In spite of good progress, there are still significant challenges in building SRI into institutional investing, according to Penny Shepherd, CEO of the UK Social Investment Forum. The challenges span the full range of industry participants from government to the pension funds.
Shepherd, who returned to UKSIF in May after a spell as CEO of the London Sustainability Exchange has been detailing her short and longer-term objectives for institutional SRI in the UK.
She explains that the main issue among trustees is access to and take-up of training in SRI, although knowledge
is improving. “We want to support this by teaching the teachers – trade
unions and some specialist training companies.”
Even investment consultants are lacking in this area. Shepherd notes that some investment consultants such as Mercer are starting to address the area. “We have seen some shift towards
long-term investment thinking and factors which may affect this,” she says. “But there is still a long way to go. So we plan to engage with consultants and to explore the possibilities. We will also lobby the government to fund more academic research into SRI.”
Currently a lot of research is focused on retail screening and the effect on investments of excluding a given sector. “This is too simplistic,” says Shepherd. “It is not sufficiently targeted to the needs of institutional investors. The institutional side should look more at the measurement of intangibles. For example, how much is our reputation worth?”
Reputation is indeed one of the main drivers of institutional SRI is the emerging interest from leading companies in having SRI element in their pension funds. “Traditionally the public sector has taken the lead. Corporate plans have lagged behind; this is a reputational risk for companies.” She adds: “Companies where we would expect to see greater focus on SRI in pension funds are those seeking a leadership position in SRI such as BP and Shell.”
Shepherd is encouraged by the increasing focus on matching assets and liabilities and what investment returns a fund needs for the long term. But she explains that this is countered by concerns about current deficits. “This drives short-termism,” she says.
It is this that is driving the UKSIF focus on institutional investing. “Pension funds need to invest for the long term so therefore need to be concerned about social and environmental factors,” says Shepherd. “The greatest obstacle to achieving the goals is the pension industry in general which sees SRI as an optional extra and not integral to the future success of the industry.”
She adds: “The other obstacle is perverse, unaligned incentives. Even though there is now an interest in awarding long-term mandates it is still much easier for trustees to compare their fund manager’s performance with the benchmark on a short-term basis. The challenge is to break out of the
situation in which managers are
incentivised by mandates to hug the benchmark.”
Legislation passed in 2000 requires trustees to state in their investment principles how much SRI accounts for. The primary legislation does not address SRI. Currently in the UK members can request the statement of investment principles (SIP) but there is no requirement for pension funds to inform members as to how the SIP is implemented. “We are now pressing for disclosure of engagement and voting
as part of primary legislation,” says Shepherd.
She adds: “We also want to see DC schemes providing access to SRI. There is too little access now.”
For the longer term Shepherd wants the government to create a sustainable investment commission to address
how to ensure sustainable long-term mandates.
She highlights the government’s commitment to leadership in sustainable public procurement by 2009. “The government is a major purchaser; this will crystallise sector risks by benefiting the good companies,” she says.
“But we are most interested in the procurement of pension funds,” Shepherd continues. “The government can only be a leader in procurement if it also ensures that public pension funds take into account sustainable criteria in their mandates.”
Trustees need to take a leap of faith to justify SRI to their members. “Traditionally trustees have been afraid that if they make a decision which, though reasonably based on the evidence available at the time turns out in hindsight to have not been right, they may be sued by the members,” says Shepherd. “So that encourages herd behaviour.”
Shepherd welcomes comments made recently by pensions minister Timms who said that if such a case comes to court it is important to examine the trustees’ decision carefully. Shepherd notes: “So the issue is: Was the decision reasonable given information available at the time? It is not the job of the courts to second-guess that decision. The minister’s comments are very positive.”

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