Pensions With Principles

Ensuring unions' assets are invested responsibly

Introduction

Few would disagree that trade unions should be concerned with ensuring that their financial assets are invested in a way that does not conflict with their principles. Historically this has proved somewhat difficult as questions have been raised about the practicality, and even legality, of seeking to develop an 'ethical' approach to investment.

More recently there have been significant developments in the fund management industry that have resulted in the growth of so-called socially responsible investment (SRI). There is a wide range of SRI products available which can marry the desire to invest in a responsible way with the need to generate decent returns.

There are also now several practical examples of unions using their investments more proactively, and seeking to ensure that they are encouraging high standards in the companies in which they invest. In addition both the TSSA [1] and the TUC [2] have produced set of principles to help guide investment strategies. Such investment practices and principles could be adopted (or adapted) by other unions.

Finally, there are initiatives in the pension and investment world, which could be of use to unions, and as such could be practically supported.

This paper argues that all unions should now consider how they are investing their assets, and seek to develop a responsible approach to investment if at all possible.

How do unions invest their own money?

British trade unions have been increasingly active in encouraging shareholders to think about their responsibilities to both companies they invest in, and the society those companies operate in. In practical terms this has involved union encouraging investors vote to against excessive pay deals for directors and push companies on other governance issues [3] . There has also been some union support for campaigns and organisations that seek to encourage the growth of socially responsible investment amongst pension funds [4] .

We have been less effective as a movement at making sure our own money is invested in a responsible way, with some notable exceptions. Unions are rarely in control of the voting rights of the shares they own, and responsible investment strategies are rare.

This is partly for practical reasons. Individual union funds, particularly pension funds, are small and as such do not have much resource to spare. In addition a number of these funds are invested through pooled arrangements where, for example, it might be difficult to gain control of the exercise voting rights.

This is problematic for two reasons. First, it means that a union pension fund's shareholder votes or investment strategy may conflict with the union's public stance on a particular issue. Second, there are clear differences between managers both when exercising voting rights, and in their engagement with management over social or environmental issues. Put simply, some managers are far more likely to support management on a whole range of issues than others, sometimes in almost all cases.

The TUC does not believe unions should be complicit in a relationship between investors and companies where votes are rarely cast against management or where questionable governance of social responsibility practices go unchallenged. Therefore unions should consider both controlling their voting rights, and developing socially responsible investment strategies. Both are explored below.

Shareholder voting

The case for unions taking a more hand-on role in voting their shares was explored in a previous TUC paper [5] . Following the endorsement of the paper and its action points by the executive committee, the TUC carried out a brief survey of trade union pension funds in August 2004. This sought to establish their current approach to shareholder voting and SRI, and whether there was any demand for a pooled voting service.

The survey ascertained that most unions delegated the exercise of voting rights to their appointed fund managers and that, at that point, there was little demand for a voting service. Looking at SRI, only one fund had a specific strategy in place. This was based on replies obtained from 10 unions.

This delegation of voting rights represents a missed opportunity. As was noted in a previouspaper [6] , unions currently collectively have investments through staff pension and general funds in the region of £1bn. Whilst not large when compared against the assets of the bigger pension schemes this does represent a slice of ownership, under direct control by trade unions, that can be used in the stewardship of UK businesses.

There is the opportunity to set a positive example to other investors and demonstrate joined-up policy and practice within the trade union movement. Therefore the TUC continues to advocate that where possible unions take control of the exercise of their shareholder voting rights.

Approaches to socially responsible investment

When considering how unions could respond to the opportunities offered by SRI it is useful to start by explaining some practical points. Much of the debate around the practicality of SRI has suffered from a misunderstanding of the potential approaches available.

There are two main strategies that trustees can employ - screening and engagement. Many of the preconceptions about SRI and the legality of unions embracing it are based on the screening approach which, whilst still used, has largely been superseded by engagement as a tool employed by most investors.

Within screening there exists the use of both negative and positive screens. In a negatively screened portfolio certain stocks would be excluded because they fail to meet certain social or ethical criteria (on say labour standards, or human rights) or because they fall into industry sectors that are deemed to be unethical (tobacco, defence, oil etc). In a positively screened portfolio the fund manager would favour certain stocks because the companies were involved in socially progressive enterprises or were the most highly rated on social or ethical issues in their industry.

It is important to recognise that in most cases today investments are screened out on the basis that their exposure to corporate social responsibility risks could damage share price performance. It is an investment decision. In addition screened portfolios typically seek to replace stocks that are not deemed suitable for investment with other investments with comparable characteristics. This is intended to offset the impact of not holding the stocks which are screened out. As such there is no reason to assume that screened portfolios are incompatible with fiduciary duty.

There are positive points for consideration in favour of screening. For one it provides a comfort factor. The fund will not invest in stocks that are felt to fail to meet high standards of corporate behaviour, and as such present a potential risk. There will be no danger of the union being 'exposed' for holding investments in irresponsible companies. In addition a number of companies now actively seek inclusion in the socially responsible investment indices typically used by screened funds.

There are also a number of criticisms to be made of screening portfolios. The first is strategic. While disinvesting from a company can be useful as a tool for making a public protest at its actions, it can clearly only be used as a one-off. Publicity may be gained at the time and it is possible the disinvestments may have an adverse effect on the company's share price. However, once this action is taken investors have no leverage with the company to encourage better behaviour. In addition the investor has to sell their shares to someone else who is willing to invest in the company. So in real terms the company will be relatively unaffected.

Secondly there is the question of risk. By definition a pension fund investment portfolio that is screened will have a restricted universe. This does mean that the portfolio might experience volatility that would not be expected in an unscreened portfolio (although by seeking replacement stocks this might be mitigated).

Finally there is the question of the types of companies to be screened out. Many socially responsible investment funds screen out certain industries such as defence, tobacco and nuclear power. It is not at all clear that adopting such screens would be in the long-term interest of union members in those industries. As such it might be necessary, if screening was felt to be a useful tool, to develop a screen specific to union interests - either screening out companies in clear conflict with trade union interests, or positively screening to include companies with good workplace practices. Building a specific screening policy is in fact the approach take by the Unison staff pension scheme (see below).

Engagement is almost the opposite approach to screening. Investors retain shares and then 'engage' with those companies to seek to change their behaviour. The form of engagement seems to vary from letter writing to face-to-face meetings to the exercise of voting rights at the AGM.

This strategy has the advantage that it clearly does not affect the underlying investment portfolio of the pension fund as no stocks are being bought or sold on the basis of how the company behaves, and as such there is no change to its risk profile. There is clearly no conflict with trustees' fiduciary duty, indeed if value is created as a result of the engagement then the fund benefits financially. In addition precisely because shares continue to be held the investor still retains some degree of power over the investee company, and engagement can overlay any investment portfolio.

Engagement is the approach taken by many fund managers who now offer socially responsible investment products, by some individual pension funds such as the Universities Superannuation Scheme and some local authority funds.

There are criticisms to be made of engagement. It is not proven that this approach has a demonstrable effect on the companies concerned. A piece of work done on behalf of the Just Pensions project suggests that the impact of engagement so far has been limited, and that precisely what impact it has had is difficult to quantify [7] . There are also concerns that as it is currently a rather nebulous concept fund managers are able to claim almost any activity as engagement.

Equally there is building evidence that engagement does deliver results. In its Sustainability Pays report Co-operative Insurance included an analysis of engagement carried out by PIRC [8] . This found that in a number of key cases engagement had led to changes in company behaviour. For example it argued that it was largely shareholder pressure that led GlaxoSmithKline (no stranger to shareholder revolts) to lower the price of AIDS treatment drugs in developing countries.

Similarly many of the fund managers with a socially responsible investment capability assert that they can point to examples where engagement with companies has led to change, although clearly these managers do have a commercial reason for making such claims.

Finally another practical advantage of engagement over screening is that it is a strategy that can be applied across all kinds of portfolios and does not have an impact on either stock selection or asset allocation. This is likely to be more acceptable to trustees who are concerned about being seen as subverting their fund's investment strategy to fulfil a social purpose.

So unions that wish to adopt an SRI strategy not only are not prevented from doing so, they also have a clear choice in how to go about it. There is a reasonably wide choice of SRI funds and services too choose.

Unions taking an active approach with their investments

As has been seen, at present many unions do not make the most from the way that they invest their assets, either in relation to shareholder voting or socially responsible investment. It is also clear that the opportunities are there for unions to play a more active role.

This is no longer simply a question of what might be good in theory, there are now practical examples of unions putting such ideas into practice. In the following section there are four practical examples of unions, and the TUC, taking a more progressive approach with their investments.

1. Unison staff pension fund

Morley Fund Management runs a £100m SRI mandate for the Unison Staff Pension Scheme. When it was awarded in 2003 this was the largest SRI pension fund mandate in the UK.

The fund is invested in Global Equities and managed by Clare Brook, director of SRI and Peter Michaelis, SRI fund manager. In addition to taking social and environmental factors into account the mandate also seeks to avoid investing in companies that are involved in privatization of public services where possible.

Paul Coard, pensions manager at Unison, said: 'The trustees of our pension scheme feel that their investment policy should not unnecessarily clash with the values of the trade union which is our principal employer. We therefore chose Morley to run this SRI mandate as they presented an investment philosophy which fits well with the values upheld by our organisation.' [9]

2. TSSA general fund

The statement below is the TSSA's ethical investment charter which is applied to the union's general funds. It has contacted all the companies in which its general fund is invested to ascertain whether they adhere to the ILO's core labour standards. Its assets are managed by Barclays Global Investors.

'The Transport Salaried Staffs' Association (TSSA) believes that its investments should be made in companies that have stable and secure working environments in which trade unions are recognised and employees are valued as the core element in the company's future well-being.

As a trade union, we look to companies to demonstrate their commitment to all their employees by reference to the appropriate International Labour Organisation conventions which cover:-

• freedom from discrimination;
• freedom from bonded or forced labour;
• freedom from oppression;
• freedom from dangerous working conditions;
• freedom of association;
• the right to organise and collective bargaining, and
• the right to equal remuneration

We will expect companies in which we invest to work with their existing suppliers and sub-contractors to implement these policies on employee rights.

We will achieve our objectives through a policy of engagement and persuasion.

Our Investment Managers have been instructed to take account of the above principles, to bring this Charter to the attention of those companies in which we hold shares and, if necessary, seek to persuade them to take account of our principles.

We will allow a reasonable period of time for our aspirations to be achieved.

We recognise that it is not possible to achieve our aim of a more responsible corporate management in isolation and we wish to see progress towards the establishment of a world wide 'Ethical Investment Charter'.

We believe that the collective financial strength of those unions affiliated to the Trades Union Congress, the Irish Congress of Trade Unions, the Scottish Trades Union Congress and other like-minded bodies should be marshalled and these bodies encouraged to use their financial power to achieve our objectives.

We will monitor the progress of our Charter continuously.' [10]

3. NATFHE pension fund

The following text is taken from the NATFHE pension fund's statement of investment principles and relates to the fund's position on socially responsible investment. Its assets are managed by Legal & General.

'The trustees have concluded that it is correct for the scheme's equity investments to be significantly overweight in companies that are included in the FTSE4Good index, through use of index-tracking funds making use of this index. This index excludes companies that are involved in certain industries such as tobacco production, weapons production and those involved in nuclear power. The index also screens out companies which are not considered to have good practice in respect to environmental sustainability, human rights and stakeholder relations. The trustees consider that this allows a socially responsible investment policy to be combined with a passive investment strategy.

'Day to day decisions as to what constitute socially responsible investment are delegated to the investment manager or to the relevant socially responsible investment index constructor, subject to any restrictions imposed by the trustees from time to time in writing.' [11]

4. TUC Superannuation Society

The Society takes its responsibilities as an investor, and owner, seriously. To demonstrate its commitment to openness and accountability, since late 2003 the Society has reported every quarter both to staff and publicly on the TUC website on how its shares in UK companies have been voted.

Since early 2004 the Society has also instructed the scheme's fund manager how to vote its shares. The Society subscribes to voting recommendations from PIRC which, once considered, are passed on to the fund manager.

The Society's voting is broadly explained in terms of the overall number of meetings where it had voting rights, and at how many of these the Society either supported, voted against or abstained. The Society reports on specific companies by exception. That is where the society has voted against or abstained on an issue at a company this is reported publicly.

In May 2005 the Society also became an associate member of the Enhanced Analytics Initiative (EAI) which is explained in more detail below. In this capacity the Society will encourage its appointed fund manager to join the EAI.

Support for unions seeking to review their investment approach

As can be seen from these examples, a number of trade unions have already developed or are trying to develop more activist and responsible approaches to the investment of their assets. There is, therefore, existing knowledge and experience within the movement for other unions wishing to review the approach they take to the investment of their assets.

In addition the Trade Union Investor Group exists as a resources for unions to draw upon. The group brings together union officers, activists and members who are pension fund trustees who are interested in the investment field. From the examples given above, both Unison and the TSSA are regularly represented at Group meetings, which take place several times a year.

Unions wishing to review the investment of their assets are encouraged to participate in the group. More information is available on the TUC website [12] .

Investment initiatives unions could support

Unions are not alone in exploring the opportunities to use financial investments as a lever for change. A number of pension funds and other investors increasingly seek to invest in a socially responsible way. In some cases investors are coming together to try and bring about change either in the financial markets or the companies in which they invest. In some cases there are overlaps with what unions what unions might wish to achieve.

The Enhanced Analytics Initiative

A good example of this is the Enhanced Analytics Initiative (EAI). In simple terms the EAI seeks to encourage financial analysts to begin taking a broader, and longer-term, view of the companies they analyse. Specifically it encourages research into 'extra-financial' issues such as the corporate governance, environmental impact and human capital management. It does this by assigning a fixed amount of broker commission to research into such areas.

Many large institutional investors, such as internally managed pension funds and fund managers, pay commission to brokers (also known as 'sell-side' analysts) to produce company research. EAI members have agreed to allocate a minimum of 5% of their commission to extra-financial research.

It is clear that unions are not in a position to play this role since union pension funds delegate management of their assets to external fund managers. However unions could support the EAI as associate members. In this case associate members encourage the fund managers they appoint to participate in the EAI, and make membership of the EAI one of the factors they take into account when awarding mandates. The TUC Superannuation Society is an associate member of the EAI.

There are several reasons unions might consider supporting the EAI. First, few would argue that financial analysts should not take a longer-term view of the companies in which they invest. Second, by supporting the initiative unions could encourage the analysis of extra-financial issues in which they have an interest, such as workplace organisation, employment standards and mergers and acquisitions. Finally, supporting the EAI would enhance the role of unions within the field of investment activism.

In practical terms the action unions would need to take is to become EAI associate members and, by extension, agree to both encourage their fund manager to join the EAI and make membership of the EAI a factor next time a mandate is awarded by the pension scheme.

The Corporate Health and Safety Performance Index

Looking at a more specific issue, another initiative that unions could support is the Corporate Health and Safety Performance Index (CHaSPI) [13] . This index was launched by the Health and Safety Executive in July 2005. CHaSPI is intended to provide investors and others with information on how individual companies are managing health and safety risks.

This is a significant initiative for a couple of reasons. First it will give investors, including pension funds, comparable data on health and safety management which may affect their investment decisions. If a company in a particular sector is seen as an outlier the investor may want to engage with the company to ensure their behaviour improves. Secondly it is possible that over the longer-term investors will factor CHaSPI scores into analysis of the companies they invest in. This may affect the firms' share price, which may in turn affect the cost of capital for those which have poor health and safety management.

At present participation in CHaSPI is voluntary for companies. Unions, through their investments, could play a key role in making the index successful. Most obviously unions could ask the fund managers handling their investments what their views are of the index. Going further, fund managers running union money could be asked to encourage the companies in which our money is invested to participate in CHaSPI. Finally, in the longer term unions could consider whether to vote against companies' report and accounts at AGMs if they fail to participate in and/or disclose their CHaSPI score.

Already CHaSPI has proved to be of interest to both some pension fund trustees [14] and some unions [15] . It is clear, however, that the index will not necessarily be successful unless enough companies participate. Unions could encourage participation, with their investments, through the approaches suggested above.

Conclusions

As has been outlined, at present unions do not use their financial investments as effectively as they could. Few have control of shareholder voting rights, and specific SRI strategies are rare. However, a small but growing number of unions are seeking to take a more progressive stance with their investments, and as such there is experience in the movement that other unions can draw upon. In addition the Trade Union Investor Group offers a further resource.

In practical terms there are service that can support both more activist shareholder voting and socially responsible investment strategies. So there are no practical obstacles to putting such approaches in place.

Looking more widely, there are specific initiatives in the investment world that overlap with some union interests which unions could support.

In summary, there is nothing to stop unions from taking a more responsible and progressive stance with their investments, both pensions and other assets. The TUC would encourage them to consider doing so.

Action points

• Unions should consider subscribing to a shareholder voting service as a way of ensuring they are using voting rights effectively
• Unions should also give consideration to developing socially responsible investment approaches, either based around specific SRI products and services, or existing union strategies and principles
• Unions interested in developing a more activist investment policy can participate in the Trade Union Investor Group
• Unions should consider how best they can support initiatives where they have an interest such as the Corporate Health and Safety Performance Index and the Enhanced Analytics Initiative

Appendix: Links to sources of further information

TUC reports and publications

Shareholder voting and engagement guidelines

http://www.tuc.org.uk/pensions/tuc-9218-f0.cfm

Trade Union Investor Group background briefing

http://www.tuc.org.uk/pensions/tuc-10507-f0.cfm

Pension fund activism: the legislative and policy background

http://www.tuc.org.uk/pensions/tuc-10400-f0.cfm

Information from affiliates

TSSA ethical investment charter

http://www.tssa.org.uk/article-68.php3?id_article=457

Unison activists article

http://www.unison.org.uk/activists/pages_view.asp?did=1860

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[1] http://www.tssa.org.uk/article-5.php3?id_article=199

[2] http://www.tuc.org.uk/pensions/tuc-9218-f0.cfm

[3] To date 2003 was the high-water mark with both Amicus and the ISTC (now Community) calling on investors to vote against particular issues at company annual general meetings (both also held demonstrations outside meetings), and the TUC taking a public line on several key votes.

[4] For example both Amicus and the NUJ support the Fair Pensions campaign. http://www.fairpensions.org.uk/index.htm

[5] Mobilising unions' shareholder votes, TUC, June 2004

[6] Trade unions and investor activism, page 9, TUC, 2003

[7] Assessing Engagement, Just Pensions, February 2002

[8] Full report: http://www.pirc.co.uk/cisreport.pdf

[9] More information: http://www.unison.org.uk/healthcare/ambulance/news_view.asp?did=1089

[10] More information: http://www.tssa.org.uk/article-68.php3?id_article=457

[11] Information obtained from TUC survey of union pension funds.

[12] www.tuc.org.uk/tuinvestors

[13] The index can be viewed here: http://www.chaspi.info-exchange.com/default.asp

[14] One member-nominated trustee has produced an article in support of CHaSPI. This is included in a discussion about CHaSPI on the Member Trustee Network discussion board. http://www.tuc.org.uk/forums/showDiscussion.cfm?forumid=2051&subjectid=438

[15] The TSSA recently issued a reps bulletin highlighting CHaSPI and the role that unions, and their trustees, could play. http://www.tssa.org.uk/work/pens11.pdf