Does Socially Responsible Investment really matter?

I think it does but twice now in recent weeks I have been in different meetings where Pension trustees (assets owners) have been urged to adopt responsible investment policies but I have been left wondering how seriously the financial services industry (as a whole) takes this issue? Or is this all just lip service?

Socially responsible investment (SRI) is not just about ethnical or green investment. Rather it is the belief that in the long term if you invest in companies that are well governedand act in a responsible way (i.e. no child labour, doesn’t destroy the environment, treat its workers well, doesn’t bribe public officials etc) then they will produce superior returns than companies who do not.

Nearly all large fund managers would claim to invest in a socially responsible way (and of course they would say this wouldn’t they!) yet many do little or nothing about it? Do they really just see RSI as a marketing tool to take in gullible pension trustees when privately they either think it makes no difference or even harms investment returns?

When you challenge them about this they blame us the pension trustees for not being interested in SRI and not making it a priority. Which if true would be a fair comment. But surely the reason why pension trustees don’t appear to be interested in RSI is that many of our professional investment advisors do not tell us that this is a key issue?

They may talk at length (rightly) about asset allocation and (wrongly) about the relative merits of particular fund managers and the latest “star performers” but little or nothing about SRI.

Trustees are very dependent upon professional advisers. Probably too dependent but that is another question. Yet until the professional advisers start making a real issue out of SRI and hammer home the benefits then you must assume that they don’t really believe it makes any difference to investment returns. So if they don’t think SRI matters then don’t be too surprised if the trustees don’t either.

Hedge fund trimmer

SIP IT

A few weeks ago I went to a “pitch” for pension business by the Hedge fund arm of a large international finance company. It was a confident and well delivered presentation. The “only” problem was that the fund managers failed to even consider Pension fund “Statement of Investment Principles” (SIP). 

By law each pension fund has to have a SIP. Many SIP's requires fund managers to put their money only in “socially responsible investments”. This is not just “tree hugging” but based on an important principle that investments in companies that do not for example exploit child labour, damage the environment treat their workers badly or bribe and corrupt local officials will produce superior investment returns. Fund managers also have to engage with companies and vote their shares. They need to have an audit trail that can prove what they are doing. 

Your typical hedge fund does none of this. No disclosure, no transparency and little regulation. Even if they had the will (which I doubt) to act in a socially responsible manner they could not even begin to explain how they could confirm with a decent SIP. Never mind how they could claim that they confirm with UN PRI (which is even more prescriptive than many SIP’s).

So, employer and employee trustees and all other representatives on pension’s scheme check your SIP and see how it deals with Socially Responsible investment. If it is no good then try and change it. If it is any good then ask all your fund managers (and prospective ones) how they apply it. It they can’t or won’t engage then sack ‘em.

(PC as always)