By Simon Howard and
Charlene Cranny of the UKSIF
The UK is Europe’s largest Sustainable and Responsible Investment (SRI) market with at least £1.4 trillion worth of assets under management, according to the 2014 Eurosif SRI study.
Our SRI sector framework is well-developed and far-reaching with all the expected commercial elements at play: large retail and investment banks, significant institutional asset owner interest, a small but vibrant share of the retail investor market, a large number of fund managers and a wide range of supporting services such as data providers, investment consultants and research houses.
The UK Sustainable Investment and Finance Association (UKSIF) – previously the UK Social Investment Forum – was founded in 1991 as the membership network for these UK financial services firms and now has over 240 members and affiliates of all sizes and types.
There is a long history of ethically motivated investment in the UK. However, SRI investment, as we now know it, can be traced back to two Quakers who started the Friends Provident Institution on a mutual basis in 1834. In 1984 Friends Provident launched the first ethical UK fund – a retail savings trust – screening out arms, alcohol and gambling.
Nowadays, UK professionals don’t just exclude particular industries, but practice a wide range of techniques and approaches to SRI. Company voting and engagement and ESG integration (the integration of environmental, social and governance factors into company valuation) are leading examples.
These advances in UK SRI mirror growing acceptance in society and politics that issues such as climate change, human rights and executive remuneration are no longer the preserve of a minority group of ‘ethical’ or values-driven investors.
For example, the UK Government was the first to set a binding target on emissions reduction in 2008. Then media coverage of incidents such as the Gulf of Mexico oil spill, consumer boycotts of Starbucks’ and Amazon over-tax, and the tragedy at Rana Plaza in Bangladesh, where a factory collapse killed over 1000 people, crystallized mainstream public opinion behind the principles of SRI and corporate responsibility.
These incidents also of course showed investors that poor environmental, social or governance (ESG) practices had huge financial implications, so SRI thinking as risk mitigation has undoubtedly become important albeit not the only function of SRI.
Pension funds are an important current area of change. UK pension funds were the first in the world to see regulation that required trustees of occupational pension schemes to disclose in their Statement of Investment Principles (SIP) whether they have a responsible investment policy. UKSIF is very proud to have been instrumental in achieving it: the consultation process was started by the UK Pensions Minister at UKSIF’s 1998 Annual Lecture, attracting support from all the major political parties and a range of leading UK pension funds and major City institutions. Similar regulation has since been implemented in countries such as Australia, Sweden, Canada and Germany.
The next step for UK based trustees concerned about the long-term value of investments to their beneficiaries came exactly ten years later in the form of The UK Stewardship Code. The Code was published by the Financial Reporting Council to enhance the quality of engagement between institutional investors and companies on their governance practices. The code is opt-in and applied on a comply-or-explain basis. As the Code explains:
“Stewardship aims to promote the long term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole. For investors, stewardship is more than just voting. Activities may include monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration. Engagement is purposeful dialogue with companies on these matters as well as on issues that are the immediate subject of votes at general meetings.”
The vast majority of UK fund managers have signed the Code. Again, the UK earned itself international attention with equivalent codes being launched in countries such as South Africa, Malaysia and Japan.
A long-running difficulty for SRI in the UK has been with fiduciary duty. Based on a 1985 law case, the view developed in some influential quarters that SRI was not appropriate for pension funds and could be a breach of their fiduciary duty to scheme beneficiaries. Similar attitudes-and professional advice- then crossed over into charity investment.
In 2013, for example, Comic Relief, one of the largest and most high profile charities in the UK, was criticized because donations had been invested into tobacco and arms. The Charity had been advised that their fiduciary duty placed a legal requirement on them to invest in the most profitable stocks in spite of their values; no one had seen official guidance in 2011 that trustees of any charity can decide to invest ethically, even if the investment might provide a lower rate of return than an alternative investment. Comic Relief has since announced a new investment policy in May 2014.
But things may be beginning to change. Part of the Government response to the financial crisis was a review of how equity markets functioned. The Kay Review, published in 2012, drew attention to confusion over fiduciary duty and recommended legal clarification. This came in 2014 when the Law Commission said that trustees should take financially material ESG factors into account. It also made clear the law was sufficiently flexible enough so that trustees may take into account non-financial factors in certain circumstances. These are important findings. The UK Government Department for Work and Pensions is currently consulting on what changes to the Investment Regulations are required following the Law Commission’s report. UKSIF is calling on them to ensure that the clarification around ESG and non-financial factors is included in the regulations to ensure trustees are under an obligation to consider them. This is potentially an extremely significant event.
In the retail space there is a large number of SRI funds available to savers, but the market is not easy. Retail finance is heavily regulated in the UK and professional advice is understandably not cheap. Letting people know that they can express a view on how their money is invested is very difficult despite the efforts of UKSIFs members in this sector. This may take some while to change. Indeed gains in retail consumer interest may be dependent on institutional owners introducing their beneficiaries to SRI concept through, for instance, pension fund reporting.
In banking the outlook is still clouded. In common with banks from most countries, the UK firms seem unable to end the continuing saga of fines and scandals linked to the crisis and post-crisis years. This is despite the senior management in the sector apparently understanding the need for behavioral change and trying to develop and instill values of the kind UKSIF is willing to support. There is a steady stream of new “challenger” banks – such as Aldermore, Shawbrook, Ffrees Family Finance and Metro Bank – which aim to offer better service, but customer inertia is high.
NGO activity will continue to push for change. Currently, there is talk of a legal test case linked to climate change risk and fiduciary duty and the wonderful work of CTI (formally Carbon Tracker) on stranded assets and the carbon bubble is getting excellent coverage. In our view the past six months have seen a steep change in the attitude of influential mainstream media to these issues due to their work. We are also home to other significant bodies such as the PRI, CDP and the IIGCC.
There are some important developments among asset owners who are variously pushing for fund managers to improve their SRI reporting – particularly on outcomes. They are laying shareholder resolutions at AGMs calling for increased corporate transparency and – one UKSIF has worked hard to support – evolving a set of voting instructions which owners can easily place on their managers. Clearly what clients want, clients will get, so these are welcomed boosts to the SRI marketplace.
There are also interesting innovations in the social space. One is social impact bonds. The first Social Impact Bond (SIB) was launched in September 2010 by Social Finance, a not for profit organization, at Peterborough Prison to fund offender rehabilitation services. Since then, a total of 14 SIBs have been launched in the UK and more are being developed. SIBs are typically small issues – £5 million for Peterborough – where investors take on the financial risk of a particular social intervention becoming successful or not that is usually sustained by governments. Governments reward investors for taking on this risk by coupon and capital payments linked to results. Social Finance says there are now 100 initiatives being explored across the world.
Our opinion polls show that the public is interested in SRI issues. Research for UKSIF’s Good Money Week showed that just over half of people want to consider the good their investments will do as well as the financial return. As mentioned above, it is difficult letting the public know that SRI investments are available and we are currently reliant on the media covering the issues and the top-down effect of institutional activity to help.
Nonetheless UKSIF is optimistic. Our climate arguments are increasingly seen as mainstream; the UK Stewardship Code is an accepted feature of corporate life as is active voting by fund managers. The public is becoming aware that all is not right and that changes are possible. Great progress has been made in the past 20-30 years and we hope it will continue.
Article by Simon Howard, Chief Executive of UKSIF and Charlene Cranny, Programme Manager of UKSIF (www.uksif.org )
Simon Howard joined UKSIF as Chief Executive in May 2013. Simon is a former Chief Investment Officer who has over twenty years of investment management experience. During a City career that started in 1990, he has been Group Chief Investment Officer at Liverpool Victoria, Head of Investments at Friends Provident and Managing Director at 3i Asset Management. Prior to joining UKSIF, Simon was Head of Sustainable Financial Markets at the charity Forum for the Future.
Charlene Cranny joined UKSIF in September 2013 as Programme Manager of the Analyst Programme with responsibility for catalysing debate on emerging environmental, social and governance issues and assisting members to develop their practice. Charlene is also responsible for PR and communications. Before UKSIF, Charlene worked on cause and policy-led campaigns and marketing for charities, think-tanks and campaign groups such as Centre for London, IPPR and 38 Degrees. Charlene has a degree in Politics and Philosophy from the University of York.
