Text of Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit
1. Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit
The toolkit aims to help UK pension scheme trustees understand more about RI and how they might integrate RI into their schemes long-term investment strategy.
Just Pensions hopes it will be of interest to many stakeholders interested in pension schemes, institutional investment, fund management, as well as individuals interested in RI.
The toolkit can be read in its entirety or each section can be read as a stand-alone guide.
2. Introduction to RI
What is Responsible Investment (RI)?
RI combines investors financial objectives with their
concerns about social, environmental, ethical and
corporate governance (SEE/CG) issues.
What are the different approaches that can be used by
3. RI Approaches - 1
Engagement a.k.a. shareholder activism
Engagement refers to the processes through which
investors seek to improve a companys SEE/CG
performance by means of dialogue on issues of concern
and/or exercising voting rights at AGMs.
Integration occurs when active fund managers include
potentially material SEE/CG risks and opportunities into the
normal investment analysis, stock weighting and/or stock
The analysis can be undertaken by the fund manager
and/or specialist researcher, who feeds the information to
the fund manager.
4. RI Approaches - 2
Positive Selection a.k.a. positive screening
Positive selection is a process by which investors select
companies that have superior SEE/CG performance.
Positive selection can come in a number of forms,
including best-in-class and thematic investment.
Negative Screening a.k.a. exclusion
Negative screening refers to the exclusion of stocks and
shares from investment portfolios on SEE/CG grounds.
An example of a negative screen is to exclude
companies that make tobacco products.
5. Regulation & Guidance - 1
SRI Pensions Disclosure Regulation (2000)
The amendment to the 1995 Pensions Act came into force
on 3 July 2000, requiring trustees of occupational pension
schemes to disclose in their SIP:
The extent (if at all) to which social, environmental or ethical (SEE) considerations are taken into account in the selection, retention and realisation of investments; and
Their policy (if any) in relation to the exercise of the right (including voting rights) attaching to investments.
6. Regulation & Guidance - 2
Myners Review of Institutional Investment & the ISC
Statement of Principles (2001/2002)
The Myners Review (March 2001) recommended that
the Government should create legislation encouraging
Following discussions with the ISC, the Government
agreed to the ISCs proposal to pursue this
recommendation, initially voluntarily, through a set of
The Government agreed to conduct a review to assess
progress after two years.
7. Regulation & Guidance - 3
HM Treasury's Review of Progress on the
Myners Principles (2004)
The HM Treasury published its Review of Progress on the
Myners Principles and proposed a number of revisions to
the principles, including:
Principle 6 (Activism)to ensure that trustees comply with the ISC Statement of Principles and ensure that the ISC principles are incorporated into fund managers mandates.
Principle 10 (Reporting)to ensure that trustees report on their implementation against all the Myners Principles, make performance assessments available to scheme members and post on the scheme website the key information they provide annually to members.
The Pension Act 2004 requires that trustees must have sufficient knowledge of pension and trust law to run their schemes properly.
The Pensions Regulator published scope guidance for both DB and DC schemes on the topic of trustee knowledge and understanding, including a specific reference to RI and CG in relation to the schemes statement of compliance with the Myners Principles.
9. The Case for RI - 1
The Shareholder Value Case for RI
Many SEE/CG risks/opportunities are investor relevant.
Corporate Governance: An assessment by Deutsche Bank on the governance of FTSE350 companies at the end of 2000 & 2003 found that 10% of companies with the best corporate governance structures and behaviour outperformed those in the bottom 10% by 25%.
SEE Issues: Research commissioned by the Environment Agency Pension Fund found 85% of the literature review studies demonstrated a positive correlation between environmental governance and financial performance.
10. The Case for RI - 2
The Regulatory & Legislative Case for RI
The UK government clearly recognises the importance and substantial benefits to shareholders of taking potentially material SEE/CG risks and opportunities into account.
The Industry Best Practice Case for RI
The view of industry associations, such as the NAPF and ABI, on RI is best articulated in the ISC statement of principles.
11. The Case for RI - 3
The Legal Case for RI
Trustees can legally take account of SEE/CG issues in relation to their investments, so long as this delivers improved or equivalent financial returns, and is subject to the overriding requirements of trust law.
The Moral & Values-Based Case for RI
Investors, as owners of the companies in which they invest have a moral obligation to act to mitigate any negative social or environmental impacts of these companies.
12. First Steps - 1
Section 4 of the toolkit provides best practice first steps for
four different types of pension scheme:
The first steps outline:
Why do it?
Which schemes are doing this?
How can trustees do this?
13. First Steps - 2
DC schemes with members who have diverse values:
Trustees should ensure that the default fund is managed
appropriately in terms of RI issues and ensure that social,
environmental, ethical and corporate governance
(SEE/GC) risks and opportunities are taken into account in
stock selection and/or shareholder activism by their fund
managers and other service providers.
Examples:Barclays, Friends Provident and Legal & General
Trustees should also consider offering a screened fund
option for members.
Examples:Barclays, Legal & General and BP
14. First Steps - 3
DB schemes with members who have diverse values:
For passively managed mandates, trustees should follow
the shareholder activism route to ensure that fund
managers or service providers engage with investee
companies on SEE/CG risks and opportunities and then
integrate the information into voting strategy.
Example:British Coal Staff Superannuation Scheme
For actively managed mandates, trustees should follow
the integration and shareholder activism route to ensure
that fund managers engage with investee companies on
SEE/CG risks and opportunities and then integrate the
information into stock selection and voting strategy.
15. First Steps - 4
DC schemes with members who have similar values:
Trustees should offer a range of RI funds, with different
levels of investment risk, all of which reflect the employers
mission and employees values.
Example:Forum for the Future
16. First Steps - 5
DB schemes with members who have similar values:
Trustees should consider adding one or more specialist
mandates that reflect the employees values or employers