British Law Requiring SRI Reporting by Pension Funds Fails to Generate Best Practice

Two years ago, the British Parliament became the first legislative body in the world to require reporting on socially responsible investing (SRI). The Pension Disclosure Regulation, which went into effect in July 2000, amended the 1995 Pensions Act to require all UK occupational pension funds to disclose the degree to which they take into account ethical, social, and environmental considerations. While the act stopped short of stipulating socially responsible investing, this transparency mandate was expected to increase SRI practice.

However, Just Pensions, a consortium established in 2000 in part to track the effects of the Pensions Act amendment, released a report last week documenting the lack of progress in SRI practice. The anti-poverty charities Traidcraft and War on Want manage Just Pensions, which receives financial support from the Community Fund. The Community Fund supports groups that help the disadvantaged and work toward improving people’s quality of life.

The report, entitled Do UK Pension Funds Invest Responsibly? A survey of current practice on Socially Responsible Investing, was based on in-depth interviews with 14 pension fund managers who control about 20 percent of all UK pension fund assets. Report authors David Coles, a former partner in the international accounting and consulting firm KPMG, and Duncan Green, a Just Pensions editor and project manager, also compared funds’ Statements of Investment Principles (SIPs) to the funds’ actual practices.

"This report has intentionally highlighted positive examples of SRI best practice among pension funds. It is, however, sobering that most of these come from only a handful of the fourteen funds contacted," the authors state. "[A]ctual practice is . . . substantially worse than we had expected. We can only conclude that poor practice by major pension funds on socially responsible investment is the norm. Many pension funds are seriously exposed."

According to the authors, the UK corporate sector widely accepts the view that poor management of ethical, social, and environmental issues represents a business risk. Last year, for example, Morley Fund Management, a major London-based asset manager, began requiring large UK companies to publish environmental reports. The Association of British Insurers (ABI) has introduced guidelines for corporate disclosure of external social, ethical and environmental risks and policies for managing those risks.

The report offers examples of best SRI practice by major pension fund managers. For example, the SIPs at BP (ticker: BP), Hermes/British Telecom (BTY), and the Universities Superannuation Scheme (USS) all stated why SRI issues should be considered to achieve satisfactory investment returns.

As well, the report listed typical examples of what it considered poor practice. For example, several funds’ SIPs admitted that the managers do not take SRI issues into consideration at all. Many funds’ SIPs adopted wording that implied a commitment to SRI principles, while their actual practices revealed scant implementation of SRI principles. The report exposed gaps between stated commitment to SRI and the infrastructure necessary to implement SRI practice, even at some of the better funds.

Many funds hire firms to manage their investments without establishing a means to monitor how the managers assess ethical, social, and environmental issues and incorporate them into investment decisions. Such disjunction undermines the intended effect of the Pension Disclosure Regulation by allowing funds to disclose policies that bear little or no relation to their actual practice.

Transparency becomes moot when obscured by smoke and mirrors. The report concludes with a warning of the stakes involved when practice fails to conform to policy.

"Unless pension funds take urgent steps to improve their implementation of socially responsible investment strategies, the case for regulatory action by government will only increase," the report warns.

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