Definition

Pension fund managers increasingly feel they have a responsibility to contribute to sustainable development in their business activities. If we look into the main characteristics of pension funds – size, investment horizon and diversification – we realize 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.

If one refers to the guide on Socially Responsible Investment issued by Mercer in 2007, SRI 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 One can find many different definitions of SRI and the diversity of these definitions reflects the various approaches that can be adopted in order to be considered as “socially responsible”.

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 world”³ and global issues such as climate change, financial crisis or social security.


¹ Mercer, "The language of responsible investment: An industry guide to key terms and organisations", London, 2007, p.10
² UNPRI Principles, see Appendix 3.
³ 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

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

SRI Practices

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

First, we can cite 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, we can still mention engagement 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.