Investment managers politely call it the ‘disconnect’ when talking with their corporate pension fund clients. In reality it’s an aching gulf.
While companies are falling over themselves these days to prove their green credentials and ensure they are not hit by risky business relationships, their pension funds are hiding in the shadows. Few have taken measures to look at environmental, social or governance issues concerning their huge pots of retirement assets.
One unsettling finding of the interesting recent survey of UK corporate pension plans by the UK Social Investment Forum, was that out of 278 companies surveyed, 153 declined to participate. Had the survey been an opportunity to brandish the latest corporate wisdom on sustainability and climate change, it’s certain the participating numbers would have been much higher. It’s difficult therefore to argue that corporates don’t have the time to fill out such surveys or to devote time to the issue.Speaking at the UKSIF launch of the survey, Reg Hinkley, former chief executive of BP Pension Trustees, the £31bn (€45bn) fund for the global oil and gas company, and a member of the UKSIF sustainable pensions advisory board, said corporate pension trustees were nervous about mixing their fiduciary duty with issues that were perceived as politically motivated.
He has a point, although there are few people around who still argue that climate change is a political axe. Many companies have recognised it as the defining issue of our times and are rapidly aligning their business models accordingly.
A counter argument is that the fiduciary duty of corporate pension fund trustees needs to take into account the commercial logic of social responsibility being pushed by their sponsor. After all, that is where investment returns could lie. Shareholders expect nothing less of the companies they invest in, so why should pension fund members get any less?
Instead, there are a couple of unspoken issues that underpin corporate pension fund inertia. The first is that companies do not like to rock the boat for their peers. Imagine company A’s pension fund decides it might vote via its fund manager against an issue at company B, which happens to be a competitor, and you get the picture.
The same rule applies to corporate legal actions. Company pension funds rarely sue another corporate for damages. Instead, campaigns for compensation after corporate misdemeanours are led by public sector pension funds.
Another concern for trustees is whether a corporate pension fund employing a responsible investment strategy might stray into strategies its corporate sponsor perceived as risky.
Again, there is a counter position that pension funds could do better by levering on the market knowledge ofthe sponsor: BP, for example, may be able to give its own fund a head-start by passing on knowledge in the areas of renewable energy where the company is investing millions.
Hinkley, a progressive in this area, argued that the issue of responsible investment needs care and consideration on the part of trustees. Optimistically, he said most pension fund boards took a lead from the attitude of the sponsor company.
That could imply we are set for a radical change in the SRI approach of company pension funds, although on the evidence so far it is hard to get excited. One practical idea might be for corporate pension funds to come together and debate the matter. That would give out a clear public signal that behind the action on corporate social responsibility there is also a desire to start engaging and investing responsibly on the part of the pension fund.