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Public pensions, fiduciary duty and SRI

Who do you think sets the agenda for our society? A healthy democracy should lay this responsibility at the feet of the individual citizen, but I suspect that great swaths of the population feel so far removed from the decisions governing their lives that they don’t even bother to get out and vote any more. That is truly a shame.

Is it the politicians then? Perhaps, but there is widespread suspicion that politicians are simply answering the agenda of big business. Indeed, many dynamic leaders in our society shy away from politics because they consider themselves more effective working for change from outside the political system. To enter politics would subject them to external pressures, real or perceived.

Is it big business then that is calling the shots? This is a theory very much in vogue. Big business makes a convenient scapegoat for our societal ills, and it is not difficult to construct an argument around that view. But to the extent that corporations respond to the buying habits of consumers, and to the fickle capital flows of investors, we come full circle to questioning whether individuals indeed do have ultimate influence in shaping society.

But there is a piece missing from this puzzle, namely, the role played by the many enormous pension funds that direct truly massive amounts of investment dollars. These funds may be invested with the members’ financial benefit in mind, but are they invested to also benefit the environment, our communities, the less fortunate? Indeed should they be? Can they be? Before I attempt to answer those questions, lets have a closer look at one such pension fund.

As of March 31, 2002 the BC Investment Management Corporation had $59.8 billion of assets under their administration. Their investment activities help to finance the retirement benefits of more than 353,000 residents of British Columbia, including public servants, employees of Crown agencies, university and college faculty and staff, schoolteachers and administrative staff, municipal employees, and members of the Legislative Assembly. I would say that $59.8 billion gives the BCIMC some degree of leverage over the activities of the corporations whose shares they hold.

A full inventory of BCIMC’s investments can be found at www.bcimc.gov.bc.ca/investments/. It would take a month of Sundays to go through these holdings one by one, but here are some highlights. BCIMC has over $100 million invested in a variety of tobacco companies, more than $50 million in some of the world’s most prolific arms manufacturers, $138 million in Talisman Energy, $109 million in Wal-Mart and $114 million in Nestle. In addition, $50 million worth of Enron and Worldcom stock they held in 2001 could now be used to wallpaper the bedrooms of every teacher in the province.

To be fair, the managers of these funds were not the only ones fooled by the fraudulent accounting practices at Enron and Worldcom, and their holdings do include a variety of companies that would be suitable components of any socially responsible fund. But what about the more controversial investments?

There appear to be two major obstacles in convincing pension funds to invest in a more socially responsible light. First, just how do you get those 353,000 stakeholders to agree on what is responsible and what is not? To use just one example, we may all desire a world that is at peace and free from violence, but for every person who feels that the path to peace will be achieved through disarmament, there is another who feels that ‘might is right’ and peace can only be assured by building bigger and better weapons than anyone else. The last time I recall a universal consensus arising from an obvious social injustice was when the world agreed not to do business with the apartheid regimes of South Africa. We are on the cusp of another such agreement with regards to the Kyoto accord on global warming but, clearly, unanimity has yet to be achieved.

The second obstacle to a more compassionate and enlightened approach to pension governance is a result of the pension trustees’ fiduciary responsibility to their clients. That is, to what extent is it permissible for trustees to invest with anything other than maximum financial returns in mind? In a report on trustee investment powers prepared by the BC Law Institute, the following conclusion was reached: “As the law now stands in British Columbia, trustees are likely in breach of trust if they apply non-economic criteria in selecting investments, such as a policy of boycotting certain industries or securities of certain governments, and thereby obtain a lower level of return than would be the case if only economic considerations were used”.

How unfortunate that economic imperatives always seem to outweigh moral imperatives. Yet despite the obstacles that pension members and trustees face in adopting socially responsible investment principles, why not begin by establishing a framework and process through which members can ensure the fund reflects their interests and needs. Surely there are a number of issues upon which trustees and plan beneficiaries can agree. How about pay equity? Screening of companies that may produce goods with sweatshop labour? Eliminating investments in companies that do business with repressive regimes? Can an agreement be reached to require businesses held in a pension fund to at least report on their environmental and social practices?

You may notice that the legal opinion cited above recognizes that a positive outcome resulting from an ‘ethical’ investment approach would not expose trustees to legal action. Nevertheless, the very prospect of legal proceedings is likely enough to cause trustees to suffer from terminal inertia. Don’t expect them to implement these initiatives. Probably looks like a can of worms as far as they are concerned. It will take action from the grassroots of plan membership to nudge pension plans into taking a more socially responsible investment approach.

Note: Talisman Energy announced on October 30, 2002, that they are selling their operations in war-torn Sudan. Talisman CEO Jim Buckee said “Shareholders have told me they were tired of continually having to monitor and analyze events relating to Sudan”.

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