UK debates the effect of the ethical disclosure law

There’s a lively debate being waged in Britain about the efficacy of the ethical disclosure legislation after the release of conflicting research into the effects of its introduction since July 2000. Australia introduced similar legislation in September of this year.

There have been a number of pieces of research done on how the legislation has worked which Jane Ambachtsheer, senior consultant with Mercers Investment Consulting in London, describes as running on a continuum between the UK Social Investment Forum’s (UKSIF) research on one end to Prabhu Guptara of the Wolfsberg Institute’s research at the other.

The UKSIF’s research has been oft quoted. It found that 70 percent of trustee boards had moved on the issue of SRI in response to the legislation. However Guptara, director of the UBS Warburg owned research house and consultancy, Wolfsberg Institute, has come up with vastly different results. He released preliminary findings of the research conducted for the UK National Association of Pension Funds at the Sustainable and Responsible Investment Forum in September. As reported in Environmental Finance Guptara found that the legislation had not improved transparency, which was the government’s stated aim in passing the legislation.

Guptara found no hard evidence that any pension assets had shifted into socially responsible investment as a result of the new rules. Furthermore he believes the only improvement in transparency was from the 4 per cent of funds whose disclosure announced that they had not taken social or environmnetal considerations into account.

The other 96 percent of funds he said had made such vague statements about their ethical considerations that they were not useful. They usually said their policy was to “engage with companies”, which Guptara felt covered anything from aggressive dialogue with companies to complete passivity. He does however, concede that the legislation has changed the “atmosphere” of institutional investment in the UK.

“It has changed the context in which everyone in the the financial services industry operates,” he said.

This is the point that Ambachtsheer picks up on. Ambachtsheer has been visiting Australia in order to participate in the William M Mercer Global Investment Forum last week.

“Before this legislation most investment houses didn’t have a policy on SRI and corporate governance. In terms of attention paid to the issue – that’s happening across the board. Trustees are talking about it as are fund managers. Fund managers are discussing how to incorporate it.”

“If you look at the detail of the legislation it wasn’t prescriptive in any way. They were simply putting it on people’s plates. In that way its been very successful,” she said.

Arbachtsheer says that as research house they are quite neutral on the issue of SRI. She says that they generally recommend an engagement approach. She thinks this fits with the increasing understanding across the finance sector of the financial risks associated with brand and reputation risk.

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