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Pension Fund Managers Must Balance Fiduciary Issues with “SRI” Desires

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“Guest contribution provided by Forex Traders”

Socially Responsible Investing, or more commonly known as “SRI”, has experienced enormous growth in both its appeal and application around the world, demonstrating a proactive bent on the part of investors to increase awareness of social, environmental, and corporate governance issues amongst businessmen, politicians, and the general public.  These figures are expected to grow, but pension managers must still wrestle with basic conflicts between legal fiduciary requirements and public pressure to be more socially and ethically responsible.

Studies from a few years back, before the recent economic slowdown, place one out of every nine dollars under management in the United States, or nearly $2.7 trillion, and one out of every six dollars in Europe, amounting to $2.2 trillion, as qualifying as “SRI” defined assets.  Socially Responsible Investing is defined generally to mean:

“Socially responsible investing, also known as socially-conscious or ethical investing, describes an investment strategy which seeks to maximize both financial return and social good.”

“Social good” is a broad term, but the constraints within SRI practices have made the following areas a focus for screening acceptable assets from an SRI perspective:

  • Governance and Ethics:  Includes transparency on policies and procedures, board independence, diversity, executive compensation, and attention to public concerns at large.
  • Workplace:  Includes labor diversity and relations, and employee health and safety.
  • Environment:  Includes corporate environmental performance and compliance with environmental regulations.
  • Product Safety and Impact:  Companies must produce safe products and services that comply with safety guidelines.
  • International Operations and Human Rights:  Include companies that support human rights and do not support governments that persist in denying the rights of their citizens.

Fund managers use a variety of both positive and negative screens to implement their various SRI allocation standards.  A negative screen would naturally exclude any companies involved in questionable activities, whereas a positive screen would include companies that supported desirable products and services.  Global investments bring the forex market into play where government exchange rate policies, related to the “USD CAD” pair for example, may also influence allocation decisions.  Due to concerns over financial performance, managers may also choose only the “Best of Sector” within each category of potential positive qualifiers.

The concern for financial return produces the very problem that pension fund managers must address in their pursuit of SRI appropriate asset allocations.  National pension legislation within North America and Europe tend to be highly conservative and require that the administrator act prudently to gain the highest return within acceptable risk limits for its participant population or risk litigation.  The general argument in favor of SRI is that stockholder value is maximized if all forms of value, including those of public stakeholders and employee populations, are maximized.  The counter argument is that accountability standards are lacking.

Surveys of pension managers reflect this conundrum of shareholder versus stakeholder value maximization.  Recent results demonstrate that the majority of pension experts remain wary of the presumed investment advantages of socially responsive selection criteria and object that SRI acceptance is primarily a result of public opinion motivating their decision-making based on reputational risk issues alone.  If there were clear cut evidence that SRI portfolios outperform broad industry averages, this issue would fade away, but studies in this area have been mixed.

Investment managers, however, do agree that SRI techniques will continue to grow support and will expand to include other asset classes beyond the present focus of company equities.  Even in the absence of a government mandate to apply SRI principles, pension fund managers will support the notion that financial performance includes the benefits to society.


Abhishek Shah

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