Too much pressure

Environment Business talks to Rory Sullivan, director of investor responsibility with asset manager Insight Investment, about the challenges facing pension fund managers

UK pension funds have a huge influence on how business behaves. This is usually positive, but complaints have been made about pressure to bring in short-term profits hindering efforts to make the kind of long-term decisions that the principles of sustainability demand.

Rory Sullivan, director of investor responsibility at asset manager Insight Investment confirms this is the case: “Investors are being required to deliver good quarterly performance figures for the pension funds, which means our focus is less on the long term success of the business and increasingly on whether the company is going to generate short term returns.”

This creates a problem for companies as this focus pushes them in a direction that doesn’t necessarily protect the business over the longer term. However, long term value can be retained by imposing a level of financial discipline which may have been lacking.

The real problem

If we accept the assumption that the perceived crisis in pension funding has squeezed business at the time that sustainability has moved into the mainstream of how many – and especially the larger – businesses are run, a real problem exists. Yet it is a problem with a paradox at its centre.

Many of the largest pension funds in the UK are corporate pensions, so when chief executives complain about investors focusing on the short term, they often own the funds pushing this agenda. Sullivan says: “When you look at the leading companies in the UK – which tend to correspond pretty closely to the biggest pension funds – many are extremely progressive on social, ethical and environmental issues. However, their policies don’t translate into how the pension fund operates – there’s a disconnection between what the company believes it stands for and the signal that its fund sends to the market.

Trust in the investment system

“There is also the question around trust in the investment system,” Sullivan says. “Companies going bust isn’t just bad for whoever is holding shares, it creates a perception that the market is corrupt or that investors’ money isn’t safe. “So to an extent investors – the pension funds and their managers – have a very strong interest in ensuring the companies they invest in behave responsibly and don’t go bust.”

Taking a close look

Chief executives (and others) who complain about shareholder activism, and particularly those who complain about the lack of interest that is shown by the pension fund community, need to look very closely at what their company’s pension fund does, warns Sullivan.

Businesses that hold themselves up as paragons of environmental management yet fail to monitor the performance of supply chains are failing to make real strides in CSR. So too are companies which do not encourage their pension funds to take social, ethical and environmental issues into account when making investment decisions.

There are a number of things businesses can do to address the pension fund paradox:
u Companies need to look at their own pension fund. Make sure it has a clear Statement of Investment Principles on social, ethical and environmental issues. And if so, is it being implemented properly?

  • Are the fees being paid to the fund manager in part dependent on how they perform on corporate governance and responsibility?
  • Does performance in these areas affect appointing or reappointing fund managers?
  • How does the company know that the fund manager is delivering? Are performance measures agreed and monitored and is the fund manager held to account?
  • Ensure the fund manager is aware that it is ethically inconsistent that your pension fund operates to a different set of rules.

    And it is executives who hold up their companies up as CSR leaders – and complain about short termist investors – that need to push their pension funds to make the environment a key part of their investment strategy


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