UK Schemes Lag Behind the ESG Bandwagon, Industry Group Claims

(August 29, 2011) — The UK’s Sustainable Investment and Finance Association (UKSIF) has asserted that too few pension funds are adopting responsible investment approaches.

“It is surprising that big companies, which focus on sustainability and increasingly recognize responsible investment has an impact on their activities and bottom line, do not translate this more speedily in their pension funds,” Penny Shepherd, chief executive of UKSIF, told the Financial Times.  

The UK group is also aiming to persuade companies to urge their pension funds to improve their responsible ownership and investment practices, the newspaper reported.

Shepherd added: “There is still a long way to go to catch up with public pension funds – such as USS or the Environment Agency Pension Fund – generally recognized as leaders in responsible investment and ownership,” thus bringing them up to speed with the stewardship code that applies to investment managers.

Despite the low ranking of sustainability among pension schemes in the UK, there are signs of optimism, according to the industry group, which asserted that responsible investment strategies are increasingly used across a wider range of asset classes than previously, such as private equity, bonds and property.

The UKSIF’s observations also follow a survey of 218 large-scale investors managing about €1 trillion — conducted earlier this month by Union Investments. The research discovered that two-thirds of institutional investors favor using shareholder engagement on sustainability and corporate governance when investing, and most follow this with active engagement.

According to the survey, German institutional investors apply sustainable factors to 50% of their assets on average. However, the percentage rises to 73% for foundations. Pension funds, meanwhile, hold below-average proportions of their assets – between 32% and 34% – in sustainability programs, while churches and endowments hold 73%.

The survey by Union Investments and UKSIF’s findings draw greater attention to the fact that investors in the UK and Europe more broadly have generally been more receptive to social and environmental investing compared to their American counterparts. Without a doubt, institutional investors around the world have been increasingly aggressive in keeping environmental, social, governance (ESG) factors in mind when making investment decisions, Mercer Consulting’s Craig Metrick, an acknowledged expert in the field, told aiCIO in April following a report that asserted that more stringent carbon emission rules are hampering corporate profits. But, while there has been a greater recognition globally to reduce emissions, the US is still lagging behind the UK, largely due to the UK’s more supportive regulatory environment. According to Metrick, one of the reasons that US institutional investors have not been as aggressive in investing in renewable energy compared to their European counterparts is because of a lack of legislation. “In Europe, there are certain regimes for reducing carbon emissions, fostering a better legislative environment, whereas the debate on climate change and renewable energy has been very politicized in the US,” he said.

The research also follows additional findings from early this month by RCM, a company of Allianz Global Investors, which revealed that introducing environmental, social, and governance (ESG) criteria into an investor’s selection process does not negatively impact performance, and instead, may actually enhance it.

“The perception that corporate efforts to become more sustainable reduce the value of companies and of investors’ portfolios is entrenched, but is based on largely unfounded assumptions and only thin academic evidence,” the research paper claimed. “It is imperative to challenge this perception empirically because it is holding back the evolution of the nascent sustainability sector and of the wider corporate sector.”