To help us participate in this exciting conversation EBBF has included among its ‘Knowledge Centers’ one on Ethical Finance, which compiles information, resources, and presentations on this topic. To give you a taste for what is there, we’re including the introduction and a selection from the subtopics on “Institutional Investors”. We hope you find it useful:
For many, Ethical Finance is an oxymoron. Corporate responsibility (CR) almost by definition is about corporations and is rarely associated with banks, insurance companies, and other forms of financial institutions. Their financial analysts and portfolio managers are often accused of being the cause of much of the external pressure on corporations for quarterly earnings estimates and short term financial results. But, to the surprise of many, these same financial institutions are increasingly joining the corporate world in seeking ways to improve internal operations through improvements in customer service, employment practices and workplace conditions, to become more involved in local community development, and to reduce their own ecological footprints. At the same time, they are recognizing the importance of their own direct external influence on customers for their products and services as well as through more active ownership of shares in their portfolios.
In this knowledge centre we provide information on eight areas of ethical finance:
- Socially Responsible Investing
- Cleantech Venture Capital
- Financial Services
- Institutional Investors
- Social Investing
- Microfinance
- International Institutions
- Philanthropy
Then we offer a powerpoint presentation on Ethical Finance that readers are welcome to draw upon should they have opportunities to make presentations on this theme.
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4. Institutional Investors
In 2001 more than 60% of all outstanding shares of the US publicly traded companies were owned by funds controlled by professional asset managers, and this percentage continues to increase with the growth of pension funds and mutual funds. As of January 2004, the global total of assets under professional management worldwide was $70 trillion, 50% of which was in the United States. These were divided as follows (in US dollars):
Pension fund assets — 18 trillion
Non-pension mutual funds — 11 trillion
Fiduciary assets controlled by insurance companies — 10 trillion
Assets of wealthy clients — 32 trillion
These immense funds are managed by a few hundred teams of independent professional investment managers. These institutionally managed funds account for an even larger percentage of equity trading and, in effect, are the market. Furthermore, the professional managers are empowered to exercise shareholder voting powers to ensure sound corporate governance practices. How active are institutional investors in exercising their voting power? In the United States, 60% of shares whose corporate control rights are vested in institutional investors are voted. Examples include CalPERS and TIAA-CREF in the United States. In Europe, large banks and insurance companies are becoming more “active” shareholders. While they have traditionally voted these shares in favour of management, an increasing number are not. Corporate governance and climate change are becoming top issues for fund managers.
The UN’s Principles for Responsible Investment (PRI), launched in April 2006, represent a major support for sustainable investment. A group of the world’s largest institutional investors controlling more than $4 trillion in assets have agreed to follow a set of common guidelines when they assess environmental, social and governance (ESG) risks and opportunities, and to apply these principles to all investment functions – i.e. not only to SRI products. The principles also reaffirm the primacy of fiduciary responsibility, declaring that because ESG issues can affect investment portfolio performance, investors acting in the interest of beneficiaries need to take them into account (www.unepfi.org). The six principles are:
- Incorporate environmental, social and governance issues into investment analysis
- Be “active owners”, integrating the issues into their ownership policies and practice
- Seek “appropriate disclosure”
- Encourage other investors to adopt the principles
- Work together to put the principles into practice
- Report on what they are doing to implement the principles
An important issue for institutional investors is their fiduciary duties with respect to environmental, social and governance (ESG) issues. The Asset Management Working Group of the UNEP FI asked a large law firm, “Is the integration of ESG issues into investment policy (including asset allocation, portfolio construction and stock or bond-picking) voluntarily permitted, legally required or hampered by law and regulation; primarily as regards public and private pension funds, secondarily as regards insurance company reserves and mutual funds?” The reply: “far from preventing the integration of ESG considerations, the law clearly permits and in certain circumstances, requires that this be done… Ultimately, the findings of this report should encourage fiduciary duty to shift its responsibility from the idea of maximizing profits, that in “agency theory”, …duty to shareholders should instead consider an investor’s wider legal obligations to weigh ESG considerations into each investment and subsequently provide reasonable returns for their shareholders.”
For access to the complete Knowledge Center, click here.
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This concept of ‘reasonable returns’ seems to bring in the idea of ‘contentment’ to the world of finance, which would be very welcome indeed. But any ideas as to what this would look like in real life? Any other questions you’d like to see answered?
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