Global Policy Forum

Edward Chancellor, author of Devil Takes the Hindmost, a history of financial speculation, articulates the growing concerns of many within the financial industry. What is the wisdom of basing long-term prosperity on a model that relies on speculation driven inflation of shareholder value from quarter to quarter? Aside from the now obvious dilemmas of probity within a framework that rewards executives primarily on short-term share price, how can businesses develop serious long-term growth strategies if they are constantly pressured to pump up share prices in the short term? Against a back drop of increasing global economic, environmental and social instability these questions are being asked at the heart of financial centres in Europe and North America. Promoting sustained returns based on sustained environmental resources, social inclusion and rigorous corporate governance, socially responsible investment (SRI) presents an increasingly attractive model for pension investors and many others in mainstream finance. Surge in SRI funds

In Europe there are now more than 220 retail based SRI funds, up from only 26 in the mid-1980s. From the US, the Social Investment Forum was able to report inJanuary that assets in socially screened investment portfolios climbed 36% to just over (GBP) 1,300bn (US$ 2,000bn) from 1999 to 2001. Despite the market slump during 2001, performance of socially and environmentally responsible mutual funds was robust. Nearly two-thirds of funds tracked by the forum earned one of the two highest rankings for performance from either Lipper Inc. or Morningstar or both.

Greater understanding of environmental and social stability and transparent corporate governance as core to a healthy economic climate has led to increasinginstitutionalisation of the principles of sustainable development within business and government internationally. As conflict is linked more to control of resources such as water, timber, coltan, or oil and militant extremism to prolonged impoverishment, the role of companies in creating healthy and economically active societies grows in significance. Emerging regulations at international, European and national level highlight the increasing importance for companies to demonstrate that they understand their corporate social responsibilities and continue to drive pension fund uptake of SRI principles.

Demanding accountability

Shareholders are foremost among groups demanding greater transparency and accountability for corporate activities. As the Myners report of March 2001 demonstrates, shareholder activism is seen increasingly as a lever to improve corporate, environmental and social performance. Fund manager attitudes are alsoaligning behind this view. Deloitte & Touche recently surveyed 65 UK based fund management organisations. The survey shows the majority of respondents, particularly the larger fund managers, believe that companies exhibiting strong environmental, social and ethical performance will outperform their peers. They also anticipate that consideration of corporate social responsibility performance will become a significantly important element of investment decisionmaking within three years.

In May this year, specialist UK insurer UIA took a bold step in affirming confidence in SRI performance by investing its entire (GBP) 90m portfolio in Morley Fund Management SRI funds. This ground breaking move enabled UIA to match its investment policies to the values of its customers without compromising investment returns. Acting on legal advice, the company was told that as long asthere was no financial detriment, investment in SRI was acceptable. UIA's board completed a due diligence process, examining research by a range or providers including ABN Amro Asset Managers, Hewitt Bacon & Woodrow, the pension fund advisors and Domini Social Investments. It concluded that SRI generally has not led to any risk-adjusted long-term underperformance.

Given the maturing perception within companies and the financial community of the link between sustainable development and sustained returns, supported by increasing legislation, it is likely that more pension funds will follow UIA. Commenting on the future of SRI Morley Fund Management CIO Gerry Hottham said "Ilook forward to the day when all investment managers will routinely declare thatthey hold the companies in which they invest to these three requirements of social responsibility: robust corporate governance, sustainability and human rights."

Key regulations and initiatives driving uptake of SRI

July 2000

- Amendment to 1995 Pensions Act requiring SRI disclosure issued in UK

- UN Global Compact launched - international business community commits to principles of sustainable development

January 2001

- Regulations requiring SRI disclosure issued in Belgium

March 2001

- Myners report issued advocating shareholder activism

June 2001

- EU begins development of CSR strategy for Europe

July 2001

- 178 nations commit to Kyoto global treaty on climate

- UK company law review issued advocating greater accountability for environmental and social impacts

August 2001

- Regulations requiring SRI disclosure issued in Germany

October 2001

- Association of British insurers issued SRI disclosure guidelines

February 2002

- International business community subscribe to Statement of Corporate Citizenship

March 2002

- French law makes environmental and social reporting mandatory

April 2002

- Global Reporting Initiative advocating international environmental and social disclosure becomes permanent institution

September 2002

- World Summit on Sustainable Development, Johannesburg