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Few set out on road to ethics

14 April 2001 - The Guardian (UK) - Despite activists' clamour, key pension funds have yet to move towards socially responsible investment. Tony Levene reports

Most of Britain's biggest pension funds have proclaimed that they are taking on board ethical issues, amid the continuing success of protesters who have targeted the financial backers of Huntingdon Life Sciences.

But in a report due to be published later this month, campaign group Friends of the Earth will reveal that few of these top pension funds have so far made concrete moves towards social responsible investment (SRI) - the blanket term for environmental and ethical investment.

Since last July, pension funds have been obliged to give members a "statement of investment practice". This tells scheme members of the fund's SRI attitudes, and whether they have a policy - or not - of screening out shares in "dirty" companies which pollute, have a bad record on human rights, or are in industries such as tobacco or pornography which are seen by many as morally reprehensible.

From next July, pension funds will also help in the shape of FTSE4Good, a new index which will only include UK companies which meet SRI criteria.

Many of the funds have seen the way the SRI winds are blowing. Last Thursday demonstrators waved placards urging mining group Rio Tinto to "Put Principles Before Profits" at its annual general meeting.

Mirrar Aboriginal people and supporters distributed leaflets opposing the Jabiluka uranium mining project in northern Australia.

"We need a guarantee that this project will not go ahead... community opposition is not going to go away. They [Rio] assert they are a corporate responsible citizen, we want to see some evidence," says Jacqui Katona, spokeswoman for the Mirrar.

But instead of the protesters being ignored or thrown out, Rio Tinto did at least re spond to concerns. It said the project could not go ahead legally without the consent of traditional land owners.

Whatever fund managers may think of the Mirrar protest, one factor is uppermost in their minds - the underperformance of Rio Tinto shares this year.

It is not the only company under attack from SRI activists who increasingly "engage" with companies to bring about change rather than simply selling the shares.

FoE has spent £30,000 on shares in construction group Balfour Beatty which is leading the consortium hoping to build the controversial Ilisu dam in Turkey.

It has put down a resolution for next month's annual meeting calling on Balfour Beatty to recognise the World Commission on Dams report which is critical of the Turkish project.

FoE's Tony Juniper says: "This is a significant step forward to show big business how serious we are in wanting to reform corporations. Balfour Beatty should put the planet on its bottom line. It's about changing a company's culture."

Change could come fast. Morley Fund Management, owned by insurance giant CGNU and controlling assets worth around £100bn - around 2.5% of the UK stock market's total value - says it will vote against FTSE 100 company annual accounts unless firms include an environmental report. So far only 37 do this although a further 21 say they intend to start doing so.

Other fund managers are likely to follow this lead as pension fund trustees put on pressure.

From July, the FTSE4Good index series will allow investors to see which All Share Index constituents pass SRI tests. Besides the UK index, other FTSE4Good benchmarks will take in Europe, the US and the world.

The index will also offer new facilities for ethical tracker funds - those currently run by Legal & General and NPI suffer from the lack of a widely accepted index.

FTSE will announce which companies are in and which are out every six months. Except for total "no-no" sectors such as tobacco, armaments and animal testing for cosmetics, the object is to be inclusive - unlike the narrowly based rival Dow Jones Sustainability indices which rejects around nine in 10 firms.

FTSE wants to encourage companies to qualify - on day one around 60% of major companies will be included. The baseline will be good practice backed by measurable environmental performance. "Hurdles" for entry will be increased over time - and companies in high environmental impact industries such as mining or agriculture will have to conform to higher benchmarks.

But FTSE realises it has a potential hot potato on its hands. "We don't expect activists to abseil our office block. But we do expect controversy," FTSE says. "Besides pressure groups, the companies themselves could complain if they are excluded. We shall have transparent rules and firms will be allowed to challenge decisions."

Other potential problems include:

• What to do with one-off events such as a major environmental disaster.
• Criteria for throwing companies out of the index - firms may argue they are being treated more harshly than others.
• Takeovers - will there be a pain threshold based on the proportion of the "dirty" business in the new entity or will the index continue to recognise good management?
• Targeted companies - some firms have been spotlighted by activists when rivals are ignored even though they might be worse.
• Investors will be able to compare the performance of the new index against the market as a whole. But there are no plans for a FTSE4Bad index.

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