Mainstreaming Responsible Investment - AccountAbility

Responsible Investment Futures
Upgrade the Governance of Pension Funds
to Reflect their Central Role in Equity Markets
If pension plan participants, through their pension funds, do
not convey an interest in seeing their money managed in a
manner that takes full account of factors that shape corporate
performance over the long run, then their agents and service
providers further down the investment value chain can hardly
be expected to act differently. By contrast, if the trustees of
major pension funds were, as a matter of course, to require
social, ethical, and environmental considerations to be
explicitly considered in investment processes, then the highly
competitive financial services industry would likely respond
rapidly with services tailored specifically to such a mandate. In
this sense, the most likely tipping point in the complex
framework of impediments to and opportunities for
mainstreaming responsible investment is likely to be found in
the area of pension fund governance.
We have witnessed a decade of dramatic developments in our
appreciation of the importance of corporate governance. This
has driven a growing number of major initiatives, often framed
by codes setting out the principles of good governance and its
implications for practice. These codes have been wideranging,
covering how board directors of companies are
selected, their competencies and responsibilities, and the way
in which these responsibilities are manifested. Codes have
demonstrated a growing appreciation of the impact of nonfinancial
issues on company performance, which in turn has
triggered the development of a new generation of strategic
management and accounting tools, as well as broadened
disclosure requirements. In this context, understanding
stakeholder concerns is no longer seen as a “nice” thing to
do, but rather as a competency and practice; boards have to
be able to demonstrate a willingness and ability to put this into
practice.
Yet throughout and despite these on-going changes, the
pension fund industry has remained largely unaffected. While
the future livelihoods of the real owners of capital, notably
pension policy holders, depend profoundly on the
performance of their capital, the trustees of their futures,
advisors and implementing agents are largely obscured from
view, and in the main do not see themselves as having
responsibilities equivalent to company directors. Their
collective competencies, the basis on which decisions are
made, and even the consequences of these decisions, are
mainly opaque to those for whom they act. Intended
beneficiaries are, of course, in part protected through the
fiduciary requirements of these stewards of capital. But even
here the interests of intended beneficiaries are underpinned by
broader livelihood strategies than those reflected by traditional
interpretations of fiduciary responsibilities, which include both
financial and non-financial elements. Pension fund investment
strategies clearly impact on both, yet (at best) they understand
their own performance purely in terms of direct financial returns.
One useful way to spur progress would be to establish an
international set of good governance principles for pension
funds akin to a corporate governance code. These voluntary
principles, perhaps memorialized in a Fund Governance Code,
would aim to ensure that pension trustees, and others
governing the use of funds owned elsewhere, demonstrably
represent beneficiary interests in intent, capability and
practice. Such a Code should include the requirement for
trustees to be certified as competent to understand, for
example, technical dimensions of investment practices,
conflict management, disclosure and ethics. Maintaining an
acceptable level of competencies would require regular
exposure to the latest research on beneficiary interests and
the links between financial and non-financial performance.
Intended beneficiaries should be able to tell if and how their
collective savings are helping press companies to improve
records on social and environmental practices. As part of this
Code, trustees should therefore be required to meet high
disclosure standards, enabling members to readily monitor
whether their funds are exercising ownership responsibilities.
Share voting records, for instance, should be made available,
and policies on management of conflicts should be clear and
public. Accountability, through clear processes of
representation, need to accompany the principle of
transparency. Trustee boards should be accountable to the
fund membership so that their decisions are aligned with
beneficiaries’ interests. Governments can ensure that a certain
percentage of pension fund trustees are elected by employees
and retirees themselves. They should be elected in periodic
meetings with full disclosure of their attendance, professional
backgrounds and other records. There should also be
provisions for beneficiaries to propose challenge candidates to
the board of trustees.
Informing intended beneficiaries is crucial, but not enough to
ensure that trustees act on their behalf. Some jurisdictions
could consider mandating that policies go to a member vote
on a regular basis, with provision for members to offer
dissident resolutions on the fund’s overall approaches to
investment. In other cases, a “lighter touch” might be
preferred, focused more on shifting the culture within which
trustees understand and act out their responsibilities. This can
be realized by an obligation on the part of trustees to
demonstrate a specific understanding of the interests of their
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