Responsible Investment: what some have seen as a revolution in a bio-degradable cup may actually be an unlikely way out of the recession.

Responsible investment should not be underestimated: it does not only have a green or liberal agenda. It could play a vital role in future proofing the economy and pension funds big and small are slowly waking up to the immediate importance of future investment.

It is not just industry giants who are flexing their ethical muscle in the market. Established in 1991, The Local Authority Pension Scheme (LAPS) Forum currently boasts 48 members and the combined assets of over £95bn. Pamela Bruce, of Lothian Pension Fund, says: "Being part of the LAPS forum involved signing up to the UN principles of responsible investment. Hermes votes for us based on our portfolio interests. Through the forum, we have a more significant voice regarding issues such as climate change."

In Head of Socially Responsible Investment (SRI) Business at Hendersons George Latham believes in the current investment market, clients are very interested in environmental, social governance. He has witnessed funds focused on responsible investment still making money. In the face of recession, this is no mean feat. He says: "The issues involved in SRI will remain involved. While the investment banking world may be in difficulty, the investment managing world is still fairly well invested."

Duncan Exley, of Fair Pensions says: "ESG issues can create risk and opportunities. Responsible investment is something you do regardless of ethics." Fair Pensions' most recent report indicates certain key pension schemes are developing means of assessing and monitoring risks. There is more engagement with fund managers and investee companies.

Companies who have signed up to the UN Principles of Responsible Investment are committed to the concept of future proofing. Gold stars are awarded to top performers: F&A, Insight, Hermes and Aviva. Fair Pensions' most recent analysis of the top 30 pension providers saw a 22% increase in engagement with the UNPRI. Their next report is due out this month and it will be interesting to see whether this is still the case. Especially when top banks such as Citibank, Deutsche Bank, JP Morgan and most recently Merrill Lynch have disbanded their SRI research teams.


Whilst some key pension funds are putting policies in place to manage long term risks and maintain accountability, Mr Exley fears there are still thousands who are not taking heed and have no apparent track record of future proofing themselves. An initial hurdle to overcome is how SRI is still widely perceived. Many are confused by what it means and perhaps rightly so. Mr Exley said: "You ask six people and you get six different answers."

A popular perception of SRI is simplistically the "screening out of bad things in favour of good things." Indeed, if this is all it boils down to, it seems not many people are interested. Rather than labeling fund managers mercenary, the problem with this definition is the subjectivity of morality. It is incredibly difficult to create blanket policy based on the criteria of what is right and wrong. People's ethics are multi-faceted and what one outwardly projects is not always what they inwardly feel.


SRI is evolving and it must employ some kind of progressive and cohesive message which appeal to the mainstream. In a Darwinian manner, SRI has already adapted to suit its context many times over. It has religious roots in the Quaker reaction to the slave trade and Wesley's Methodist sermon, 'The Use of Money'.

Much more recently, it developed a political agenda regarding human rights violations. Its philosophy encouraged divestment with South Africa during the Apartheid era and established the Sudanese Task Force in 2006 in response to the genocide in Dafur.

To have relevance now, SRI needs to strike a careful balance between some kind of contemporary angle and prosperous longevity. It needs to affect the current quarter whilst exhibiting valuable investment prospects in the long term.


Fund managers may feel SRI concentrates predominately non-financial issues. Mr Exley argues against this, claiming its focus is on areas which are not yet financial such as responsible lending, restrictions on climate change and ESG. He says: "We are concerned the fire-fighting after the financial crisis has led to a fire sale where companies have ended up selling their fire alarm at the same time."


Hendersons have tried to avoid throwing the baby out with the bath water by focusing their attention on long term thematic trends and industries of the future. Responsible investment does not need to be some kind of philanthropic indulgence. Investing in education, healthcare, social housing and cleaner energy provides sustainability. There will always be a need for these areas, however our society develops. Companies who are heavily involved in "bad" energy face increasing hikes in taxation and stifling amounts of regulation. They are therefore likely to experience huge loses in the upcoming years. For once an old adage may truly prove to be the case: slow and steady wins the race.



Mr Everly believes one reason why some pension funds have been so slow in seeing the benefits of responsible investment is due to them delegating too much responsibility to fund managers who only operate in the short term. He feels there needs to be a change in the way fund managers approach contracts. He says: "Fund managers will look at a three year contract as just that but some issues within a pension scheme will build up for decades. 10 years ago, subprime lending was not a risk and climate change certainly wasn't viewed in the way it is now."

In a bid to look towards the future, Mr Latham is also quick to point out recent errors of the past: "Companies who have been well invested in corporate responsibility have been less affected by the recession. If one considers RBS two years ago, it was obvious they were weak on corporate responsibility and governance. More conservatively managed banks such as HSBC and Standard Charter haven't emerged unscathed but they are in a far better position."


He adds: "There is a strong correlation between good management and social responsibility. A focus on short term running and cutting corners can only expose a company to risks and shocks. In 2001 BP was seen from the outside as a strong competitor with good short term profits. Nevertheless, their maintenance and health and safety were not secure. They were too busy looking towards the next quarter and half term profits to see what culminated in 2004/5. In comparison, BT's strong management team has led to a sustainable profit growth."


Fair Pensions' research has found a majority of fund managers' management of ESG is limited to governance issues only. Climate change and other social concerns should irrevocably influence how investors behave. If it does not now, it will. The next 15 years will be rife with physical, regulatory and legislative changes affecting how all companies operate. Those who wait for the government to tell them what they have to do, risk missing a very important boat.