of realpolitik came from one portfolio analyst
within a private bank. He said that his fund would invest
in environmental commodities or 'Green' companies, not
because of SRI but because they believe that the particular
commodity or company would be profitable.
“Our policies and investments are only decided by profits and
not by environmental or social matters,” he said. In general,
only a minority of respondents were opposed to Responsible
Investing; the vast majority (89%) said they were either
neutral or positive on ESG matters.
“Implementing special policies on ESG is a ‘must’,” said
the head of finance at one major canton. “Investing in
'Green' projects and in long-term projects can also be very
profitable.”
Largest ten Swiss pension funds
Fund name
AUM
€bnA
UN PRI
signatoryB
CDP
memberC
Publica
19.8
N
N
BVK
14.4
N
N
AHV
14.0
N
N
UBS
13.4
N
Y
Migros
11.1
N
N
PK Stadt Zurich
9.6
N
N
SBB
8.8
N
N
Novartis
8.6
N
N
PK Post
7.6
N
N
Credit Suisse
7.3
N
Y
A IPE Top
B www.unpri.org
C www.cdproject.net
• Pension Assets: €1,162bnA
UK
• In brief: Europe’s largest occupational pension market
by volume, however the UK still has less ESG coverage
than the Netherlands and Denmark. A new nationwide
plan in 2012 is intended to repair many of the gaps.
• RI Status: As home to Europe’s most sophisticated
financial services centre, the UK is in the vanguard of
product creation. Opinion among native pension funds,
however, remains divided.
A OECD
The UK is a pioneer in Responsible Investing. Several local
authority funds awarded ethical mandates for a small
percentage of their assets during the 1990s, building on the
popularity of ‘Green’ retail funds. In 2000, the government
made consideration of such criteria a requirement for all
occupational schemes: pioneering legislation since emulated
around the world.
Familiarity with the issues is reflected in our survey which
found less than 4% of respondents were negative on ESG
factors.
One large local authority pointed out that it had aligned its
investment policy with United Nations conventions since the
1990s.
A regional transport authority fund said its interests were
best served by being environmental as this policy offers
better long-term returns.
But a leading independent trustee claimed that the private
sector could not afford to take the same view as public sector
schemes. Rita Powell of Inside Pensions said: “Responsible
Investing is all well and good for public sector funds in the
UK because ultimately the government picks up the tab.
Concerns are very different for private-sector funds in the real
world.”
Largest ten UK pension funds
AUM
€bnA
UN PRI
signatoryB
CDP
memberC
USS
36.6
Y
Y
BT
36.4
Y
Y
Royal Mail Pensions
27.1
Y
N
Railways Pension
24.7
N
Y
RBS
20.5
N
Y
BP
17.0
Y
Y
Lloyds TSB
16.2
N
N
National Grid
16.1
N
N
British Airways
16.1
N
N
15
Y
N
A IPE Top
B www.unpri.org
One respondent from a basic materials company said: “We
are aware of the issue but in the current economic climate
there are far more important considerations. She added that
ESG is mentioned in the Statement of Investment Principles
but in reality is insignificant.
So is there a gap between the UK’s private and public
schemes? Our data confirms that ESG is more of a concern
for public-sector funds across Europe, although the gap is not
as wide as such comments above suggest. While more than
half of public-sector tenders for the first half of 2010 ask for
information on ESG, so do almost three in ten private-sector
requests (see Table 7).
Table 7: Public vs Private
ESG Criteria in RFPs (as percentage of all RFPs)
Private-Sector
Public-Sector
2008
2009
1st Half
Year 2010
20.6%
21%
29%
23%
35%
55%
Fund name
Shell
Robin Ellison, Head of Pensions at law firm, Pinsent
Masons, and former head of the UK National Association
of Pension Funds, agreed that “matters such as deficits are
far more pressing for the average corporate board.”
Having said this, the table above shows that public-sector
interest appears to be accelerating faster than private-sector
interest. But those in the public sector do not come across
as naïve. The finance officer of a London local authority said:
“We recognize that where we can invest responsibly with a
good return, we should. But ultimately returns for members
are the bottom line. We don’t invest in ideology.”
This view best sums up the UK’s cautiously optimistic
attitude to Responsible Investing. The country is very
familiar with the philosophy, having played a major role
in defining and promoting Responsible Investing to the
world. But worrying levels of domestic deficits and a rising
sense that occupational pension schemes are a burden to
employers rather than a benefit to employees, mean that any
investment strategy which does not promise short-term
C www.cdproject.net
15
returns loses some appeal. Just over 38% of respondents said
they were positive on ESG, while 43% were neutral.
As in France, it should also be noted that the activities of the
UK’s largest schemes varies from the huge number of smaller
arrangements. The table on page 15 shows the considerable
Responsible Investing credentials of the largest British funds.
Below we profile a champion of the cause, the BT Pension
Scheme. But across our whole survey we find a surprisingly
few number of PRI signatories outside the top echelon.
Perhaps the UK feels it already has enough organizations,
from the National Association of Pension Funds down, that
provide support in this field.
Howard Pearce, Head of Environmental Finance and
Pension Fund Management at the Environment Agency,
says that his scheme has even had success encouraging
existing managers to sign up. “US firms are more resistant
than their European peers to PRI,” he says, adding that
the resistance typically comes from the US firms’ legal
advisers but that it is diminishing as the number of
signatories worldwide grows.
Ringing the changes
As a former public-sector entity (and one still seeking
legal clarification on whether the State will underwrite its
liabilities), British Telecom is well-positioned to speak to all
sectors regarding ESG.
British Telecom, or BT as it is now known, is sponsor to
Europe’s largest corporate pension fund. The €36.4bn entity
has been a responsible investor longer than most. In 2000,
when other UK schemes were coming to terms with the
requirement to state their position on ESG, BTPS was already
clear that appointed asset managers had to evaluate their
underlying holding thus: “A company run in the long-term
interests of its shareholders will need to manage effectively
relationships with employees, suppliers and customers, to
behave ethically and to have regard for the environment and
society as a whole.”
Today this belief is enacted as one of the ten Hermes
Principles (Hermes is BTPS’s wholly-owned subsidiary asset
manager).
Donald MacDonald, former telephone engineer and current
scheme trustee, points out that under the aegis of Alastair
Ross Goobey from 1993, Hermes defined much of modern
corporate governance. There are echoes of the Hermes
Principles in the UN PRI, whose board MacDonald chairs.
16
Focus on ESG separately from investing does not seem
appropriate, however. “BTPS is not an ‘ethical’ investor in
the narrow sense of that description. We are a mainstream
Responsible Investor that seeks to integrate ESG analysis into
our normal investment process,” he declares.
Paul Lee, a director of BTPS Management, explains further. “If
you look at what drives companies’ success, it is the strategy
for the next three to four years, not quarterly earnings. The
strategy is not evident from the quarterly figures. It is heavily
reliant on ESG factors as defined in the Hermes Principles.
We disagree that these are extra-financial factors. We believe
that they are financial factors not yet recognised by market
indicators.”
Defined contribution
Like most UK corporates, BT has closed its final-salary
arrangement in preference for individualised DC. As such,
DC plans present insightful cases of how large groups of the
population feel about Responsible Investing.
The £450 Logica DC plan serves IT programmers in the
UK; an educated, literate group. Over the past decade,
there has been little appetite from the membership for
any ‘Green’ offering in the scheme. Simon Baynes, Plan
Chairman, says: “We listen to members and the one thing
they really pushed us on was a property fund. We haven’t
received much interest in Responsible Investing.”
At the other end of the spectrum lie members of the
Pensions Trust, a multi-employer arrangement for charity
and voluntary organisations. In a recent poll, members
put Responsible Investing second behind financial returns
on their priorities for the scheme. The other choices were
clear communication from the fund, and keeping risk to a
minimum.
Pension Trust Chair, Sarah Smart, nevertheless, says
she was pleasantly surprised by the high value put on
Responsible Investing. Translating members’ wishes into
actions is harder. Smart reckons that the cost of a multiasset, Responsible fund via an insurance platform costs
30-50 bps more than a conventional equivalent.
In the UK’s DC market at least, obtaining the biggest pension
possible and investing in companies that operate responsibly
can present immediate headaches.
Consultants' Influence
The influence of investment consultancies varies across
countries in Europe. Data from Greenwich Associates
suggests 91% of pension funds in the UK use a consultant
but only 33% across the rest of Continental Europe.
In our RFP research, 54% of searches were conducted via
an adviser. Although the data is anonymised, it is fair to say
that the great majority of consultancies involved were wellknown. We find that only 15% of survey respondents require
their consultants to be PRI signatories.
Among the global advisers, Responsible Investing currently
sits alongside traditional financial analysis. For example,
Mercer awards an ‘ESG rating’ (ESG1 to ESG4) to asset
managers (see Table 9 overleaf), and Towers Watson
undertakes an ‘Active Ownership Watch’ which includes an
assessment of the manager’s ESG analysis and integration.
Each of these assessments sits alongside the mainstream
scorecard, the findings of which are gradually being
integrated into the mainstream analysis. This separation
may come as a surprise. According to Emma Hunt, who leads
Sustainable Investment at Towers Watson, understanding the
impact of ESG integration on portfolio performance, and the
ability of portfolio managers to add value to their portfolios
through their application of ESG integration, is a work-inprogress.
Towers Watson recognises the organic, moving relationship
between ESG, other factors and the managers’ stated aims
and strategy. “We find understanding a manager’s process
and rationale for ESG integration is an important input,
although it is just that,” says Hunt. “The real value is down to
the individual portfolio manager’s skill. Does ESG integration
lead to the individual portfolio manager making better
portfolio decisions?”
She gives managers’ reactions to the BP oil spill as one
example. “We interviewed managers for a sense of their view
of the incident, and their understanding of its implications for
their investment. The responses were stark. Some managers
were proactively seeking information from the company,
their customers and other stakeholders to better understand
the investment implications of this increasingly profound
situation as it unfolded. Others took a passive, wait-and-see
approach, watching from the sidelines of how the situation
unfolded. We were discovering how profound investors’
knowledge of the company and how an ESG factor may
impact that company truly was. That is ESG in action – or not
in some cases.”
Integration
Olivier Cassin, Head of Research and Development at search
specialist, Bfinance, takes up the question of integration.
He believes that there are fewer than 10 equity managers
currently active in the European institutional market whose
processes truly combine ESG and conventional financial
factors.
“When you drill down, there are many who buy in ESG
research from external providers, or which have one
dedicated ESG researcher without much influence,”
he explains. “This is not what I would describe as truly
integrated.”
Bfinance conducts 80 searches per year for institutional
investors globally, so Cassin is well-placed to comment. His
estimate nevertheless will come as a surprise to many, given
that globally there are 424 asset manager PRI signatories.
For Cassin, PRI is a framework but does not demand that
much from signatories. He interprets it as a starting rather
than an end-point. Few would argue with this observation:
the Principles are there to be enacted in ways signatories see
fit. Their actions are not expected to be homogenous, except
perhaps in spirit.
As an analyst of asset management styles, Cassin sees variety
in approach and performance of ESG strategies. “If you look
at portfolio holdings, you can see biases derived from popular
ESG ideas such as biotechnology or clean energy,” he says.
Such dispassionate analysis will be welcomed by all seeking
the best for their beneficiaries. Cassin concludes that some
pension funds start off with a relative weighting for ESG
which moves both up and down during the selection process
as they learn more about each prospect’s style and sources
of performance. “There is a trade-off between fiduciary
responsibility and ESG,” he concludes.
Steve Birch, Head of Manager Research at consultancy,
Hymans Robertson, shares Cassin’s belief that PRI is a
starting point. “Our first question on incorporating ESG
is simple: ‘Is the manager a signatory of PRI?’” he says.
Hymans finds, however, that the extent of incorporation
is what really matters. “It’s less to do with the numbers of
researchers or analysts and more to do with the effectiveness
of incorporating ESG into the overall decision-making
framework,” he says.
17
Consultants' Influence
While PRI is now part of quantitative due diligence, Birch
believes that only qualitative assessment gives a true picture
of how each manager’s ESG analysis is adding or subtracting
value for clients.
Until recently, there has been significantly greater interest
in ESG from Hymans public sector clients than from their
private sector clients. “This has come about largely due
to pressures brought about by elected members of the
Councils”, comments David O’Hara, Senior Investment
Consultant and ESG specialist at Hymans Robertson.
“Although we expect the interest from public sector schemes
to continue to increase, we also anticipate a pick-up in
interest from private sector clients. As Corporate Social
Responsibility becomes more of an issue in boardrooms, it
is likely that companies will examine how they are dealing
with environmental, social and governance issues across the
business – including within the pension fund.”
Weighting ESG
Our research suggests that more than one-quarter of all
RFPs issued by European pension funds in the last three
years make mention of ESG criteria. How the answers are
ultimately incorporated into decision-making varies. Here
below, however, is one example of a common method of
integration.
The administering authority for the £2.4bn Avon Pension
Fund in the South-West of England recently sought an
unconstrained global equities manager. In the initial tendering
process, the Fund’s investment panel gave a 5% weighting
to ESG factors. It was also made clear that PRI would have
an influence as the fund is working its way to becoming a
signatory.
Rating managers
By the end of May 2010, investment consultancy, Mercer had
analysed over 3,500 investment strategies on ESG criteria.
When assigning the ratings, Mercer categorises managers into
four groups – ESG1 (the highest rating) to ESG4 (the lowest
rating). For a strategy to be assigned an ESG1 rating, the
investment team must have demonstrated market-leading
capabilities in integrating ESG and active ownership in the
following processes:
• Generation of investment ideas.
• Construction of portfolios.
• Implementation of their active ownership practices
(through voting and engagement).
• Demonstration of the degree of firm-wide commitment
to ESG issues.
At the bottom end of the scale, an ESG4 rated manager is
considered to be lagging across all of these issues with little
indication of intention to improve practices in either ESG
integration or active ownership practices.
Mercer said "The standards which we apply in determining
ratings are, naturally, somewhat subjective. Clearly, we
could apply softer standards and award a larger number
of ESG1 and ESG2 ratings. However, our intention is to
clearly distinguish the groups which are, in our opinion,
leading the way."
Table 9: Mercer’s Distribution of ratings for investment
strategies within asset classes (end May 2010 – 3,500 +
strategies).
Table 8: Avon Pension Fund's initial evaluation of global
equities managers
Equity
Fixed Income
Property
Infrastructure
Private Equity
Hedge Funds
Other
Investment Process
Corporate Governance &
Responsible Investment
Risk Management &
Portfolio Construction
Resources
Corporate Structure
Source: www.mercer.com
Performance
Fees
Client service
0%
5%
10% 15% 20% 25% 30%
Source: www.bathnes.gov.uk
18
ESG1
%
1.5
0.0
3.3
0.0
2.8
0.5
0.0
ESG2
%
7.0
2.0
16.7
12.3
24.8
2.5
7.4
ESG3
%
44.2
18.2
55.5
50.9
29.4
19.3
17.0
ESG4
%
47.3
79.8
24.4
36.8
43.1
77.7
75.5
Looking Forward
Most pension funds in Europe are required by law to consider
ESG factors.
For a growing number of funds, this obligation is best met by
adoption of the UN’s PRI, a global commitment to investigate
ESG and encourage the same of peers and service providers.
There are now more than one hundred PRI signatories
among Europe’s asset owners and this report has sought to
investigate their influence in the wider context of Responsible
Investing.
A report commissioned by the UN in 2009 claimed that
very few asset owner signatories to the PRI were promoting
acceptance of the standards in the investment industry.
The findings of our survey indicates that the ‘very few’ is no
longer accurate. The fraction is growing year by year. We find
that 17% of RFPs issued this year explicitly ask prospective
managers whether or not they are PRI signatories.
Given the PRI only started in 2006, this is a startling adoption
of international standards. As our example of Unipension
of Denmark shows, PRI is not optional for service providers:
sophisticated asset owners are now restricting business
to those commercial firms which share their genuine
commitment to ESG.
PRI Chairman Donald MacDonald believes that collective
investment activities will surpass the current trend for
collective engagement activities among members. Moreover,
he is convinced that the Board has to remain in the hands
of asset owners rather than managers to avoid overlycommercial pressures.
This should come as welcome news to pension funds large
and small: the chance to work together, across national
boundaries, on responsible investments in a collaborative
atmosphere with agents near but not uncomfortably close to
negotiations.
At the same time, as Olivier Cassin of Bfinance points out,
PRI is merely a starting-point; a framework. Insiders at the
organization itself describe it as a ‘big tent’. And several Dutch
pension fund respondents told us there is much more that
could be done.
1
Fundamentally, there is no overwhelming proof that
ESG managers achieve superior risk-adjusted returns
to conventional managers. Some avant-garde pension
funds such as Nottinghamshire County Council binned
their Responsible Mandates after several years’ worth of
underperformance. Likewise, scant evidence has emerged
following the BP spill in the Gulf of Mexico that ESG analysts
are wiser than anyone else. Most seem to have been as
satisfied as other investors with the processes of BP and its
contractors.1
The answer may be that the world needs more not less ESG
analysis. ESG, after all, is not an alternative to conventional
investing: it is a mode of analyzing investments in addition to
the scrutiny of financial figures and executive presentations.
The case for ESG is that it gives a more holistic view.
The results from our survey suggest that, pension funds
understand this but some lack the resources to fund the
greater view. Working together via the PRI as well as national
and regional forums may solve this problem.
Ignoring ESG blindly is not prudent, especially if one looks
at the growing tide of regulation in these areas that falls on
investee companies. Everything from CO2 emissions to waste
disposal to building safety becomes more expensive. At the
same time, national and financial regulators are increasingly
looking to institutional investors to do more in monitoring
investee companies’ conformity with these regulations.
Pension funds do not need to take on the character of
evangelists about ESG. Some very prominent PRI signatories
in our survey described themselves as neutral in attitude. This
seems fair: to back enquiry into the workings of companies
beyond the financial figures without presumption about what
the extra investigation will reveal.
PRI is rightly described as a framework. How that frame
gets filled will vary from institution to institution. But this
report does prove that more and more pension funds are
considering ESG factors in their process. More and more
funds are availing themselves of the communal power of the
PRI to achieve this goal.
Oliver Bonnet, Head of RI at ERAFP singled out Oekom of Germany as one exception here.
19
Author biographies
Cindy Rose is a Head of SRI Research on the Global Equities
Team at Aberdeen Asset Management. She conducts SRI
research and analysis on companies in which the ethical funds
invest. Cindy joined Aberdeen via the acquisition of Glasgowbased Murray Johnstone in 2000. At Murray Johnstone, Cindy
worked as an investment writer and web editor. Previously,
Cindy worked for United States Tax Court, Washington DC.
Brendan Maton is a freelance journalist and researcher.
He has covered retirement systems in Europe for 15 years.
He spent eight years in the Financial Times Group and still
contributes to FTfm.
Cindy graduated with a MSc in Comparative Literature from
the University of Edinburgh.
Participants A
3M Spain & Portugal
Abelio
ACGME (Association de Retraite des Cadres du Groupe Mornay Europe)
Adecco
AEA Technology plc
AG2R Prevoyance
AGBAR Grupo - Sociedad General de Aguas de Barcelona
Ahold St. Psf.
Air Liquide
Akzo Nobel
Alliance & Leicester
Anima Arti & Mestieri Fondo Pensione Aperto
AP Fonden 1
Araba Eta Gasteiz Aurrezki Kutxa II
Arvika Kommun
Atlanticomnium
ATP Private Equity Partners
Ausgleichsfonds derAHV (Alters- und Hinterlassenversicherung)
AVIVA
Ballangen Kommune
Banco Popular
Banque Cantonale de Geneve
Banque de Patrimoines Privees
Baring Asset Management France
Barnardo's
Bergen Kommunale
Bfinance
BKK - Schwarzwald-Baar-Heuberg
Bobst
British Broadcasting Corporation
BT Pension Scheme
Caisse de Pension du Commite International de la Croix Rouge
Caisse Paritaire de Prevoyance de l'Industrie et la Construction
CAMARCA (Caisse Mutuelle Autonome de Retraites Complementaires
Agricoles)
CAP Gemini Ernst & Young France
CAPGemini UK
CARCEPT (Caisse Autonome de Retraites Complementaires et de
Prevoyance du Transport)
Cardiff Council
Carillion plc
CARMF (Caisse Autonome de Retraite des Medecins Francais)
CARPIMKO (Caisse Autonome de Retraite et de Prevoyance des Infirmiers,
Masseurs-Kinesitherapeutes, etc.)
Caser Gestora de Fondos de Pensiones
CEMEX UK
CERN Pension Fund (European Organization for Nuclear Research)
CGRCR (Caisse Generale de Retraite des Cadres par Repartition)
A
20
Some participants requested to remain anonymous
Ingersoll-Rand International Ltd.
Inside Pensions
InterContinental Hotels plc
Jaguar Land Rover
Kellogg Brown & Root (UK) Ltd.
Kodak
Koelner Pensionskasse
KP - Konsumentkooperationens Pensionsstiftelse
KLP
Lafarge UK
Landkreis Schaumberg
Landstinget Gavleborg
Liverpool Victoria Friendly Society Ltd.
Lloyd's Register
Logica
London Borough of Brent
London Borough of Croydon
London Borough of Hackney
London Borough of Redbridge
London Borough of Tower Hamlets
LVM Pensionsfonds
LVMH Louis Vuitton-Moet Hennessy
Mediafond
Mercer
Metalektro (PME) (MN Services)
Midcounties Co-operative
Nestle
Neue Leben Pensionskasse
Next
Norrbottens Landsting
Northern Ireland Local Government Officers' Superannuation Committee
Nuclear Decommissioning Authority
Nykoping Kommun
Old Mutual plc
Opplysningsvesenets Fond
Ove Arup & Partners International Ltd.
Palmer & Harvey McLane Ltd.
Peek & Cloppenburg
PensionDanmark
Pensionskasse der Griesser
Pensionskassen for Sygeplejersker
The Pensions Trust
Pinsent Masons
Pirc
Probus Compagnie
CIA (Caisse de Prevoyance du Canton de Geneve)
Co-operative
Cornwall County Council
Costain Group plc
CPEV - Caisse de Pension L'Etat de Vaud
Credit Cooperatif
Cyngor Gwynedd Council
Danica Pension
De Eendragt Pensioen
De La Rue plc
Degussa UK Services Ltd.
Deloitte
Deutsche Bank
DHL
DIP (Danske civil og akademiingeniorers Pensionskasse)
EADS Deutschland
Electricite de France (EdF)
Electronic Data Systems Ltd.
Endesa
ENPAV (Ente Nazionale di Previdenza ed Assistenza Veterinari)
Environment Agency Pension Fund
ERAFP - Etablissement de Retraite Additionnelle de la Fonction Publique
Ergo Lebensversicherung
Ericsson
Essex County Council
Esso Benelux 'Protector'
Etablissement De Retraite Additionelle De La Fonction Publique
Ethicon S.A.Johnson & Johnson
Ethos
European Central Bank
European Patent Office
Eurosif
Evangelische Zusatzversorgungskasse Darmstadt
Experian
F. Uhlmann-Eyraud
Ferrocarril Metropolita de Barcelona
FIATC Seguros
Fondation de Prevoyance Edipresse
Fonditel (Telefonica de Espana)
Fondo Pensione Aperto Unipol
Fondo Pensione Dipendenti Gruppo SEA
Fondo Pensioni CARIPLO
Fondo Scuola ESPERO
FondoSanita
Fondsfinans
Forum For Sustainable Finance (Italy)
Freudenberg & Co. KG
FunktionaerPension
Gallaher plc
Geroa Pentsioak EPSV
GKN plc
Goldman Sachs International
Government Pension Fund - Norway
Groupe Burelle
Hamburg Notarversorgungswerk
Hampshire County Council
Hapag Lloyd
HeidelbergCement
Helvetia Versicherungsgesellschaft
Hewlett-Packard
Highland Council
House of Fraser (Stores) Ltd.
Hymans Robertson
Industriens Pensionsforsikring
ING Pension Fund
Procter & Gamble
Provident Financial plc
Provisum
PSA Peugeot Citroen
Realdania
Rolls-Royce & Bentley
Rolls-Royce plc
Sanofi Aventis Pharma Ltd.
Sacker & Partners
Selex
SIDECO
Simon Group plc
SNS Reaal Pension Fund
Societe Generale
Somerfield
Somerset County Council
South Tyneside Metropolitan Borough Council
South Yorkshire Integrated Transport Authority
Spar Handels
Spoorweg St. Psf.
SSE plc
St. Bpf. voor de Agrarische en Voedselvoorzieningshandel
St. Bpf. voor deMedia PNO
St. Psf. Elsevier-Ondernemingen
St. Psf.TDV
States of Jersey
Statoil Pensjonskasse
Stichting Co-op Pensioenfonds
Stichting Nedlloyd Pensioenfonds
Stichting Pensioenfonds IBM Nederland
Stork
Strathclyde
Surrey County Council
Svedala Kommun
Svenska Kyrkan
Swatch Group
Tate & Lyle plc
Taylor Wimpey plc
Telia Pensionsstiftelse
Thales Nederland St. Psf.
Thales UK
Total UK
Towers Watson
Trelleborgs Kommun
Tyco Electronics UK Ltd.
UKSIF
Vallourec
Veolia Environnement
Versorgungswerks der Architektenkammer NRW
Vervoer
Vinci plc
Vita Group
Vittoria Assicurazioni
Vodafone Ltd.
Volker Wessels Stevin
Waterbouw St. Bpf.
Weir Group plc
Wesleyan Assurance Society
Westland Helicopters Ltd.
West Midlands Pension Fund
West Pensionskasse & Pensioenfonds
William Hill plc
Wiltshire County Council
Wincanton plc
Xerox Ltd.
21
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1 Bread Street
London EC4M 9HH
Tel +44 (0) 20 7463 6000
Fax +44 (0) 20 7463 6001
www.aberdeen-asset.com
Important information:
© Aberdeen Asset Management
No part of this report may be reproduced electronically or in print without written permission from
Aberdeen Asset Management.
Pensions Intelligence is a service provided by Aberdeen Asset Management.
02 2019_0910

Pensions Intelligence

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