Institutional fund managers and socially responsible investment
This page is aimed at institutional fund managers who offer
discretionary portfolio management services. Whether you manage charity funds,
or local authority or corporate pension schemes, this page is an introduction to the
services and research EIRIS provides and explains why many fund managers are
now taking on board socially responsible investment (SRI) issues.
From the moment that the amendment to the Pensions Act 1995
came into force in July 2000, ethical investment became an issue that no
pension fund manager could afford to ignore. The amendment requires pension
fund trustees to state their policy on social, environmental and ethical
issues, which in practice means that fund managers need to be ready to address
them too. Existing or potential fund managers of pension schemes can find
further information on the
Pensions Schemes page.
Several fund managers already offer an institutional fund management
service. Fund managers who do not offer any
ethical investment selection and monitoring risk losing a competitive edge and
may even miss out on the opportunity to win or retain future investment
business, especially in the area of pensions and charity investment.
Charities provides further information for
fund managers in the specific area of charity investment.
EIRIS has more than 20 years’ experience in helping people
invest according to their principles or concerns. We are the
Already many pension funds are responding positively to the
new pension regulation. A UK Social Investment survey in 2000 found that 59% of
pension funds incorporate socially responsible investment into their investment
strategies either by engagement or by specific request to the fund manager.
These include the three largest funds, BT, British Coal and the Universities
Superannuation Scheme. An EIRIS/NOP survey in 1999 demonstrates clear demand
from members for ethically invested pensions. This found that over
three-quarters of pension scheme members think their fund should operate an
ethical policy, making it likely to encourage trustees to establish ethical
investment policies, or to further develop existing ones.
Many trustees are turning to their fund managers to
determine the approach that they should take and to implement the policy on
their behalf. Some trustees have mandated their fund managers to take into
account social and environmental factors insofar as they affect companies’
financial performance, when selecting the shares in which they invest the
scheme’s assets. Others have asked fund managers to engage with companies on
issues of concern.
Apart from meeting clients’ needs, there may be other good
business reasons for taking social and environmental factors into account in
the investment decision making process. Studies suggest that investment
performance can be affected by companies’ records in areas such as employment,
social impact, and pollution control. Paying attention to social and
environmental issues can characterise a business that is well-managed
generally.
Fund managers who look for an ethical approach in the
companies they select, or who encourage companies to improve their practice,
learn more about each company and any potential risks of which they might
otherwise have been unaware. Increased ongoing understanding of a company, and
its direction, aids decisions about whether to add or reduce the size of
holding in its stock, as well as how to respond to developments such as
takeovers, rights and other share issues.
Approaches that fund managers may want to consider can be
divided into "house" and "tailor-made" approaches. House
approaches are based on issues and a strategy developed by the fund manager,
while tailor-made approaches entail implementing the client’s own ethical
investment policy. Many fund managers may wish to combine both approaches,
developing their own house style suitable for most clients, while having the
capability to implement bespoke ethical policies for particular clients.
Two models for developing house approaches are given below.
Fund managers implementing this approach would apply it
across the entire investment portfolio, because they believe that taking into
account social and environmental factors in the investment decision-making
process will improve shareholder value. In particular, fund managers may look
for indicators of reputation risk. They could then use a preference strategy,
applying a higher than usual market weighting to those companies assessed to be
managing risks well, and investing less in those which do not have a good risk
management strategy. Fund managers could also use an engagement approach if
they believe this will improve a company’s policies or practices and that any
such change will increase the value of the company’s shares.
This approach might take into account issues of commonest
concern. If implemented through a screening or preference strategy, fund
managers might want to back-test the policy to measure the effects on financial
performance. The ethical option approach could also be implemented using an
engagement strategy, targeting, for example companies operating in a high
environmental impact area which do not have good environmental management
systems in place.
There are a number of areas that fund managers may find
helpful to consider when looking at which sort of house approach to develop.
This section looks firstly at factors concerned with the fund manager’s
organisational structure and secondly at matters relating to the implementation
of the house policy.
·
How does ethical or socially
responsible investment (SRI) fit with the fund manager’s overall business
strategy? Is it an area they wish to take a lead in? Or is it a project for a
small team, to deal with the needs of particularly enthusiastic clients?
·
What resources are available?
Engagement strategies are likely to be quite labour-intensive, as they require
fairly extensive communication with companies, good record-keeping, and systems
for follow-up, monitoring and reporting. Preference strategies may require
analytical software to ascertain the effects on risk and return. Fund managers
will also need to look at their compliance systems, to ensure that house SRI
approaches and individual client SRI mandates are properly implemented.
·
How tailored are the services provided
to individual client requirements? And what is the client base? If the fund
manager has quite a centralised structure, then it may prefer to develop a
house approach. If bespoke services form a major part of the organisation’s
business, then systems will be in place that allow tailor-made SRI strategies
to be implemented. If the fund manager has a number of local authority clients,
it will probably be familiar with environmental issues. Similarly, those with a
range of charity clients may have an understanding of other ethical concerns,
such as third world issues. They will also have experience of implementing
different investment strategies for different clients. As a general rule, fund
managers will find it much easier to develop SRI approaches that are compatible
with existing systems, than to try to develop new approaches from scratch.
·
Does the proposed strategy fit with the
fund managers’ investment style? Preference strategies may work well with asset
allocation based investment, where fund managers are accustomed to adjusting
sector weightings according to different factors. Reputation risk could be
another such factor. Engagement strategies may be better suited to
stock-picking styles of investment, as engagement requires greater knowledge of
individual companies. Those managing mostly passive funds may want to develop
ethical indices or focus on engagement strategies.
·
How much contact does the fund manager
have with companies? If communication levels are quite high, especially on
ethically-related issues such as corporate governance, then it may be
relatively easy to build on this and incorporate social and environmental
issues.
·
Does the fund manager operate an
ethical policy already for one of its funds, or in a branded in-house fund that
the group already markets? If so, it may be possible to use this policy as a
blueprint from which to formulate an overall house policy and to begin the
process of designing client-driven policies.
·
Alternatively, what ethical policies
have trustee clients developed already? Checking these offers the opportunity
to clarify how the policy may work in practice, and how it may develop. This
process should also help the fund manager to formulate a house policy to offer
other clients who have not yet drafted an ethical policy.
·
Who will be in charge of monitoring
compliance with clients’ ethical investment policies? If the fund manager
already manages an ethical fund, or has charity clients with ethical policies,
the systems used for monitoring compliance may be adapted for pension fund
clients.
·
Who will be responsible for
co-ordinating practice for all the fund managers within the group? One approach
could be to make one individual, or team, a centre of expertise or point of
reference.
·
Are there technical or software
implications relating to the implementation of the ethical policy? If so, the
team is likely to need to include an information technology expert from a very
early stage.
·
How will the fund manager report to
pension fund clients on the investment performance of their funds? Fund
managers will need to be able to demonstrate an understanding of the links
between the ethical selection process and financial performance. They will also
need clear audit trails showing the action they have taken, their reasons for
doing so, and the effect on the portfolio or on individual companies.
·
set up a pooled ethical fund to offer
as an AVC option
·
identify ways in which the portfolios
of existing clients can be improved to reflect their values more closely
·
monitor the social and environmental
performance of clients' portfolios over time
·
liaise with companies on social and
environmental issues of concern to clients
·
keep abreast of developments in the
rapidly changing field of socially responsible investment
See
EIRIS services for
investors and investment managers for further details
We provide the most comprehensive corporate ethical research
service available to private client fund managers, analysing companies in more
than 40 research areas. Our expertise is in researching companies and
developing socially responsible investment policies. Our skilled researchers
are devoted to ensuring EIRIS’s research is up to date and relevant. Each
researcher is recruited according to their knowledge and experience and each
works on an area of speciality, for example, human rights or the environment.
The five principal reasons why fund managers choose EIRIS
research services are that EIRIS:
·
is independent of any other
organisation, does not offer financial or legal advice, and does not promote
any particular view on the ethical issues we investigate.
·
has regular dialogue with companies and
excellent contacts within companies
·
offers comprehensive coverage of
companies around the world and of all key issues of concern to investors
·
provides data you can trust from expert
researchers
·
offers a bespoke service so that
clients receive information tailor-made to their individual concerns and
requirements
See
Why clients choose EIRIS
for more details.