The Pensions Trust defends responsible investment policy

Companies operating in the non-standard credit market became the focus of pension scheme attention in July when it was revealed that the Church of England fund held indirect investments in payday lender Wonga.

Institutional investors have been urged to take into account factors other than performance in their investment decisions, but schemes and fund managers have warned against the difficulty of screening particular assets.

The Pensions Trust had been approached by an employer from SHPS, who was concerned that an investment in high-interest lender Provident Financial was at odds with the needs of the often-vulnerable people housing associations serve.

“[Our response to employers] set out the approach we’re adopting... and our partnership with Governance for Owners, which assists us in engaging with employers where we believe there is room for improvement,” said Logan Anderson, head of customer relations at the trust.

The organisation has been a signatory to the UN-backed Principles for Responsible Investment since 2010.

Scheme rejects screening

The trustee board’s investment subcommittee considered the issue at its next meeting in early September. Anderson said while it “remained comfortable with its own position as trustee” it sought to make the SHPS pensions committee aware of the alternatives for screening individual holdings.

The primary aim of pension fund trustees is to earn the returns required to pay pensions

“Setting up a similar passive fund to that which SHPS currently invests in, but excluding payday loans companies, comes at considerably more cost than the arrangement that the scheme currently has,” he said. “The cost of setting such arrangements up and the annual running costs are actually higher than the size of the investments themselves.”  

He also noted that the company in question forms part of the FTSE4Good Index and as such does “not fail on the criteria for this ethical investment vehicle”.

After deliberation, the SHPS committee decided to continue with the status quo. “It agreed to continue its endorsement of [The Pensions Trust’s] approach that the investment aims of the scheme should continue to focus on the financial interests of the members. It is writing to employers setting this out,” Logan said.

Craig Mackenzie, head of sustainability at Scottish Widows Investment Partnership, said pension scheme trustees need to ensure the managers they appoint understand social and responsible investment risks, and are active shareholders. “This isn't easy because many managers talk a good story on this without walking it,” he said.

Mackenzie added that fiduciary responsibilities often mean “money trumps ethics” and expected poor returns is usually the driver for any divestment.

Universities Superannuation Scheme’s co-head of responsible investment David Russell agreed that schemes should behave as active owners.

“There is no doubt that the primary aim of pension fund trustees is to earn the returns required to pay the pensions of their members. However, this doesn’t preclude them from being responsible owners,” Russell said.

He added that the USS does not operate an ethically based screen, “but does believe that there is value to our members in ensuring that the investments we make on their behalf manage these ESG issues appropriately”.

There is an increasing expectation for investors to report on sustainability factors as part of good fiduciary management, said Chris Washington-Sare, marketing director at Camradata, which provides data analysis and reporting services to investment consultants and institutional investors. 

"For example, the Association of British Insurers in its guidelines to institutional investors expects that a company’s annual report should include information on ESG-related risks that may impact on the future of the business," he said.

"Additionally regulatory requirements are getting stricter and good fiduciary management means absolute compliance with the requirements."