Canadian pension plans sticking with SRI

“We’ve seen no reduction in interest from institutional investors,” said Jordan Berger, principal with Mercer Investment Consulting, speaking during a panel discussion at the Canadian Business Ethics Research Network’s second annual SRI Cluster in Ottawa on Friday, May 29.

Responsible investing in Canada is proceeding slowly, compared to other countries, Berger said, with large institutional investors (mostly in the public sector) taking the lead. “Canada has been a little slow to pick up on responsible investment, but there has certainly been a steady increase in interest in the subject.” he added. “But there are certainly lots of questions related to the current crisis.”

Katharine Preston with OPSEU Pension Trust, a plan with 80,000 members and $11 billion in assets under management, says there’s a growing recognition within the pension community that environmental, social and governance (ESG) issues affect investment performance. OPSEU recently introduced its first ever statement of responsible investment principles.

Still, Preston admits that it can be tough to get ESG on the agenda at board meetings, particularly in tough times. “It’s an evolutionary process,” she says.

And there are larger issues to consider. Berger noted that incorporating ESG requires a “re-think” of the entire pension process. “Climate change is an example of something that can be transformative for humanity,” he said. “And there’s a need to focus on governance and regulation.”

A soon-to-be-released report from Ian Bragg, a consultant with CR Strategies, concludes that five major factors contributed to the recent credit crunch: governance/executive compensation; sub-prime/predatory lending; transparency/disclosure; securitization; and systemic risk.

Bragg, who also participated in the panel discussion, said the SRI movement was ahead of the mainstream on issues such as governance, predatory lending and executive compensation. For example, one-third of all shareholder resolutions over the past five years related to executive compensation. Bragg found that 58% of SRI mutual funds supported “say on pay” type resolutions, compared to just 8% of non-SRI funds.

However, the SRI movement, like everyone else, failed to see the securitization problems and the hidden risks embedded in financial instruments such as non-bank asset backed commercial paper (ABCP) and collateralized debt obligations (CDO).

That’s partly due to the “opaque” nature of those instruments, he said, a point reinforced by fellow panelist Eugene Ellmen, executive director of the Social Investment Organization, who noted in his presentation that investors and advisors didn’t really understand what they were buying, and originators often didn’t really know what they were selling.

ABCP, for example, trades in the exempt market, meaning there are no prospectus or disclosure requirements. “On its own, this wouldn’t have been a problem,” Ellmen said. “But in a low interest rate environment investors were looking for secure products that could juice their returns.”

The root of the problem, the U.S. sub-prime mortgage crisis, was fundamentally an ESG crisis, Ellmen argued. Unethical lending practices focused on unknowing consumers, which created an unsustainable market filled with toxic debt.

“The ESG risks were not priced into these products,” he said.

On the pension side, and from a practical perspective, panelist Ronald Davis, associate professor of law at the University of British Columbia, said trustees and pension fund managers remain concerned about their fiduciary responsibilities related to ESG — and with good reason.

Although there’s a strong argument to be made that fiduciary duties should go beyond just maximizing returns (and in fact ESG factors are now a widely accepted part of the investment process in the pension world), “trustees are justifiably not comfortable using this criteria,” Davis said.

That’s not because adding ESG to the investment process is wrong, but there remains a hesitancy to fully embrace the concept, Davis suggested, pointing out that few private sector pension funds have signed on to the United Nations’ Principles for Responsible Investment.

“Making money still trumps fiduciary duty,” Davis said, but that doesn’t mean the concepts are mutually contradictory. “Pension funds need to care about ESG. It’s right and it’s popular, but is it sustainable? You need to engage [pension] beneficiaries in the process.”

Doug Watt is an Ottawa-based writer and editor, and co-founder of SRI Monitor, a blog on socially responsible investing.

(06/01/09)