The Walmart of the skies

Last week Michael O'Leary lost an important battle when a Danish labour ruled, if I understand it rightly, that workers at Copenhagen airport can take secondary action against Ryanair.

This is in response to the notoriously anti-union company's latest wheeze to avoid as many workplace protections as possible. Ryanair wants its Copenhagen-based staff to be subject to Irish law, which means that cabin crew get paid far less than Danish employees. The case in the Danish labour court was essentially seeking to determine what action was permissible if the company refused to sign a collective agreement. This time O'Leary lost. In his typically consensual style, in response he has publicly threatened to close Ryanair's other base in Denmark in Billund, though this may just be a bit of sabre-rattling.

In the meantime in response to Ryanair's behaviour several Danish investors have dumped their shares in the company, clearly in response to track record on labour standards. Disinvestment over labour issues is very rare in my experience, and the only comparable case of this happening in relation to labour issues in the global North is Walmart. So by refusing to compromise O'Leary is managing to turn Ryanair into the Walmart of airlines, not just in terms of its reputation, but in terms of the negative reaction from some large investors.

If you look at what has been happening to WalMart two things strike you. First, it has made itself into a target for long-running action, include strikes and sit-ins, by the employees it refuses to treat with respect. Second, in the long run it had to cave in and pay better wages, one of the key issues employees had been fighting over.

Ryanair just took one on the chin, it now has a choice how to respond. It is surely in the interests of all the company's stakeholders that - for once - it tries to work with its employees rather than against them. So if you work in RI and your institution holds Ryanair you might want to take a look at this.

ESG - where are the workers?

There's an interesting PRI report just published on investor engagement on public policy. It is worth a read. But I thought I'd carry out a little experiment to see the relative emphasis put on different issues as measured by mentions.

Here's the scores on the doors -

Sustainable+sustainability - 56 (37+19)
Climate - 53
Environment - 34
Governance - 31
Social - 19

Employee - 5 (of which 3 are part of the name of an investment institution)

Employment - 2

Union - 2 (including 1 in 'European Union')

Inequality - 1
Labour - 1
Worker - 0

To be clear, this is not a criticism of this particular report, it's a general point, and this is a very simplistic measure. But I wonder if anyone in this world would be surprised? Personally I think it's pretty indicative of where the RI community is at currently. The people whose money is being organised, and used to engage with corporates, don't get much of a look in. Attention is very much focused on environmental issues, and climate change in particular.

Limits of responsible investment

Rory Sullivan's new book about corporate responsibility reporting is worth a read. I have to say that the stuff I like best in it is where he is honest about the limitations of responsible investment, because few people are willing to say this stuff publicly. Like...

Even with the emergence of 'responsible investment' as part of mainstream investment strategies, the reality is that the positive outcomes that can emerge from the investor-company relationship are primarily those that are of benefit to companies and their investors: best risk management, better performance reporting and better governance, It is much more difficult for responsible investment to deliver outcomes that are primarily about improved social or environmental performance where there is no business case.

And the important point, as he makes elsewhere, that it simply isn't the case that all ESG issues are material. There's a bit of self-deception in the RI world that ESG issues play out over the long term. Sure, some of them do, but all of them? Is it really likely that all (or even most) issues are material, just over the long term? Not in my view.

And this has implications for public policy:

[P]olicymakers should take a cautious view on the role investors can play. Where there are clear short- and long-term policy drivers or other incentives for companies to take action, investment research and investor engagement can play an extremely valuable role, through encouraging companies to identify risks, establish and effectively implement management systems and processes, set targets and report on performance. In the absence of clear policy drivers or incentives (ie when the business case is limited), investors are unlikely to take these issues into account in their investment research or to press companies to improve their performance on these issues. Expressed another ay, the experience with responsible investment suggests that government needs to ensure that appropriate regulations or prices signals are in place to drive behaviour; in the absence of these signals, investor engagement will inevitably be limited in what it can achieve.

Needs to be said, dunnit?

As I was saying...

Albert Hirschman, hero. Why do I ever entertain the idea that I've had an original thought? The first couple of sentences below from Hirschman (from this) could have easily been written about the promotion of responsible investment over recent years.

"[A]ppeals were often made by reformers who, while fully convinced of the intrinsic value and social justice of the measures they advocated, attempted to enlist the support of important groups by appealing to their "longer term" rather than short-term and therefore presumably short-sighted interests. But the advocacy was not only tactical. It was sincerely put forward and testified to the continued prestige of the notion that interest-motivated social behaviour was the best guarantee of a stable an harmonious social order."

A short history of responsible eating

Everybody needs to eat, in order to produce the energy required to live, but historically there have been some significant differences about the process of eating.

For example, early in the history of eating, some people raised objections to the eating of animals. The reasons for their opposition were varied. Some held religious beliefs that led them to the conclusion that eating animals was simply morally wrong. Others had theories of rights and justice that led them to the same conclusion. Others simply felt within themselves that they weren't comfortable with eating animals. But all were principally motivated by the belief that there was something 'wrong' with eating animals. So they decided to set up their own approach consumption of food, dubbed ethical eating, which avoided including animals in their diet.

This did not go without challenge. Some felt that ethical eating advocates were trying to 'politicise' food consumption. Some went further and argued that the advocacy of ethical eating fundamentally subverted the function of food consumption and might lead to to a poor diet and, by extension, poor health. These people opined that ethical eating might even therefore be illegal. However most were willing to tolerate this new group, provided they kept their unorthodox practices to themselves.

As a result the ethical eating movement grew, to the extent that it began to create a demand for services. Ethical eating service providers began to appear, and this became a small but significant market niche. At the same time researchers began to look at the claim that ethical eating would lead to a poor diet and poor health. Surprisingly they found that there was little basis for such a claim, provided that the food was sensibly prepared, and there was even some evidence that not eating animals might lead to a better diet, and better health.

The ethical eating movement began to become more ambitious. Emboldened by the findings that there might be some health benefits to their approach, some advocates began to call for it to become mainstream. Ethical eating shouldn't be restricted to specialist restaurants and shops, it should be available as an option everywhere. Increasingly they argued ethical eating not in terms of the rightness of their approach, but of the benefits to be gained by adopting it. You don't need to believe that eating animals is wrong, they argued, to understand that eating them can be bad for you. Gradually ethical eating products and services began to appear as options in mainstream restaurants and shops.

But ethical eating advocates recognised that they faced a problem of language. The term 'ethical eating' gave the clear impression that such an approach to food consumption was predominantly a values-driven initiative. Various alternatives were adopted, with 'socially responsible eating' popular for some time, though ultimately even this was narrowed down to just 'responsible eating'. Under this label no obvious value judgments were implied, and who disagrees with a responsible diet? More and more restaurants and shops introduced 'responsible eating' options, and increasingly they signed up to industry initiatives, aware that customers may not even enter their establishments unless they were signed up to them (though whether they were actually convinced of the benefits is another question).

At the same time analysis of responsible vs traditional eating became more complex. It turned out that it wasn't quite true to say that 'responsible eating' in general was better for your diet. Rather it was the case that eating some things and avoiding others was probably a better approach. In addition, simply paying a bit more attention to the food preparation process was generally a good idea. As a result mainstream eating adopted minor elements of responsible eating, like not eating too much meat too often, rather than simply avoiding eating animals full stop. Nonetheless responsible eating advocates continue to push their case, and hope that one day they can drop the 'RE' label altogether because it will be incorporated into the mainstream, albeit with some significant compromises with their original ideals.

Now, of course, no-one really argues the case for RE in terms of the rightness of not eating animals, which frankly feels rather preachy and old-fashioned, and even a little bit embarrassing. And in any case where's the need when you can make a case for eating a bit less meat in terms of long-term healthy diet?

Odds & sods

1. Best headline and newstory of the day.

2. Most people have probably seen Chris Dillow's piece on Myners and ownership, but if not it's here.

3. In a smilar vein, Hugh at Responsible investor about incentivising long-termism.

4. Meant to link to this post on speculation and oil prices by Nick @ The Capitalists a while back, so here it is. One to keep an eye on (CFTC doesn't seem to have reported yet).

5. An old (2002) but well interesting paper (PDF) on the idea of ownership as applied to companies.

6. A new study has found that most charities don't apply any kind of SRI policy.

7. Something else I meant to link to ages ago - UNPRI docs on socially responsible private equity (no sniggering from GMB members please).

UKSIF report on pension funds

A quick plug for UKSIF's survey of pension fund practice in terms of ESG issues. More details here. Headlines below:

BT Pension Scheme retained its Platinum ranking in this second bi-annual survey, while The Barclays UK Retirement Fund, BP Pension Fund and HBOS Final Salary Pension Scheme all progressed to a Gold ranking from Silver. Three quarters of repeat respondents achieved a higher score this year than in 2007.

The survey found that trustees of three quarters of surveyed funds now believe that ESG (environmental, social, governance) factors can have a material impact on the fund’s investments in the long term. Two thirds of trustees thought it was important to align the plan’s RI policy with the fund sponsor’s CSR policies.

Rebuilding unions in the US

There's a bit of a battle going in the US over the Employee Free Choice Act. If passed, this should make it easier for American workers to unionise - it will tilt the scales back in favour of labour after a long period of an incredibly hostile environment for organised labour.

This paper (pdf) provides a good summary in favour of the EFCA. Here's a snippet:

The current economic crisis is not a result of unforeseen market forces, but of decades of failed policies that led to an unsustainable low-wage, high consumption economy. From 1947-1973, both productivity and median family income roughly doubled—a result of policies designed to promote income equality.1 However, since the 1970s, workers’ wages have failed to keep up with the continuous increase in productivity. From 2000 to 2007, income for the median working-age household actually dropped by $2,000 after inflation.2

Though average workers failed to reap the benefits of decades of economic growth, those at the top have done quite well. In 1965, CEOs earned 24 times as much as the average worker; in 2007, they earned 275 times as much as the average worker.3 The top 1% of wage earners now hold 23% of all income—the highest inequality in income since 1928.4 This stagnation of median wages despite the rise in productivity is linked in large part to the decline in union density.5 In 1960, private sector union membership was 30%;6 by 2007, it had dropped to 7.5%.7 As unions declined, both union and non-union workers lost the economic benefits of collective bargaining. More than half of the decline in the average wage of workers with no more than a high school education is attributed to the decline in union density.8 As collective bargaining declines, the distribution of income widens9—but unions help reduce income inequality and provide clear economic benefits.

On average, union members earn 30% more than non-union workers.10 When controlling for factors such as education, occupation, and experience, union members still earn 14% higher wages than non-union employees.11 The difference is even greater for Latinos, with a union wage advantage of 18%, and for low-wage workers, where union membership raises wages by 21%.12 Unions also raise the wages of African American members by 12%,13 and for women union members by 11%.14

Of course there is lobbying against the EFCA by the business community and the Right. In addition an organisation called the Financial Services Roundtable (which includes representatives of UK-listed banks) has also been lobbying against. Surely this is something that responsible investors ought to have a look at?

Hat-tip: Michael L

Fair Pensions analyses asset managers

This (PDF) is worth a read. It has a serious stab at analysing how fund managers address evironmental, social and governance (ESG issues. No surprises here for me:

Our findings suggest that asset managers’ focus on ESG more often than not is limited to governance issues such as board structure and remuneration. Of the 22 asset managers that disclosed a policy on ESG issues 19 covered only corporate governance issues, while only F&C, Insight and Standard Life could explain their policy on environmental and social factors in any detail. Similarly, on corporate engagement, although the overall score for the 30 asset managers on ESG engagement was 53%, this fell to a mere 25% when environmental and social issues were considered separately from governance. It appears as though investment analysis of environmental and social risks/opportunities is confined to a small niche in the industry. This is a significant cause for concern as the risks associated with environmental and social mismanagement by companies can be as damaging to value as governance issues both in the short and the long run.

Here is the TUC reaction. As they say, there's not much evidence of the S in ESG.

Chickens march on...

Well, I was wrong about Hugh Thingummy-Whatsit's resolution at Tesco, it is going ahead according to reports today. After enlisting the help of supporters such as rock bores Keane, he was able to raise the money to cover the £86k costs demanded by Tesco.

I still think the system for filing resolutions needs an overhaul though. Simply lowering the ownership threshold required to file would do it - why not stick it at 1%?

Elsewhere The Scotsman has run an excellent comment piece reacting to Kitty Ussher's speech yestersay. I couldn't have put it better myself.

A critical Left view of socially responsible investment

Prompted by a comment a few days back I thought I would post up a short extract from Doug Henwood's Wall Street on social investing. Doug also runs Left Business Observer. Anyway, here's a quick quote.

"A contradiction no social screen can address is that investment profits originate ultimately, no matter how you dress them up, in the uncompensated labor of workers, and that they depend on a social order in which some people have money to spare and others don’t. When asked to comment on this, the former radical academic turned social broker Michael Moffitt conceded, “It’s a problem.” Moffitt’s past makes him aware of “the problem,” but most social investors don’t even think about it.

With South Africa no longer an issue, the most popular social screens reflect the concerns of upscale liberals: tobacco, women in the boardroom, animal testing, and the grosser environmental crimes. Concerns like women on the assembly line, unionization, and workplace injuries rarely appear. One of the favorite stocks of mainstream SI has been that of the Washington Post Co., a fiercely anti-union firm that publishes the daily journal of record for the DC branch of the status quo."

I would make a couple of counterpoints. Since this was written engagement has supplanted screening as an approach to SRI amongst mamy institutional investors (though screened funds still dominate the retail market). Secondly, although it is still the case that labour issues feature far less often than environmental or other factors, they have started making an appearance (FirstGroup being a good recent example). And I still believe that investor activism is a tool that unions should be using more often.

However I do agree that SRI as a distinct investment market/product often does little to address the underlying questions the labour movement is concerned about, and is often instead an exercise in feeling good about yourself (not necessarily a bad thing).

Responsible investment - are pension funds getting the message?

The report below from Professional Pensions really nails one of the myths in the investment world - that (most) fund managers properly consider environmental, social and governance (ESG) issues. I've personally been involved in this bit of the world for over 6 years now and progress has been pretty sluggish in my view. One of the problems has been that trustees take at face value what fund managers report back to them about ESG issues, without interrogating the info properly.

I don't think fund managers are necessarily at fault here. If trustees only demand that there are a few paras in the quarterly report about ESG issues, and don't ask questions about them, why would a fund management house consider they really need to get a handle on them? At present the exchange is basically this. Trustees ask: are you doing anything on ESG? Fund managers reply: yes we are. And this is (currently) sufficient for funds who want/need to brush off stroppy scheme members or NGO campaigns - we ask our fund managers to assess ESG factors and report back to us. I think only in a small number of funds does anything significant really happen, and many of the funds where this does happen have a unique focus for one reason or another (Environment Agency, USS< local authorities etc).

I really hope that initiatives like RI Metrics will make trustees aware of how limited a lot of ESG reserach and engagement really is. I don't expect this tochange the world - some funds may never take these things seriously. But at least putting some quantitative info in trustees' hands will give those who do want to do things a much clear idea of how things stand presently.

RImetrics report reveals ‘significant variations’ in ESG practices
Kelly Gregor

THE fund management industry is a "long way" from best practice over environmental, social and corporate governance issues, research by RImetrics shows.

The ESG data provider’s research – among global asset managers representing over $12trn of assets and including over half of the world biggest 20 managers –showed that although many fund managers had improved their understanding of the issues involved competencies and practices varying greatly from manager to manager.

The report found the integration of ESG knowledge and research into the investment process posed the greatest challenge for the majority of asset managers – also warning that there were also significant variations in voting practices.

And it found that, while the majority of asset managers had a responsible investment strategy, few had consulted their clients on its development

RImetrics chief executive Jonathan Horton said there was a shift towards "a greater acceptance" of ESC in relation to investment performance and client demand.

"With this has come a greater demand for credible, independent and reliable responsible investment data and information.

He added: "It is clear that the maxim ‘if you can’t measure it, you can’t manage it’ applies in this field just as much as in any other."

Commenting on the report, BT Pension Fund trustee Bill McClory said: "This is a wake-up call to those managers who do not demonstrate good practice."

Responsible Investment co-head of Universities Superannuation Scheme David Russell added: "This report is further evidence that fund managers are struggling to integrate extra financial factors into their investment processes to the extent many trustees would like to see.

"The analysis provides us and other pension funds with a valuable benchmark by which to evaluate manager performance in this important area."

Cabinet Office on social investment returns

Here's the release about Phil Hope's speech on Tuesday.

Plan for standard measure of social return on investment
6 May 2008
CAB/050/08

Phil Hope, Minister for the Third Sector, speaking at a groundbreaking social investment conference, has today announced a new programme of work to help standardise and improve how social return on investment (SROI) is measured. The Government is to carry out a project that will bring together the public sector, independent investors and social enterprises to agree a standard methodology for SROI measurement that places a financial value on social benefit.

The research aims to be an important driver of the rapidly developing social investment market and is designed to help third sector organisations, including charities and social enterprises, access more sustainable funding and finance. This is an exciting and developing field that may soon see the introduction of a social stock exchange and a social investment wholesaler.

It is estimated that ethical business in the UK is worth around £30bn. Increasingly, investors are looking at the impact of their investments on society and the environment. Consistent measurement of social return has the potential to enable investors to put a financial value on the social and environmental benefits derived from their investment. It could also help commissioners of public services take better account of the social value of a service when tendering for a contract.

Phil Hope, Minister for the Third Sector said:

“I am pleased to announce that the Office of the Third Sector will undertake fundamental development work on Social Return on Investment. Social enterprises and other third sector organisations play hugely important role in improving peoples' lives as well as the environment. Like any businesses they need access to finance. This will enable them to demonstrate their impact to investors and public services and help them attract funding.”

The Office of the Third Sector in the Cabinet Office, in partnership with NESTA, is presenting Good Deals, the first national social investment conference, sponsored by the RBS Group and organised by Social Enterprise magazine. This reflects the UK Government's position at the forefront of social investment.

Notes to Editors

Social enterprises are defined as “businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners”.

The Ethical Purchasing Index (EPI) valued the ethical sector in the UK in 2005 at £29.3 billion.

The Good Deals conference is presented by the Office of the Third Sector in partnership with NESTA. It is sponsored by the RBS Group and organised by Social Enterprise magazine. This is the first of its kind, reflecting the UK's position at the forefront of innovative policy development and thought leadership in the field of social investment. For further information please see: Good Deals! Social investment conference on May 6th.

A social investment bank was recommended by the Commission on Unclaimed Assets. If resources permit, and subject to clarifying and addressing any state aid implications, the Government would like to see a proportion of unclaimed assets in England used to support social investment in third sector organisations, by strengthening existing finance providers. Legislation is being introduced to enable this to happen. For further information please see:

http://www.unclaimedassets.org.uk/ [External website].

Independently of government, The Rockefeller Foundation is working closely with stakeholders within the social enterprise and financial sectors to explore the feasibility of a social stock exchange.

Major responsible investment report

A quick plug for the interesting report by Responsible Investor on... err... responsible investment which you can download here (PDF). Lots of useful info in there. One very quick excerpt that I thought was on the money from Axa's Raj Thamotheram:

For us, one of the points of enlightenment was a proposal for a definition that came from an academic in the Netherlands. It proposed categorising RI activity under three headings: ‘values‑based’, ‘alpha‑enhancing’ and ‘beta‑securing’. I have slightly modified that, but broadly those were the three categories. The values‑based activity I think is where we have all come from historically in the Anglo‑Saxon community such as ethical, normative or the Scandinavian international norms exclusion approach. I would also say that ‘best-in-class’ is a values‑based proposition. There is no evidence that it adds to performance and there is no evidence that it decreases performance. It is a value that you would like your money to be allocated to as some kind of good corporate citizen.

Then you have the newer categories around better risk‑adjusted returns and here I think there is growing evidence that SRI does add to performance in a risk‑adjusted sense and certainly where you can look at particular issues in particular markets, such as corporate governance.

Then you have beta‑securing activity, the idea that you are exposed to a large market index and your ability to match your liabilities is related to that.

Now, I think the interesting thing about this classification is that it allows you to have a discussion with your clients about which balance you might want. For example, with a large institutional asset owner you might want quite a lot of beta‑type RI activity, whereas for the retail community you might want a very
high values‑based proposition. I think part of our struggle is to have a more sophisticated approach internalised within fund managers.

That makes a lot of sense to me, and I think it also points up the need for unions to think carefully about how they respond to the responsible investment world. Since unions are typically in the game of increasing labour costs (let's be honest!) it's not always an easy sell to get investors - even those that claim to be responsible investors - to take labour issues seriously if we only argue them in terms of long-term shareholder value, or enhanced analytics. Sometimes I think we are better off with a forceful values-driven argument, and most likely to get traction with investors with a values-driven approach to SRI.

Socially responsible private equity

Just stumbled across this report by the Environment Agency pension fund. This fund, as you might expect, is a bit of a leader in the socially responsible investment world. Almost uniquely as a UK fund they have attempted to apply a responsible investment strategy across all their asset classes - including the unions' favourite, private equity.

I've not read the report properly, so I am mainly posting for info in the hope that others maybe able to use it. However I did notice some interesting comments in the 'lessons learnt' section at the end. Notably the bigger PE funds (focused on buyouts) were less open to 'responsible entrepreneurship', as were those based in North America.

I'm just posting the section from the scheme's manager Robeco which handles the PE policy for them. The scheme itself has a separate list of points.

Robeco:

The key lessons learnt investing the Environment Agency mandate are as follows:

1) Most private equity funds find it easier to comply with negative screening (exclusion of certain industry sectors, such as tobacco and fur) than accepting the Responsible Entrepreneurship Strategy, which requires more efforts.

2) The acceptance of the Responsible Entrepreneurship Strategy is best in the Emerging Markets, followed by Western Europe and North America. The good reception in the Emerging Markets is caused by the fact that private equity funds in this region have experience dealing with sustainability-conscious investors, such as NGOs that have their own sustainability requirements. Especially in North America, hesitance with respect to the legal implications of accepting the Responsible Entrepreneurship Strategy is an important reason for not working with Robeco in this field.

3) The acceptance of the Responsible Entrepreneurship Strategy is better with smaller funds (growth capital funds, small buyout funds) than with larger funds (large buyout funds). Large funds apparently are less open to changing their current investment process than smaller funds that typically have a somewhat more flexible (less institutionalized) approach.

4) In order to convince private equity funds to accept the Responsible Entrepreneurship Strategy, a proactive approach needs to be taken, in which the value that this strategy can bring in terms of reducing risks and taking opportunities deriving from social and environmental trends needs to be explained on a very concrete and operational level.

5) The Responsible Entrepreneurship Strategy should be positioned as a practical tool to assist private equity funds in managing their portfolio companies better, rather than as a checklist that needs to be complied with and for this reason is merely an administrative burden.

6) The requirement to implement the Responsible Entrepreneurship Strategy somewhat limits the universe of investment opportunities. Whether this has a negative impact on returns in the end remains unproven.

7) The clean tech private equity market has over the past few years changed from a cottage industry to one of the next waves (after IT and Life Sciences) of venture capital investing. This is evidenced by the growth in the number and the quality of available private equity funds in this investment area.

8) It takes time to build a diversified clean tech private equity portfolio. That is, during the beginning of the mandate, clean tech private equity funds were nearly all North American based. Today, Western Europe and Asia are catching up. The consequence is that only a few years into the mandate the target geographical allocation will be reached.

9) On the co-investment side, the Environment Agency has a notice period of 10 working days to review an investment opportunity. Given the ambitious timelines of these deals, this can be challenging from a logistical point of view.

Interview with UNPRI chair

There's an interview with Donald MacDonald, chair of the UN Principles for Responsible Investment and member trustee on the BT pension fund (and ex-CWU officer), on the SHARE website here. I've just pulled out the union-specific questions below.

3) The international trade union movement has come out in support of PRI, and developed a guidance note to assist trustees in implementing them. As a member-nominated trustee yourself, how do you view the role of the labour movement relative to the PRI?

We welcome the support of the global labour movement – and the worker capital it represents. This support is clearly very important: Trade unions have an obligation, through their member-nominated trustees, to deliver best value pensions but also to exercise active ownership. The relationship between capital and labour has evolved considerably in the pensions sector, and a very collaborative approach now exists. It is very important that workers and their representatives are actively involved in the good management of their pension schemes. We invite trade union pension schemes to take part in the good work of the PRI.

4) Do you think that PRI is a useful tool for member-nominated trustees to raise issues of importance to workers and their trade unions related to the investment of workers capital?

Clearly, PRI provides a useful framework for trustees: there is a commonality of interest here. Consider the universal ownership issue: the health of workers’ pension funds depends on healthy economies, avoidance of wars, the secure production of foodstuff, access to clean water, etc. There is a circular relationship between investments and the globe: if the world is unhealthy, our pensions are unhealthy. Trade unions have a very unique role in this respect: Trade union members are the beneficiaries of pension funds but also supply the labour that manufacture goods and provide services.

The PRI can be used as a vehicle for corporate engagement in many areas of interest to the labour movement, such as supply chain issues, gender, labour rights, etc. PRI signatories, in turn, need to be aware of their responsibilities in areas of key concern to workers, such as labour rights, health and safety, child labour etc.

5) PRI’s lack of explicit reference to authoritative international standards of corporate behaviour (ILO, OECD) is frequently mentioned as a drawback in trade union circles. How do you respond?

The ILO and OECD instruments are of a different nature: they are, by nature, inter-governmental organizations mandated to set standards that are enforceable through legal action. PRI is different: it is an investor-led initiative. Members are motivated by the proper exercise of fiduciary responsibility, by the belief that ESG risks can be material, and can impact the long-term returns for members’ beneficiaries.

To be effective and raise standards in the capital markets, you have to be pragmatic. PRI pushes for the integration of ESG considerations in investment decision-making. Given the wide range of extra financial issues out there, this process has to be generalized and indicative to be valuable for asset owners. The Principles are clearly aspirational, but underpinned by a clear assessment process.

Tories getting smarter?

Have a look at pages 12 to 14 of this Conservative Party policy document that appeared last month. It promotes the revitalisation of the HSE's CHaSPI (an index for measuring companies' health and safety performance) and it recommends that the disclosure amendment to the Pensions Act requiring pension funds to disclose their policy on SRI and voting should be reviewed, and strengthened:

This review would be conducted with a view to further strengthening the reform by incorporating an annual reporting requirement for Pension Schemes detailing what action has been taken in support of the SIP.

The usual caveats apply - this is only a policy document, it might be just hot air - but it does raise the prospect of the Tories actually looking more actively supportive of responsible investment and shareholder engagement than Labour. In addition I can't believe that the Tories got there by themselves, they must have been talking to some people in the SRI world (there's only a handful of people in the investor community who have properly thought about CHaSPI in my opinion). That's not a bad thing in itself of course, and I really wish we could get CHaSPI properly up and running so any help must be positive even if it comes from the Dark Side.

But it does signify that the SRI community thinks the Tories are worth talking to/assisting with policy development. I'm afraid it may be another sign of which way the wind is blowing.

Quick plugs

Some random plugs before I get my blogroll up to date. Change To Win Investment Group has just started a blog which you can access here. They have also set up a scetion dedicated to their engagement with banks over sub-prime failures here. One day the UK unions are going to be this good, I know it!

Separately I can't recommend highly enough the IUF's Private Equity Buyout Watch. Top notch labour movement analysis of private equity that doesn't fall back on 'fat cat' cliches. Definitely worth keeping an eye on.

Turning to the SRI world, I've recently stumbled across this blog which covers that bit of the investment market. Coincidentally they've got a brief comment on Predictably Irrational.

Also well worth a plug if I havent done it before is the Responsible Investor site, run by a journo mate of mine. It's a must read if you are interested in responsible investment.

SRI links

A couple of comments on recent posts made me think I ought to put a list of SRI news type sites together, so here are five to kick off:

Responsible Investor
Ethical Performance
Social Funds
Investing for the Soul
Green Money Mail


Any further suggestions welcome, I will update and repost the list as necessary.

Do NGOs really just want to increase the cost of capital?

I was having a chat with a mate who works in the socially responsible investment (SRI) world yesterday and we started talking about what NGOs hope to gain from their involvement in SRI. I said I thought NGO activity in the UK seemed to split between company-specific campaigns (for example War On Want shareholder resolution at Tescos last year) and attempts to get pension funds to develop SRI policies.

He made the interesting point that in the latter case, and in broader attempts at mainstreaming SRI, part of the drive was to increase the cost of capital of companies involved in, for want of a better word, 'irresponsible' activity. This should therefore act as an incentive for companies to do the right thing. However he said that even if there was an impact on the cost of capital, it might be slight and therefore not enough to shift company behaviour, except over the long term, which might be too long to address some issues (ie climate change). This sort of chimes with something I heard from another contact at a fund management house last year, who said that NGOs should be a lot clearer about the outcomes they expect from companies when active in the SRI world.

What I take from these conversations is that NGOs could waste a lot of time trying to change 'the system' to make it transmit useful information about corporate social responsibility issues more effectively. Although personally I probably find systemic reform a more interesting proposition, I think for civil society groups it arguably shouldn't be a priority. Financial markets and the products within them are continually changing, whilst many people in the NGO world have probably only just got their heads around trying to use equities as a route in. Therefore trying to develop a sort of investment counter-culture as some seem to be attempting will be a very tough job (though I think we should still be trying to do it over the long term).

In the short term I think NGOs interested in capital markets are going to have more joy if they prioritise company-specific campaigns with an investor element to them over attempting systemic change. Focused campaigns can work, even if companies only make change to get NGOs off their backs rather than because it's economically rational to do so. At the moment trying increase the cost of capital seems a very long shot.