July 24, 2002
British Law Requiring SRI Reporting by Pension Funds Fails to Generate Best Practice
by William Baue
A recently released report identifies gaps between UK pension funds' stated commitment to SRI
issues and their actual implementation of SRI practices.
Two years ago, the British Parliament became the first legislative body in the world to require
reporting on socially responsible investing (SRI). The Pension Disclosure Regulation, which went
into effect in July 2000, amended the 1995 Pensions Act to require all UK occupational pension
funds to disclose the degree to which they take into account ethical, social, and environmental
considerations. While the act stopped short of stipulating socially responsible investing, this
transparency mandate was expected to increase SRI practice.
However, Just Pensions, a consortium established in
2000 in part to track the effects of the Pensions Act amendment, released a report last week
documenting the lack of progress in SRI practice. The anti-poverty charities Traidcraft and War on
Want manage Just Pensions, which receives financial support from the Community Fund. The Community
Fund supports groups that help the disadvantaged and work toward improving people's quality of
The report, entitled Do UK Pension
Funds Invest Responsibly? A survey of current practice on Socially Responsible Investing, was
based on in-depth interviews with 14 pension fund managers who control about 20 percent of all UK
pension fund assets. Report authors David Coles, a former partner in the international accounting
and consulting firm KPMG, and Duncan Green, a Just Pensions editor and project manager, also
compared funds' Statements of Investment Principles (SIPs) to the funds' actual practices.
"This report has intentionally highlighted positive examples of SRI best practice among pension
funds. It is, however, sobering that most of these come from only a handful of the fourteen funds
contacted," the authors state. "[A]ctual practice is . . . substantially worse than we had
expected. We can only conclude that poor practice by major pension funds on socially responsible
investment is the norm. Many pension funds are seriously exposed."
According to the
authors, the UK corporate sector widely accepts the view that poor management of ethical, social,
and environmental issues represents a business risk. Last year, for example, Morley Fund Management, a major London-based asset manager,
began requiring large UK companies to publish environmental reports. The Association of British Insurers (ABI) has introduced guidelines
for corporate disclosure of external social, ethical and environmental risks and policies for
managing those risks.
The report offers examples of best SRI practice by major pension
fund managers. For example, the SIPs at BP (ticker: BP), Hermes/British Telecom (BTY), and the
Universities Superannuation Scheme (USS) all stated why SRI issues should be considered to achieve
satisfactory investment returns.
As well, the report listed typical examples of what it
considered poor practice. For example, several funds' SIPs admitted that the managers do not take
SRI issues into consideration at all. Many funds' SIPs adopted wording that implied a commitment
to SRI principles, while their actual practices revealed scant implementation of SRI principles.
The report exposed gaps between stated commitment to SRI and the infrastructure necessary to
implement SRI practice, even at some of the better funds.
Many funds hire firms to
manage their investments without establishing a means to monitor how the managers assess ethical,
social, and environmental issues and incorporate them into investment decisions. Such disjunction
undermines the intended effect of the Pension Disclosure Regulation by allowing funds to disclose
policies that bear little or no relation to their actual practice.
moot when obscured by smoke and mirrors. The report concludes with a warning of the stakes
involved when practice fails to conform to policy.
"Unless pension funds take urgent steps
to improve their implementation of socially responsible investment strategies, the case for
regulatory action by government will only increase," the report warns.