European pension managers are revolutionizing the practice of portfolio management.
Managers are casting aside traditional stereotypes about social and environmental issues, and are integrating socially responsible investment analysis into their investment strategies.
This revolution has yet to find its feet in Canada, but the current federal consultation on defined-benefit pension plans may kick-start this new way of thinking on this side of the Atlantic. Earlier this year, Finance Canada announced a national consultation on defined-benefit pension plans regulated under the Pension Benefits Standards Act.
The SRI industry has responded to this consultation with two key proposals: first, pension funds should be required to disclose how, if at all, they incorporate social and environmental issues into their investment policies; second, similar to new rules governing mutual funds in Canada, pension funds should be required to disclose their proxy-voting policies and how they vote their shares.
SRI disclosure has been part of the pension landscape in Britain for the past five years.
These rules have helped educate pension managers on the importance of incorporating issues of product safety, sustainable development, human rights and community involvement into their investment policies. Big pension plans such as the Universities
Superannuation Scheme — the third-largest pension fund in Britain — are adopting SRI policies as a result.
Similar rules are in effect in France, Germany, Australia and other countries.
Recently, European pension funds and asset firms managing more than 360 billion euros in assets launched the Enhanced Analytics Initiative — a process to encourage brokers to integrate non-financial factors with traditional investment analysis.
These rules have helped bring about a new way of thinking. A recent survey of investment managers around the world by Mercer Investment Consulting showed 70% believe environmental, social and governance factors will be integrated into mainstream investment analysis in three to 10 years.
In Canada, pension funds are moving slowly in this area. With some notable exceptions, such as the Caisse de dépôt et placement du Québec, which implemented an SRI policy in January, pension funds hold to the outdated thinking that social and environmental issues are unconnected to investment performance.
If Canada rejects mandatory social and environmental disclosure by pension funds, it risks falling behind other countries in this new era of investment management.
It’s becoming clear that social and environmental strategies are synonymous with good, long-term pension management. The performance of the Domini social index in the U.S. and the Jantzi social index here in Canada show that SRI strategies outperform their conventional benchmarks over the long term.
For example, the September 2005 report of the DSI, which is based on 400 companies, says it has returned 477% since its inception in May 1990, compared with 416% for the S&P 500 in the same period. The JSI, which is based on 60 companies, has been in existence for a shorter period, since January 2000; the September 2005 report for the JSI says, in that time, it has increased by 43%, compared with 37% for the S&P/TSX 60.
Pension funds have a fiduciary duty to consider SRI strategies. And plan members have a right to know what strategies, if any, their funds have in place.
Not only is pension management an issue, but so is shareholder voting. Starting next fall, the Canadian Securities Administrators will require mutual funds to disclose their voting policies and report how they vote on shareholder resolutions. The requirement follows similar rules introduced by the U.S. Securities and Exchange Commission.
The CSA and SEC believe conflicts of interest are possible when mutual funds fail to disclose how they vote on shareholder issues. This concern is fuelled by lack of institutional investor scrutiny in the months leading up to the Enron Corp., WorldCom Inc. and other corporate debacles. More attention to proxy voting would have placed management under greater scrutiny, reducing investors’ losses.
It is also important to implement the same requirements for pension funds. Pension regulators and standard-setting bodies such as the CFA Institute, which confers the chartered financial analyst designation, all argue strongly that pension funds have a duty to vote their shares in the interests of their plan members. As such, pension plan members have a right to have information on the proxy voting policies of their plans and how they are casting their votes.
About 1,200 pension plans are affected by the federal government’s review. It is an important consultation as the PBS act regulates about 10% of pension assets in Canada; and the outcome is expected to establish the model for pension legislation across Canada for years to come. Now is the time for Ottawa to bring about transparency in Canada’s national pension plans. IE
@page_break@Eugene Ellmen is executive director of the Social Investment Organization. The SIO is the national association for socially responsible investment in Canada.
An opportunity for Canada to catch up
European pension managers set pace in adopting socially responsible investing strategies
- By: Eugene Ellmen
- November 3, 2005 October 29, 2019
- 15:08
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