A fanfare greeted the launch of the Principles for Responsible Investment earlier this year. UN Secretary General Kofi Annan urged institutional investors to adopt the principles at the high profile US launch at the New York Stock Exchange. The principles saw the light of day after a year long process co-ordinated by the UN Environment Programme Finance Initiative and the UN Global Compact. With such a hullabaloo at its birth, hopes are high that this initiative will trigger a great leap forward in the adoption of ethical investing principles.

In the Nordic region interest is high, with seven regional institutions – AP2, Folksam, Norwegian Government Pension Fund, Storebrand, Banco, Ethix and GES Investment Services – having signed up. The six voluntary principles are backed up by 35 possible actions that institutions can adopt to integrate environmental, social and corporate governance considerations into their investment activities.

There is a feeling that the principles are a step in the right direction and go as far as they could reasonably go right now. “I think they are really good, and the best we can expect at the current moment, but they will develop,” says Henrik Syse, at Norges Bank, who heads a group within the bank working on policy to exercise ownership rights on behalf of the Norwegian Government Pension Fund. “It is important to see it as a step in a process. I think they are strong enough to be meaningful.”

Ethical standards long underway

The Nordic countries have a head start as far as ethical standards are concerned. Legislation and regulation in Sweden, Norway, Denmark and Finland set high standards for environmental and social factors and gender equality. The Swedish Code of Corporate Governance, for example, effective from July last year, imposes a ‘comply or explain’ principle – listed companies with a market capitalisation over SKr3bn have to include a corporate governance report in their annual reports and if they have deviated from the code they must explain why.

In Norway, the decision of the Norwegian Petroleum Fund (now the Norwegian Government Pension Fund) to engage with the companies it invests in on implementing ESG principles has had a major effect on a wider base of investors.

“I would say in the past year, since the Norwegian Government Pension Fund established their ethical criteria, there has been a huge shift in awareness, at least within Norway,” says Christine Tørklep Meisingset, head of SRI at Storebrand. “It’s a lot easier to get attention in the media, and several of our competitors are moving in that area. What is in the criteria is hard to disagree with, because it represents a minimum of what the Norwegian people would accept.”

The adoption of ethical criteria represented a revolution for the government pension fund, which previously operated a hands off approach in the practices of companies it invested in.

“Because it’s such a broadly invested fund with small stakes in each company the conventional wisdom on this was these are not the sorts of investments that gain much by being actively engaged,” says Dr Syse. “Over the last few years partly due to Enron and similar scandals, partly due to a growing appreciation of the importance of these issues, that view has changed. And today corporate governance is taken very seriously. I see the same thing in large pension funds in Sweden and Denmark.”

Emma Hunt,
Mercer Investment Consulting

Emma Hunt, senior associate at Mercer Investment Consulting, agrees that it is the bigger funds, particularly state sponsored funds in Sweden, as well as the Norwegian Government Pension Fund, who are leading the way.

“Confidence is growing within Nordic investors in this area, particularly among larger funds and state sponsored funds,” she says. “There is no reason to believe this won’t filter through to larger corporate plans, especially across companies that want to align their corporate mission with their pension funds. For example a number of corporates say they believe environmental, social and corporate governance issues can impact on their business performance and have adapted their strategies as a result. There is pressure to say, if you believe that, how are you translating that to your pension fund?”

Detractors are hard to find, however, and Ms Tørklep Meisingset admits that at Storebrand’s annual SRI conference organised earlier in the year, it proved difficult to recruit anybody to argue the case against ESG. There has been some opposition from the Progress Party in Norway, the far right political party that is currently garnering a fair amount of popular support.

At the asset manager level there is some foot dragging: they have to heed their clients’ wishes on how their money is invested. This is the point of view expressed by Henrik Fænøe, head of equities at Danske Capital: “We adjust to the norms that our customers want us to follow because we manage money for a lot of different customers so we cannot have one uniform policy for all. On the other hand, we do have some official views on corporate governance that could be related to this, so to some degree perhaps we are following these principles. Our views on corporate governance are fairly broad but are most important in our Danish equity investments.”

This underlines the fact that the impetus for the SRI comes from a number of asset owners, not just asset managers. The owners can dictate how they want their money invested. And the backing of some major global institutions should be enough to persuade other investors to join, so the argument goes.

A key effect of the launch of the principles has been the level of interest and awareness it has raised among investors. Once rolling, this ball should continue to gain momentum, stimulating greater action along the way. The process has already started. In May, Ethix hosted a seminar in Stockholm attended by some participants who were interested and wanted to find out more - AIG Europe, AP 3, AP 7, AIG, Robur, Sampo Fund Management, Société Générale Asset Management, and the Swedish Church. Also in attendance were consultants Wassum, and Colin Melvin, director of corporate governance at Hermes Pensions Management, one of the prime movers behind the design and launch of the principles.

A valuable discussion

“Those who were there says it was a highly valuable discussion,” says Ulrika Hasselgren, vice president and founder of Ethix SRI Advisors. “And because Colin was there and he has been involved in the development process, he was the best person to answer all the practical questions and questions of implementation. Several participants says they had taken it up with their board, they were thinking about it and hoped to sign.”

Christina Kusoffsky Hillesöy, a spokeswoman for AP3, confirmed the fund was in the process of “digging into the principles” and a decision on signing up rested with its board. AP3 already includes ethical considerations in its investment policy. “We try to ensure that the companies we invest in identify and manage social and environmental risks in a way that creates shareholder value,” she adds.

Also considering whether to sign up is Danish pension fund ATP, which by this August should have made its decision. “We want to see how far it corresponds to our own current social responsibility guidelines,” says Claus Wiinblad, head of Danish equities. “We don’t want to sign up to something that afterwards we might regret.”

ATP’s current policy forbids investment in companies that breach UN conventions, or Danish or local laws. An internal committee which includes the CEO and CIO screens out companies for exclusion.

ATP’s reservation about joining points to a weakness of the principles: an engagement programme needs resources. ATP already practises active engagement in Danish companies where it has significant shareholdings. “If we own 6, 8 or 10 per cent of a company in Denmark we consider it a responsibility to engage in active ownership,” continues Mr Wiinblad. “But with some of the small positions in our European portfolio at the moment we don’t have the resources for active engagement.”

Causes for optimism

So how well will this initiative work? Ethical, social and corporate governance issues have been around for a long time; there has been a lot of discussion, but rather marginal action. Advocates maintain that what gives cause for optimism this time is the inclusion of a reporting element. Principles five and six commit signatories to work together to increase effectiveness and then to monitor and report back on progress, so the onus will be on them to demonstrate they are actively working to implement the proposals and to show what they have achieved.

Dr Syse thinks this will take the movement forward. “Together we will be able to have influence, we will challenge each other, we will raise issues and try to get similar funds on board,” he says. “When we report in years ahead on how we follow up on this, I think reports will be eagerly read by other investors.”

Many long-term investors like pension funds are convinced that in the longer term investing in a way that takes account of ESG principles will pay off, even if hard evidence is currently thin on the ground. Dr Syse says: “I think there is a broad consensus in the research community that long-term investors that engage in environmental, social and corporate governance issues perform well. We are talking about long term horizons here so it’s too early to say in financial terms what this means. But there is broad consensus that these issues do count, financially speaking.”

Also significant is the fact that the principles are governed by asset owners, rather than asset managers – asset managers are bound to follow the rules laid down by the owners.

“There are a number of factors pushing asset owners to consider this, even those who previously say we can’t consider this; we have performance goals and that’s it,” says Ms Hasselgren. “There is increased focus on ESG issues, corporate scandals, and the media is playing an important role writing about these concerns. When asset owners formulate a policy the asset managers develop products and solutions.”

Printer friendly version

Email this article to a friend