Just Pensions 2005 Responsible Investment (RI) Trustee Toolkit

• The toolkit aims to help UK pension scheme trustees understand more about RI and how they might integrate RI into their scheme’s long-term investment strategy.

• Just Pensions hopes it will be of interest to many stakeholders interested in pension schemes, institutional investment, fund management, as well as individuals interested in RI.

• The toolkit can be read in its entirety or each section can be read as a stand-alone guide.

Introduction to RIWhat is Responsible Investment (RI)?

• RI combines investors’ financial objectives with theirconcerns about social, environmental, ethical andcorporate governance (SEE/CG) issues. What are the different approaches that can be used byresponsible investors?

• Engagement

• Integration

• Positive Selection

• Negative Screening

RI Approaches - 1Engagement a.k.a. “shareholder activism” • Engagement refers to the processes through whichinvestors seek to improve a company’s SEE/CGperformance by means of dialogue on issues of concernand/or exercising voting rights at AGMs.

Integration• Integration occurs when active fund managers includepotentially material SEE/CG risks and opportunities into thenormal investment analysis, stock weighting and/or stockselection processes. • The analysis can be undertaken by the fund managerand/or specialist researcher, who feeds the information tothe fund manager.

RI Approaches - 2Positive Selection a.k.a. “positive screening” • Positive selection is a process by which investors selectcompanies that have superior SEE/CG performance. • Positive selection can come in a number of forms,including best-in-class and thematic investment.

Negative Screening a.k.a. “exclusion”• Negative screening refers to the exclusion of stocks andshares from investment portfolios on SEE/CG grounds. • An example of a negative screen is to excludecompanies that make tobacco products.

Regulation & Guidance - 1SRI Pensions Disclosure Regulation (2000)The amendment to the 1995 Pensions Act came into forceon 3 July 2000, requiring trustees of occupational pensionschemes to disclose in their SIP:

• The extent (if at all) to which social, environmental or ethical (SEE) considerations are taken into account in the selection, retention and realisation of investments; and

• Their policy (if any) in relation to the exercise of the right (including voting rights) attaching to investments.

Regulation & Guidance - 2

Myners Review of Institutional Investment & the ISCStatement of Principles (2001/2002)• The Myners Review (March 2001) recommended thatthe Government should create legislation encouragingshareholder activism. • Following discussions with the ISC, the Governmentagreed to the ISC’s proposal to pursue thisrecommendation, initially voluntarily, through a set ofISC principles.

• The Government agreed to conduct a review to assessprogress after two years.

Regulation & Guidance - 3HM Treasury's Review of Progress on theMyners Principles (2004)The HM Treasury published its Review of Progress on theMyners Principles and proposed a number of revisions tothe principles, including:• Principle 6 (Activism) to ensure that trustees comply

with the ISC Statement of Principles and ensure that the ISC principles are incorporated into fund managers’ mandates.

• Principle 10 (Reporting) to ensure that trustees report on their implementation against all the Myners Principles, make performance assessments available to scheme members and post on the scheme website the key information they provide annually to members.

Regulation & Guidance - 4 Pensions Regulator’s Trustee Knowledge &

Understanding Scope Guidance (2005)• The Pension Act 2004 requires that trustees must have

sufficient knowledge of pension and trust law to run their schemes properly.

• The Pensions Regulator published scope guidance for both DB and DC schemes on the topic of trustee knowledge and understanding, including a specific reference to RI and CG in relation to the scheme’s statement of compliance with the Myners Principles.

The Case for RI - 1 The Shareholder Value Case for RI

• Many SEE/CG risks/opportunities are investor relevant.

• Corporate Governance: An assessment by Deutsche Bank on the governance of FTSE350 companies at the end of 2000 & 2003 found that 10% of companies with the best corporate governance structures and behaviour outperformed those in the bottom 10% by 25%.

• SEE Issues: Research commissioned by the Environment Agency Pension Fund found 85% of the literature review studies demonstrated a positive correlation between environmental governance and financial performance.

The Case for RI - 2 The Regulatory & Legislative Case for RI• The UK government clearly recognises the importance

and substantial benefits to shareholders of taking potentially material SEE/CG risks and opportunities into account.

The Industry Best Practice Case for RI• The view of industry associations, such as the NAPF and

ABI, on RI is best articulated in the ISC statement of principles.

The Case for RI - 3 The Legal Case for RI• Trustees can legally take account of SEE/CG issues in

relation to their investments, so long as this delivers improved or equivalent financial returns, and is subject to the overriding requirements of trust law.

The Moral & Values-Based Case for RI • Investors, as owners of the companies in which they

invest have a moral obligation to act to mitigate any negative social or environmental impacts of these companies.

First Steps - 1Section 4 of the toolkit provides best practice first steps forfour different types of pension scheme:

The first steps outline:

• Why do it?

• Which schemes are doing this?

• How can trustees do this?

First Steps - 2DC schemes with members who have diverse values:• Trustees should ensure that the default fund is managedappropriately in terms of RI issues and ensure that social,environmental, ethical and corporate governance(SEE/GC) risks and opportunities are taken into account instock selection and/or shareholder activism by their fund managers and other service providers. Examples: Barclays, Friends Provident and Legal & General

• Trustees should also consider offering a screened fundoption for members.Examples: Barclays, Legal & General and BP

First Steps - 3DB schemes with members who have diverse values: • For passively managed mandates, trustees should followthe shareholder activism route to ensure that fundmanagers or service providers engage with investeecompanies on SEE/CG risks and opportunities and thenintegrate the information into voting strategy.Example: British Coal Staff Superannuation Scheme

• For actively managed mandates, trustees should followthe integration and shareholder activism route to ensurethat fund managers engage with investee companies onSEE/CG risks and opportunities and then integrate theinformation into stock selection and voting strategy. Example: Shell

First Steps - 4DC schemes with members who have similar values:• Trustees should offer a range of RI funds, with differentlevels of investment risk, all of which reflect the employer’smission and employees’ values. Example: Forum for the Future

First Steps - 5DB schemes with members who have similar values:• Trustees should consider adding one or more specialistmandates that reflect the employees’ values or employer’smission. Examples: Environment Agency & UNISON Staff PensionScheme • Trustees should also ensure that the other funds aremanaged appropriately in terms of RI issues and that SEE/CG risks and opportunities are being taken into account in stock selection and/or shareholder activism bytheir fund managers and other service providers. Example: Environment Agency

Potential Next StepsAfter pension schemes have implemented theappropriate best practice first steps, the following optionsare open to them:

• Conduct a Portfolio SEE/CG Risk Analysis/Monitoring

• Address Concerns with an ‘Avoid and Explain’ Policy

• Support Positive Selection

• Encourage Better Broker Research on SEE/CG Issues

• Join forces with other trustees via collaborative initiatives(i.e. Enhanced Analytics Initiative, Institutional InvestorsGroup on Climate Change, Local Authority Pension Fund Forum & the Marathon Club)

‘How to Do It’ Guides to RI - 1Getting Started Provides some basic tips for trustees on how to get started:• Complete the self-assessment questionnaire. • Discuss the results of the questionnaire at your next

trustee meeting. • Make allies with other trustees outside your fund about

RI and exchange ideas and learning.

Developing High-Level Policy• Highlights that trustees need to decide whether theyadopt their own policies, adopt industry-wide codes (suchas the ISC code), adopt the fund manager’s own policy onengagement and/or invest some money into specialistapproaches. • Implement internally or delegate to a fund manager?

‘How to Do It’ Guides to RI - 2SIPs• Meet requirements of the amendment to the 1995Pensions Act – ‘SRI Pensions Disclosure Regulation’.

Implementation Policies & Mandates• As a SIP only provides the broad framework for a fund’sapproaches to RI, it is essential that trustees design animplementation policy and/or reflect their SIP in some, orall, of their mandates.

Reminder• In doing the above trustees should always seek

professional advice and consult members.

‘How to Do It’ Guides to RI - 3Fund Manager Selection - Engagement• Trustees should seek professional advice frominvestment consultants.• Trustees should formally request that their investmentconsultants evaluate fund managers with respect to theirengagement capability and performance.• Trustees should ask fund managers questions about RI.• Trustees should assess how fund managers areresponding to the pilot Transparency Guidelines for Engagement & Voting, which aim to provide a consistent framework for disclosure to trustees.• TUC have expanded the no. of questions it asks fundmanagers on engagement in its annual Voting Survey.

‘How to Do It’ Guides to RI - 4Assessment & Review: SIP & Implementation Policy• Trustees should formally review the scheme’sSIP/implementation policy on a regular basis in order toidentify any necessary changes in approach.• This would normally take place annually and/or after theoccurrence of a major market development.

Assessment & Review: Fund Managers • Trustees should also formally review the performance oftheir fund managers on an annual basis to ensure that theyare delivering on the objectives specified in the SIP/mandate.

• Transparency Guidelines and league tables onshareholder activism by investment consultants will provideuseful information.

‘How to Do It’ Guides to RI - 5Reporting – To Trustees• Reporting to trustees on RI activity is essential for trusteesto be able to satisfy themselves that their policy is carried outconsistently and rigorously.• For engagement and integration approaches, trusteesshould be provided with reports on a regular basis oralongside performance reports detailing aspects of SIPimplementation.

Reporting – To Scheme Members and the Public • The HM Treasury’s Review of Progress on the MynersPrinciples states that it is important for trustees to report toscheme membership and the public.

Conclusion & Appendices

Useful Networks, Resources & Links

Appendix A: Self-Assessment Questionnaire for Trustees

Appendix B: Questions for Trustees to Ask about

Engagement based RI

Appendix C: Responsible Investment Glossary & List of

Acronyms