How does the SRI system work?
Much of the focus of SRI has been on the role of large institutional investors or asset owners. These institutions include pension funds, insurance companies, and banks that pool money to buy securities (money invested with them by retail investors like you), and the asset managers that they mandate to invest your money on their behalf. The diagram below illustrates how capital markets work.
Capital flows from the individuals on the right hand side to the listed companies on the left hand side. This flow takes place either via the institutional investors (asset owners), or via individual investors supported by retail financial advisors. Investment consultants and retail financial advisors will make recommendations on which fund manager to use to invest your money. This is known in financial markets as the “buy-side”, because it is here that shares on the stock exchange are bought.
The buy-side managers will receive analysis and stock recommendations from the “sell side”, brokers that act as intermediaries between companies and the buy-side managers.
Source: Aviva (2014) A Roadmap for Sustainable Capital Markets
Is your pension fund acting in your best interests?
As part of an asset owner’s fiduciary duty, which is the duty to act in the best interests of its members (e.g. pension fund beneficiaries), an asset owner should, in conjunction with its investment consultants, establish an investment mandate that the asset manager subscribes to. The investment mandate sets out the investment strategy according to which investments must be made by the asset manager on behalf of the asset owner.
An investment mandate should reflect the responsible investment strategy, if there is such a strategy, of the asset owner. This strategy should also be used to inform the selection of asset managers – i.e. the way in which asset managers select investments for the asset owner must conform to the values and strategies of the asset owner. However, in general, it appears that many pension funds do not demand that their investment consultants provide SRI advisory services. This means that many asset owners do not have SRI mandates. In instances where SRI mandates do exist, asset managers are in many cases not not implementing them. The subsequent low demand for SRI means that there is a lack of SRI funds available for investors, which reinforces the perception that SRI is not of importance or concern to the ultimate beneficiaries of investments.
You have the power
With the focus of SRI being on institutional investors, most people who have money invested in pension funds do not realise that, as the ultimate beneficiaries or owners of those funds, they have significant power over how those funds are invested. This power includes the right to know and influence how the asset managers managing your money are voting at the AGMs and other shareholder meetings of the companies you are invested in. It also means that you have the right to ensure that management of those companies is acting in the best interests of the shareholders. Shareholders’ interests include the manner in which companies manage environmental, social and governance risks – many of which are also important concerns to investors in their daily lives.
However, the majority of people do not know whether or not their pension fund manager supports responsible investing practices such as voting at AGMs. They also don’t know whether or not their pension funds are being invested in companies that have negative environmental or social impacts or companies that fail to support best corporate governance practices.
The behaviour of listed companies and their approach to both financial and ESG risks has an enormous impact on society. In a global environment where these companies in many instances have enormous power and are not effectively regulated by government, it is important that shareholders use their power to influence and change this behaviour so that the activities of these companies do not create risks and liabilities for future generations.