Why Adopt Responsible Investment?

Business Case | Legal Case | Reputational Case


1. The Business Case

“Important economic analysts and leading financial institutions are satisfied that a strong link between good ESG performance and good financial performance exists.”

~ Freshfields Bruckhaus Deringer (2005)

A 2007 report prepared by Mercer and UNEPFI which examined 30 leading industry and academic studies on the link between RI and ethical investment and performance provides evidence that adopting an RI approach to investment will lead to improved performance. Of those studies dealing specifically with an active ownership approach to RI, three showed a positive correlation with performance, one found a neutral correlation and none found a negative correlation.

2. The Legal Case

There is a declining but persistent belief that there is a legal prohibition on the adoption of RI. This is partly due to the perceived implications of the 1985 case of Scargill v Cowan in which it was held that the Mineworkers’ Pension Scheme was acting outside of its powers in refusing to invest in certain assets on political or ethical grounds with Justice Megarry stating that “a trustee may not rule out an investment opportunity on principle for non-financial reasons, no matter how repugnant”.

Unfortunately, some still interpret this to mean that any consideration of ethical issues by trustees is prohibited, which can lead to a failure by trustees to consider environmental, social and/or governance issues (ESG Issues) even where they have the potential to materially impact financial performance. However, legal opinion now exists that such an interpretation is incorrect and that in fact, “it may be a breach of fiduciary duty to fail to take account of ESG considerations that are relevant and to give them appropriate weight”. (Freshfields Bruckhaus Deringer, 2005)

3. Growing acceptance of RI

“Pension funds need more confidence that broader considerations such as ESG issues are consistent with their requirement to act in the best financial interests of members. Our analysis of research in this regard provides evidence to support this view.”

~ Paul Trickett, European Head of Investment Consulting at Watson Wyatt

Research commissioned in May 2009 by Co-operative Financial Services found that 18 per cent more people intend to invest ethically this year compared to before the financial crisis. At the same time, research from Friends Provident reveals that 54 per cent of people think ethical investing is more important now than it was 25 years ago when the UK was also emerging from recession. Friends Provident’s research also found that 70 per cent of people expect financial advisers to offer ethical investment options, while 45 per cent thought it was important that pension fund managers took social, ethical and environmental issues into consideration as long as they were a ‘good’ investment.

FairPensions’ latest report in April 2009 found that the top three UK pension funds for adopting Responsible Investment were:

Download the report in full: Responsible Pensions? UK Occupational Pension Schemes’ Responsible Investment Performance 2009.