The Guardian
September 19, 2013
By Emma Simon

It’s easy to identify the companies that are leading the way on climate change. But how many of them follow the same principles when it comes to their pension funds?

We often think of European companies leading the way on good environmental practices. But a recent report by Independent Capital Management AG, took a closer look at the pension funds of a number of Swiss companies, all of which are listed on the global Dow Jones Sustainability Index. Not one fund it looked at adopted the same stringent investment policies as its sponsoring company.

This report (in German) included global brands such as NestléSwiss Reand Zurich Insurance – all of which have made very public commitments to supporting more sustainable business practices. It found that while some pension funds were starting to apply such criteria to their equity portfolios, few considered these factors when investing on bond and property markets. [EXPAND Read more]

The report did highlight those funds that have signed up to the UN principles of responsible investment and are taking steps to align investment strategies with a firm’s business practices. In the UK this includes companies such as Marks & Spencer and BT, as well as the pension funds of Dutch companies Philips, Rabobank and Shell. The Swiss bank Zurcher-Kantonalbank now invests 30% of its pension fund assets in sustainable sources.

Other reports have found, in the UK at least, more pension funds are focusing on responsible asset ownership. In 2011, the UK Sustainable Investment & Finance Association (UKSIF) reported an increased number of pension funds were now engaging with these issues. It found 60% of respondents were looking to align their investment mandate with that of their sponsoring company.

But this association report is now nearly three years old and it is difficult to tell whether this upward trend has continued. What’s more, while the findings were broadly positive – with more pension funds than previous years (BT, the Co-operative pension and F&C’s plan) awarded its highest “platinum” grading – most large pension funds did not respond at all. It’s probably fair to assume that they aren’t hiding their progressive policies under a bushel.

Campaigners say that while it is important to highlight leading pension funds, more should be done to identify firms where there is still a gulf between what a business preaches and what its pension fund does. Catherine Howarth, the chief executive of ShareWatch said: “In the UK there are a numerous examples of companies who have developed good corporate social responsibility policies, but their pension funds are not fully engaging with these issues at present.”

She said this applied to companies such as Unilever, GlaxoSmithKline and Kingfisher, which owns B&Q – all of which run substantial pension funds. Although Kingfisher’s pension was rated in “gold” category by UKSIF, Howarth said all should be making more progress when it comes to developing sustainable investment policies.

She added: “Unilever is a good example. Paul Polman [the chief executive] has talked seriously at company AGMs about the financial risks of climate change, and the business benefits of taking a sustainable approach. If it is in the best interest of the company to do this, then surely these same arguments apply to the pension fund?”

Of course, the pension fund doesn’t belong to the company, it belongs to its members – current and former employees. Large companies, such as Unilever, employ trustees who have a fiduciary duty to look after members’ interests, and ensure there are sufficient funds to meet the company’s pension liabilities. There are clearly financial risks in diverting assets away from companies like BP – which pays out a substantial proportion of its profits as dividend payments.

But groups like ShareWatch argue that there could be greater long-term damage if these funds ignore the climate change debate – particularly if this leads to a significant re-rating of the assets currently held. This problem has been exacerbated by the structure of company pension schemes. The pension fund is a separate legal entity and, for obvious reasons, its trustees should not be unduly influenced by the company’s own corporate plans. You wouldn’t want pension-fund assets being used to prop up a failing business venture, for example.

Caroline Escott, head of government relations with UKSIF, says: “The trustees’ duty is to make sure there are sufficient funds to pay thepensions due.” This, she said, can lead many to focus solely on the highest returns, encouraging short-term investment behaviour. “Trustees may be advised that the fact the sponsoring company is very sustainable should play no part in their thinking. In turn, the sponsor company may feel any attempt to influence their decisions would be seen as a failure of governance and best practice.”

But this independence should not prevent boards of trustees considering the business logic behind a firm’s environmental stance. And in reality many company finance directors sit on the investment board of the pension fund, so this should encourage greater alignment.

Many trustees are concerned that taking a more sustainable approach will dent returns. However, this “underperformance argument” has been refuted in a number of studies, including the recent UN environment programme report. Escott added: “Performance statistics are really blunt instruments and need careful use. Trends vary over different time scales.

“As long term investors, trustees need to think about long-term trends. We think it is very likely that, over time, assets invested in areas which, for instance, damage the environment, consumer finite resources extravagantly or don’t respect human rights will come unstuck: either government action or public reaction will damage their business model and destroy value.”

Kate Brett, a senior associate with consultants Mercer, said that public sector schemes generally had far more transparent and progressive investment policies. “But we are seeing more interest and engagement from the private sector. The new stewardship code has certainly helped.”

Many private schemes offer defined contribution schemes now offer a range of funds, including an “ethical” or socially responsible investment-mandated option. But Howarth said this isn’t an adequate solution. “This isn’t about not investing in certain sectors, like armaments. A sustainable financial model should be hard-wired into all types of pension scheme to deliver the best long-term results.”

“It’s now more pertinent for individuals to ask where their money is invested and demand smart investment policies that are alert to dangers like climate change.” [/EXPAND]