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December 10, 2012

FairPensions Calls on UK Ethical Funds to Adopt Positive Screening and Increase Corporate Engagement
    by Robert Kropp

A survey of nineteen UK-based ethical funds finds that most continue to rely on negative screening of sin stocks, and few have committed to shareowner engagement with corporations.

SocialFunds.com -- Much of the recent literature on sustainable investment highlights the potential long-term investment advantages of positive screening, the practice of selecting portfolio components according to a company's environmental, social, and corporate governance (ESG) performance. Coupled with proactive shareowner engagement, positive screening can help effect the transition to a low-carbon economy and contribute to improved social justice as well.

Currently, however, most funds that are classified as sustainable or responsible—or ethical, as the UK-based FairPensions describes them in a recent survey—continue to focus on negative screening of so-called sin stocks as the basis of their investment strategy. While US SIF: The Forum for Sustainable and Responsible Investment found in its most recent Trends Report that the emphasis on sin stocks such as alcohol and tobacco has declined among sustainable investors, negative screening continues to be the predominant ESG incorporation strategy.

And in its recently published survey of UK-based ethical funds, FairPensions also noted a continuing reliance on negative screening of sin stocks, "despite the fact that human rights and environmental protection now feature much more prominently in most surveys of people's ethical priorities."

"Too much of the industry appears to be characterized by the unthinking application of a traditional screening approach to an outdated set of ethical priorities," the report states.

Many of the 19 ethical fund providers surveyed could benefit from improved transparency, FairPensions found. While almost all of them publish some information about their investment criteria, "nearly half do not publish the fund's full holdings." And only about half of the policies of the funds address environmental and social issues as well as corporate governance.

Furthermore, only three of the funds surveyed actively seek out the opinions of their customers. "Savers choosing ethical products will want to know that their voice is being heard and their money is managed in a way which reflects their values," Christine Berry of FairPensions said. "Our findings suggest that the ethical investment industry should be doing a lot more to ensure it stays relevant to the issues that matter to its customers."

FairPensions has been a pioneer in championing shareowner engagement in the UK, where the practice of submitting shareowner resolutions is still relatively uncommon compared to the US. Last year, the organization published a Guide to Shareholder Resolutions in the UK, in an effort to provide nongovernmental organizations (NGOs) and institutional investors with opportunities to influence corporate behavior.

Thus far, the uptake by ethical funds of FairPensions' recommendations on corporate engagement is lagging, the survey found. "Only five fund providers display a strong commitment to ethical engagement," while nearly 60% do not practice engagement at all. Disclosure of voting and engagement activity is lacking as well. Forty percent do not disclose engagement records at all, only seven providers disclose full lists of all votes, and only two—F&C Investments and Scottish Widows—"give explanations for all contentious voting decisions."

Five of the 19 funds surveyed performed well across all areas. In addition to F&C Investments, they include Standard Life, WHEB Asset Management, The Co-operative Investments, and Jupiter Asset Management.

"We urge the rest of the industry to learn from these leaders," the report concludes, "asking themselves why their customers choose to invest ethically, what issues they care about and whether engagement might have a part to play in meeting their expectations."

"The ethical investment industry can and should be leading the way in improving corporate behavior."

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