SRI in Practice

The article, "No Chickening Out," in the November issue of IR Magazine profiles the head of Socially Responsible Investing (SRI) at Jupiter Asset Management, Emma Howard-Boyd. (Subscription only).

In her position, she oversees funds within six green categories, including clean energy, water management, waste management, green transport, environmental services, and sustainable living. It is her feeling that the next step in SRI will be about how companies communicate long-term issues and their impacts. She also stated that there is not enough emphasis on presenting strategic, financial data concerning the surmounting of sustainability barriers (such as energy cost increases).

However, she did mention that "information flow has improved dramatically" in the past 12 years, with quality IR communication aimed at SRI analysts and increased disclosure either in annual reports or in stand-alone sustainability reports. She singled out both the banking and retail sectors as leading this charge.

Companies that provide goods or services that improve environmental conditions or contribute to sustainable living practices fit Jupiter's criteria for their SRI funds. Banks are capitalizing on responsible lending, and supermarkets touting organics such as Sainsbury enjoy increased sales. Howard -Boyd adds that companies tend to single out SRI analysts only, yet issues such as climate change and energy costs are now "material issues," deserving the attention of all analysts.

The Government Pension Fund of Norway is itself a socially responsible investor, and it made news over the weekend after its value increased in the third quarter by $32.1 billion, the largest quarterly increase in the fund's history. The state investment fund, now formally called The Government Pension Fund - Global, is designed to support an increasing number of retirees in the country by using petroleum revenues to manage long-term, foreign investments. Norway's offshore oil industry makes it the third largest exporter of oil in the world, just behind Saudi Arabia and Russia.

Norges Bank, the central bank of Norway, manages the fund, investing the capital in bonds and equities outside of the country in accordance with protocol administered by Norway's Ministry of Finance. What sort of protocol? For one, the fund can not hold more than 5 percent of a given firm. In addition, the Associated Press reported that, "the $263 billion global fund is under strict government imposed ethical guidelines to ensure that money doesn't go to companies linked to such things as weapons production, human rights abuses, environmental damage or coruption."

The guidelines, which were imposed in 2004, have led to the exclusion of 18 companies from the fund, 12 of which are US based. The Finance Ministry acts on recommendations made by the National Council of Ethics, which periodically reviews the investments. When unethical operations cause a company to fall outside of acceptable terms, the company's shares are sold off, and the name of the company and reason for exclusion are made publicly available.

Obviously this sort of disclosure can have repercussions. Benson Whitney, the U.S. abassador to Norway said that "the stain of an official accusation of bad ethics harms reputations and can have serious economic implications." Selling off all the shares of a banned company certainly has serious economic implications too - and a couple US companies have seen their share prices drop as a result.

While these conditions clearly can provide incentives for improved corporate governance, should the fact that this is a state-owned fund call into question the very ethics of the methods used, which seem to create incentives based on penalties and negative recognition resulting from exclusion, as opposed to positive recognition resulting from inclusion? Is Norway just in its efforts to “weed” out unethical corporate entities, or is it leveraging its resources to unilaterally assume a role as a global hall-monitor, and rather unethically, impose its code of ethics on global markets?

Nonetheless, Knut Kjaer, director for the central bank's investment branch, said that the fund is being copied by a "major player," and "a lot of praise for Norway around the world" has been prompted by the fund, which is now the largest pension fund in Europe.

This state owned fund owns .5 percent of the global public equity market, making it quite influential due to its scale. In an article in the Australian, Kjaer reveals that the bigger you are, the more of an impact your investments will make, however he claims that he tries to minimize the market footprint that this fund leaves with the latest technology and direct links to stock exchanges to "cover our tracks as much as possible."

However, in the same article, he did leave a caveat for other investors to follow the lead of his fund, admitting that working alone on corporate governance doesn't create much impact. But, he stated, "it is only when we come together with other investors on common positions that we can have a real impact."

Thoughts?

Technorati Tags: SRI, Corporate Governance, Corporate Social Responsibility, CSR, The Government Pension Fund - Global