|
March 30, 2005
To Screen Or Not To Screen?: That May Not Be The Question For Fiduciaries
by William Baue
Part two of this two-part article examines the opportunities and limitations that social and
environmental sustainability screens present to pension funds and other institutional investors.
SocialFunds.com --
Fiduciaries with legal responsibilities to their beneficiaries may be as conflicted as
Shakespeare's Hamlet when it comes to the question of environmental and social sustainability
screening. A defining component of socially responsible investment (SRI), screening shows
preference to companies and/or excludes companies from portfolios based on certain criteria. How
sustainability screening fits into the fiduciary equation is a complex question; part two of this
two-part article examines some of the answers that are starting to emerge.
 An historical survey reveals that US pension
funds and other institutional investors with fiduciary duties have employed several different kinds
of screens. For example, the Sullivan Principles were developed
in 1977 by General Motors (ticker: GM) board member Reverend Leon
Sullivan to address problems of corporate involvement in apartheid South Africa.
"The
Sullivan Principles very elegantly, perhaps even accidentally, laid out a series of possibilities
for pension funds to participate, allowing them to take graded positions along three levels of
screening--from a very dramatic to a very mild version," said Steve Lydenberg, chief investment
officer of Domini Social Investments.
Similarly, pension funds such as those administered by New York City and Connecticut State
screen for compliance with the MacBride Principles, which address
labor standards in Northern Ireland. The California Public Employees Retirement System (CalPERS), the largest US public pension fund
at $183 billion, screens entire emerging market economies such as Indonesia, Malaysia, and Thailand
on corporate governance. And tobacco screens proliferated in the 1990s, with some continuing to
this day.
However, looking to the past offers only limited guidance as to what the future
holds for social and environmental sustainability screening.
"If you're talking about
screening out, that's not the way public pension funds are going to go, and in my view, it's
not the way they should go," said Jim Hawley, co-director with Andrew Williams of the Center for the Study of Fiduciary Capitalism at St.
Mary's College of California. Profs. Hawley and Williams also co-authored the influential 2000
book, The Rise of Fiduciary Capitalism: How Institutional Investors Can Make
Corporations More Democratic. "It really depends on what you mean by screening."
"Tilting" strategies such as the KLD Select Social Index or the US Core
Environmental portfolio from State Street Global Advisors (SSgA) and Innovest Strategic Value Advisors overweight
sustainability leaders and underweight sustainability laggards, forms of positive screening.
"These kinds of weighted indexes take the form of positive reinforcement instead of
exclusionary screens, and will mostly fall under the so-called alternative investment strategies
category, so relative to the size of the assets of the fund, they are going to be small," Prof.
Hawley told SocialFunds.com. "And they are certainly going to be experimental, so funds are
tiptoeing very carefully that way."
"I think this kind of strategy is likely to take hold
if returns on those types of funds over a three or five year time period begin to be competitive
with their benchmarks," said Prof. Hawley. "To me, however, the more significant issue is the
degree to which we are going to see forms of engagement to reinforce baby steps such as positive
weighted indexes on a small scale."
Forms of fiduciary engagement include
behind-the-scenes negotiations, development of policy statements, and the filing of shareowner
resolutions on issues such as climate change--in other words, shareowner action strategies
pioneered by social investors. Fiduciaries are adopting these tactics due to "the increasing use
by SRI and sustainability shareholder groups of corporate governance means to focus increasingly on
the long-term economic implications of their orientations," according to Profs. Hawley and Andrews
in a 2003
paper.
However, the scale of institutional portfolios effectively prevent fiduciaries
from adopting the earliest defining feature of SRI, exclusionary screening.
"If you took
the Domini Index or the Calvert Index, how
would you invest $80 billion?" Prof. Hawley asks. "If you invest $80 billion in 200 firms, you end
up being the controlling interest in each and every one of those firms, and that has legal
implications, political problems, and managerial hassles."
"I have no problem with SRI
funds, but you can't, in my view, run a large, highly-diversified, fiduciary fund on a SRI basis,"
Prof. Hawley said. "You can do it on an engagement basis, since the fiduciary duty is to
monitor and engage on those issues where you see problems--that's the approach that has been
gathering steam."
Mr. Lydenberg agrees.
"There is a presumption sometimes that
activism is a milder step than screening, and in certain circumstances that's true, but on the
other hand when you're looking at institutional investors the size of the pension funds, that's not
necessarily so," said Mr. Lydenberg. "Whether you're doing screening or activism on a big issue
like South Africa or global warming, the ability to raise the issue for broad public debate is
significant whichever of these two approaches you take."
Mr. Lydenberg also points out
that the implicit final step of engagement, if compromise proves impossible, is divestment, the
ultimate form of exclusionary screening.
In the end, the question of whether
fiduciaries are screening may be a misdirected focus.
"From the big pension fund
fiduciary point of view, SRI has a number of things that can be learned from, not so much about
screening but the standards for screening," Prof. Hawley said. "SRI is a canary in the mine to
them--if something's not in an SRI fund, why isn't it there, and what should they be looking at?"
"Even though they own it and they're not going to get out of it, screening might point to
an engagement strategy," concluded Prof. Hawley. "Not that it's a silver bullet, but it's a good
place to begin."
Part one of this two-part
article surveys the current landscape of US public pension fund screening of corporate social and
environmental sustainability.
©
SRI World Group, Inc. All Rights Reserved.
Top
|
