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Socially Responsible Investment

Updated by Julien Goy on 12.06.2015

Pension fund managers increasingly feel they have a responsibility to contribute to sustainable development in their business activities. When looking into the main attributes of pension funds – size, investment horizon and diversification – it is possible to see that they have the characteristics that qualify them as natural supporters of socially responsible investment. Since pension funds take decades-long approach, Socially Responsible Investment (SRI) would be particularly appealing, as it takes an explicitly long-term approach.

There are various definitions of SRI. According to one of them, it can be defined as An investment process that seeks to achieve social and environmental objectives alongside financial objectives.1 Signatories of the United Nations Principles for Responsible Investment (UNPRI) state that they “believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time)”.2 Many different definitions of SRI can be found and the diversity of these definitions reflects the various approaches that can be adopted in order to be considered as “socially responsible.”

Thus, an SRI fund can address different topics such as ethics, environment, governance, social aspects, economics, labour rights, international and national norms,  amongst  others.

The choice of which dimensions are covered by the funds, and how, is up to the managers, therefore impacting the definition of SRI. For this reason, any organisation that plans to engage in SRI needs to establish a clear strategy based on a sound knowledge of the various alternatives that are available.

Taking investment decision based on such criteria is considered to be an investment strategy that promises to do good while performing well. Evidence and experts’ opinion support the argument that doing good not only can be done in parallel, but, in fact, has a direct causal link to performing well. This “double dividend is considered to be rooted in a long-term and more comprehensive take on the corporate world3 and global issues such as climate change, financial crisis or social security.

Not only is SRI within the bounds of investor’s fiduciary duties, but it even seems to be strongly recommended. In addition to the enhanced return on investment that such a strategy can provide, many pension funds, in order to avoid damage to their own reputation, have realized that “they have to avoid investments that are publicly perceived as (socially) unacceptable or irresponsible”.4

 

The practice of SRI can take many forms, often complementary.

  • First, there is the negative screening, also known as “exclusion”. The objective here is precisely to exclude companies, sectors or countries that are considered as non-responsible (e.g. companies coming from sectors such as tobacco, pornography, gambling, …).
  • There is another form of screening, called “positive”. It's about creating a portfolio by selecting companies that meet pre-established criteria. These criteria may be related to environmental, social, governance, ethical aspects, etc. The most common form of positive screening is called "best-in-class".
  • Finally, engagement can be mentioned as a SRI strategy. In this case, the investor will engage with companies in which it invests. By voting at annual general meetings, or by establishing an on-going dialogue, the investor will seek to influence the companies towards more responsible practices.


Since those strategies are not mutually exclusive, investors have the opportunity to combine strategies. Combining strategies happens to be a widespread approach.

Socially Responsible Investment is to become a major trend amongst pension funds. Therefore, SRI will contribute in a number of ways to the development of social security: on the one hand by improving the risk management of the long-term investment of pension funds and, on the other, by stimulating good social protection practices among the invested companies.

1 Mercer, "The language of responsible investment: An industry guide to key terms and organisations", London, 2007, p.10
2 UNPRI Principles.

3 et4 Allianz Global Investors, "Doing Good by Investing Well? Pension Funds and Socially Responsible Investment: Results of an Expert Survey", International Pension Papers, no. 1, 2010, p.4, p.9.


Main Resources

Socially responsible investment, decent work and pension funds. Concepts and international experiences - ESS 36

Investment and Enterprise Responsibility Review – Analysis of investor and enterprise policies on corporate social responsibility

 UNCTAD, 2011

 

Statement of Intent between the ILO and the Government of Brazil: promoting principles and rights of decent work through investment policies of pensions funds