||Volume 18, Number 3, November/December 2005
Opinion: Socially responsible investing
Teachers' pension fund invests in bullets, bombs, and butts
by Jim Pine
Do you know where our $12 billion pension fund is being invested? We buy shares in tobacco, weapons, gambling, and sweatshops. For a complete listing, visit www.bcimc.com. Go to Investments and then open bcIMC Inventory March 31, 2004.
As a social justice union, why are we investing in anti-union, sweatshop companies like Wal-Mart? bullet manufacturer SNC Lavellin? Cruise Missile developer Raytheon Corporation? the world’s biggest tobacco seller Altria (previously known as Phillip Morris)? Iraqi war profiteer Halliburton? gambling corporations like The Great Canadian Casino?
On my year-long odyssey of investigation. I’ve discovered that we don’t have to put our money into unethical companies. We can use our money morally by following socially responsible investing, or SRI. Whenever the issue of applying non-financial criteria to the investment decision-making process, there are a number of concerns raised.
The first concern is that SRI would compromise the fiduciary responsibility of our pension trustees to maximize pension returns. Is SRI prudent?
Lawyer Gil Yaron answers the question of legal permissibility of SRI in his May 17, 2005 paper on fiduciary duties: "A review of both statutory and common law indicates that the law does not prohibit the use of investment screening and economically targeted investments (ETI) as part of a pension plan’s investment policy. Pension trustees may incorporate investment screening and ETI into a fund’s investment strategy provided that it is articulated in the fund’s investment policy, that it is communicated to plan members, and that it does not impair the risk and return profile of the fund’s portfolio." ("Fiduciary Duties, Investment Screening and Economically Targeted Investing: A Flexible Approach for Changing Times," p. 22) www.share.ca/files/pdfs/FINAL DRAFT.pdf
Historically, the implementation of negative screening regarding investments in South Africa played a significant role in the eventual collapse of apartheid. Increasingly, governments around the world are recognizing the consideration of non-financial criteria by pension fund trustees. In 2000, Britain "...adopted regulations that require pension funds to disclose" (a) the extent (if not all) to which social, environmental, or ethical considerations are taken into account in the selection, retention, and realization of investments..." (ibid, p.11) Sweden, Belgium, France, Germany, and Australia have enacted similar provisions. Austria, Spain, Denmark, Switzerland, and Italy are also considering similar clarifications.
The second concern is that SRI would not be acting in the best interests of all of the shareholders and would breach the trustees fiduciary duty of loyalty, which requires pension trustees to act in the best interests of plan beneficiaries. But if the pension trustees are not considering SRI, are they acting in the best interests of plan beneficiaries? Trustees must not act in the best interest of the union or the plan members as union members. Their primary concern is the interest of plan members as plan beneficiaries. Yaron argues that: "Failure to consider non-financial indicators, such as climate change or corporate operations in zones of conflict, could constitute a breach of fiduciary duty where it is determined that trustees ought to have had a reasonable expectation that such factors could influence materially the long-term performance of plan investments." (ibid, p.9)
A third concern is the trustees’ obligation to diversify and thereby safeguard pension monies against downturns that might negatively affect one sector. In other words, don’t put all of your eggs in one basket. So the argument goes that investing in SRI limits the world of investments. However, any investment strategy involves the selection of some investments to the exclusion of others. Traditional investment managers screen out lots of companies based on fundamental or other analysis. Applying criteria that focuses on social, environmental, and governance issues is simply doing more due diligence. While it used to be argued that in order to maintain sufficient diversity, bcIMC had to invest in the entire Canadian equity market, that is less of a concern now with the elimination of limits on foreign investments and the availability of other classes of investments. In other words, we don’t need Canadian tobacco and Canadian gambling in our portfolio anymore to maintain diversity.
Diversification could also be interpreted as the need to balance between short-term and long-term investments. Optimal diversity may very well necessitate some form of SRI. For example, in the U.S., the United Methodist Church (US$10B) found that during the dotcom collapse, their investments in affordable housing helped to balance their equity losses. "When equities overall were declining, (the Church’s) $1 billion in affordable housing brought in 16.8% in 2000, 81% in 2001, and 12.8% through September 2002..." ("The New Fiduciary Duty," Business Ethics, Spring 2003)
Finally, is SRI profitable? The web site, www.sristudies.org, lists 16 studies that show that SRI funds do as well as or better than comparable financial-only funds. The Domini 400 Social Index is a list of US companies that meet certain social and environmental criteria. Over the 10 years to 2001, the index returned an annual rate of 16.3%, compared with the 15.1% returned by the S&P 500. In Canada, we have the Jantzi Social Index of 60 Canadian companies selected on social responsibility criteria. Although the index does not have a long track record, historical data shows that the value of the JSI increased by 18.9% over a five-year period, compared with the TSE 100’s growth of 18.1% and the TSE 300’s 17.4% over the same period.
As a parent and an educator, I want my money going to make the world a better place. I also want to know that my pension fund is in good shape. Investing my money in tobacco, gambling, and the weapons industry will not make this a better world. There are better options out there. Let’s be the change we wish to see in the world and start the move to SRI.
Jim Pine teaches at Victoria High School, Victoria, and is a member of the GVTA Social Justice Committee. For more information, visit www.pensionjustice.info.
Socially responsible investing
by Teachers’ Pension Board of Trustees
Socially responsible investing (SRI) is one of the hottest topics for pension-plan managers. If what the proponents of SRI state is true, implementation of an SRI strategy is not only necessary but required in order for the trustees to meet their legal and fiduciary responsibility to plan members. If it is not true, the trustees should avoid SRI. Unfortunately, in managing a pension plan such as the Teachers’ Pension Plan, issues such as SRI never have black-and-white solutions.
What is SRI, and how is the Teachers’ Pension Board of Trustees responding to issues raised by SRI proponents?
SRI is primarily selecting or managing investments according to social or environmental criteria. The Canadian Social Investment Review 2004 identifies a number of unique approaches:
- Screening based on exclusionary or inclusionary criteria such as tobacco, alcohol, environmental performance, human rights violations, community involvement, and employee relations. That top-down approach includes the application of pre-determined screens to investment selection.
- Stock portfolio analysis and management that integrate social responsibility and/or sustainability policies with traditional financial analysis. It is a bottom-up approach incorporating social policy considerations in the investment decision without establishing screens.
- Shareholder advocacy and corporate engagement strategies. Shareholders influence corporate behaviour through corporate communication, shareholder proposals, proxy voting policies, and divestment.
The 2004 report indicates that no large Canadian public-sector pension plans have established screening as a method for implementing SRI policy. Further, the report indicates that only two organizations use analysis for implementing SRI policy: the Hospitals of Ontario Pension Plan and the Caisse de depot et placement du Quebec, which manages the pension assets for most Quebec public-sector pension plans. Finally, the report notes that many public-sector pension plans use shareholder advocacy and corporate engagement strategies to implement SRI policy.
The first thing that members need to know is that the trustees are not sitting on their hands when it comes to SRI.
One of the basic beliefs of the trustees is that the best performing and most profitable companies in the Canadian and world economies maintain high ethical standards, comply with environmental regulations, have a record of progressive labour relations, do not have business dealings with companies where human rights are violated, and do not have the production of armaments as their primary activity. Currently, active investment managers are instructed to favour companies that reflect those values; however, they are not instructed to screen out or exclude companies that do not meet those values.
The trustees have taken a proactive role in terms of engagement and advocacy. They use their influence as shareholders to promote good corporate governance and to encourage companies to be good corporate citizens. The trustees believe that encouraging companies to employ high ethical standards is in the best interest of plan members and that they will be more influential by voting for proactive directors and resolutions at the company’s annual general meeting than they would be by boycotting their shares. The trustees also work with other institutional investors through the Canadian Coalition for Good Governance. The coalition represents Canadian institutional investors to promote best corporate governance practices and to align the interests of the boards and management with those of the shareholders (the trustees). The Ontario Teachers’ Pension Plan is a founding member of the coalition. And, the trustees co-operate with Shareholders’ Association for Research and Education (SHARE), a labour-sponsored B.C.-based non-profit organization whose objective is to help pension funds build sound investment practices, to protect the interest of plan beneficiaries and to contribute to a just and healthy society. One aspect of SHARE’s operation, in which the trustees participate, is tracking proxy voting and voting on shareholder initiatives by investment managers.
As you would expect, the trustees of your pension plan have been proceeding cautiously as they consider the next steps to be taken with respect to SRI. The trustees cannot ignore the legal implications of any actions they take, notwithstanding the opinions of some, as there continues to be considerable debate among legal experts as to whether trustees can use SRI screens under the existing legislative framework. If the trustees were satisfied that there are no legal implications in moving forward on SRI screening, the bigger challenge may be that of determining criteria acceptable to all plan members for establishing the SRI screens. The members of the Teachers’ Pension Plan have diverse religious, economic, political, social, and personal views that need to be considered in establishing any criteria for including or excluding any investments.
The Teachers’ Pension Board of Trustees continues to consider the issue of SRI. In fact, the trustees will be participating in a major review of the topic later this year that will include a one-day conference in which all aspects of SRI will be considered. It remains to be seen whether there are acceptable options out there that can be implemented and which, at the end of the day, will lead to a more financially viable pension plan.
The focus of the trustees is to ensure that the pension promise made to teachers is met or exceeded. An implicit component of that promise is to keep the cost of the pension plan as low as possible. If SRI is a strategy that will help the trustees accomplish that goal, then it must be given serious consideration.