SRI and Pensions – a marriage of convenience

CEO of NOW: Pensions Morten Nilsson

CEO of NOW: Pensions Morten Nilsson

Even though a number of Socially Responsible Investment vehicles (SRI) have had to close down, SRI has gained significant traction over the last 10 years.  Despite the financial crisis, which has somewhat shifted investment focus, a belief that it is possible to maximise returns while investing responsibly is becoming more of a trend.  Have pensions, given their inherent long term nature, supported or bucked this trend?  And what is the future for SRI in pensions, given the considerable changes the industry is facing over the coming years?

The US Social Investment Forum defines SRI as “integrating personal values and social concerns with investment decisions”.  Broadly, SRI will have some consideration of workplace, social, cultural, religious, environmental and economic issues[1].  UK Sustainable Investment and Finance (UKSIF) found in 2000 that, out of the top 500 UK pension funds, 59% incorporated SRI principles into their investment processes[2].  At the time, SRI funds invested in the UK amounted to £51.7bn, of which £25bn was pension funds[3].

Since 2000 the UK SRI market has continued to grow.  The European Sustainable Investment Forum estimates “Core” SRI invested in the UK at £54.7bn as of 2011, and “Broad” at £884.2bn[4], and  a UKSIF report in 2011 found that “funds that start on the responsible investment journey tend to deepen their practices over time”[5].  They also highlighted that smaller funds have caught up with the predominantly larger funds that dominated SRI a decade ago.  Funds responding to their SRI survey were 51% and 49% under and over £1bn in assets respectively.

So clearly SRI isn’t going anywhere.  François Passant, Executive Director of Eurosif, has stated that:

…it has been shown that the inclusion of ESG [Environmental, Social and Governance] factors … is … becoming mainstream…  Certainly there is a long way to go but the study[6] clearly shows that pension funds take their fiduciary duty seriously.

This shows that fund managers increasingly consider social responsibility synonymous with long term financial return.  Some have claimed that, had SRI been more prevalent, the pensions industry needn’t have taken a hit during the financial crisis[7].  Whilst it seems optimistic to expect SRI to act as insulation for the industry against shocks as widespread as that, certainly SRI can only gain importance in a world where pensions have to look longer and longer term.  The ageing population and coming auto-enrolment mean that high and dependable returns will be more important than ever.  With the scandals in the financial industry it has been evident that there is a clear demand for higher moral standards to avoid future scandals and to regain trust in the industry. Signing up to SRI standards is good step, but SRI needs to be more than just a box ticking exercise. It needs to be fully integrated in the business model, the products and business as a whole. SRI could be a means to achieve that, so I believe it is certainly here to stay.

[1] Ellipson, 2001Socially Responsible Investment by Pension Funds: A State-of-the-Knowledge Report.  Ellipson Ltd.

[2] Mathieu, Eugenie. 2000Response of UK Pension Funds to the SRI Disclosure Regulation.  UK Social Investment Forum

[3] Sparkes, Russel. 2000Social Responsible Investment Comes of Age.  Claros

[4] Eurosif, 2010European SRI Study 2010.  European Sustainable Investment Forum

[5] UKSIF, 2011Responsible Business: Sustainable Pension 2011.  UK Sustainable Investment and Finance

[6] Eurosif, 2010European SRI Study 2010.  European Sustainable Investment Forum

[7] Professoinal Pensions, 6th June 2011SRI can generate strong returns.  Incisive Media

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