Tobacco companies could be hit as pension funds inch towards ethical investment. Gideon Burrows reports
From this month, university employees will be able to find out if their pension contributions are being invested ethically. Last summer, the then minister of state for pensions, Stephen Timms, announced that all pension scheme trustees would have to reveal - by July 2000 - "the extent to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments".
Universities will not have to invest pension funds ethically, but they will be required to publish, in their Statement of Investment Principles, the approach they plan to take. University pension schemes that do not take ethical considerations into account may come under pressure from members angry about their pensions being invested in arms, tobacco and pesticide companies and firms that test products on animals.
A recent survey by the Ethical Investment Research and Information Service showed that 77 per cent of all pension scheme members want their schemes to operate an ethical investment policy. As Stephen Timms said: "Scheme members want to know what is being done with the money invested on their behalf. I think they are entitled to know."
So how have universities' met Timms's challenge?
Some say that they can only take account of ethical considerations as long as pension fund profits are not reduced. The University of Leeds, for example, is asking its pension fund managers only to "take account of social, environmental and ethical considerations insofar as they believe such considerations will benefit performance and/or reduce risk".
John Lillywhite, investment manager at Leeds University, explains: "The trustees regard their primary duty as the health of the fund." Pension fund members were not consulted about the new ethical guidelines, but Lillywhite is "sure the trustees would be willing to look at things if (particular) investments were causing concern".
The University of Birmingham pension scheme also only asked investment managers "to take account of socially responsible considerations insofar as they believe such considerations will not jeopardise performance or increase risk".
Other fund managers say they are willing to discuss ethical concerns with companies in which they invest but have stepped back from actually rejecting certain shareholdings. The Universities Superannuation Scheme, the central pension scheme for UK lecturers, which has about Pounds 20 billion of investments, has taken this approach after a high-profile campaign by students and university staff. Manchester University has followed a similar line (see right).
Yet other fund managers have agreed to invest a portion of university funds in ethical trusts. At the University of East Anglia, investment managers have agreed to divert 10 per cent of UEA's pension fund into an ethical trust. UEA is the first British university to take this step.
Perhaps the most radical response to the growth of concern about ethical investment is the rejection of shareholdings in some companies because of their social, health and environmental effects.
In April, Selwyn College, Cambridge, agreed to adopt an ethical investment policy that prevents investment of college funds in particular companies. The details of the policy remain confidential, but the student union's recommendations were that the "college's longstanding unwritten agreement not to invest in tobacco companies become formal policy" and that there be a "commitment not to invest in any company that produces torture devices - and any company with a long record of selling weaponry to repressive regimes".
The college disposed of its shareholdings in GKN and BAE Systems, two major arms companies, even before the new ethical policy was formally accepted. The University of Glasgow has taken a similar approach, formulating a policy that excludes tobacco companies from its investment portfolio (see right).
Durham and Reading universities and Balliol College, Oxford, are in the throes of deciding what their approach to ethical investment will be. And as growing numbers of universities are seen to be ethically - and profitably - investing their funds, yet more are expected to follow suit.
Penny Shepherd, director of the UK Social Investment Forum, is pleased with the trend: "Across the board pension funds are seeking to put a toe in the water. It is very positive that the combined pressure of interest from trustees and members is making fund managers consider ethical investment more seriously."
ETHICAL OPTIONS FOR PENSION SCHEMES
According to the Campaign against Arms Trade, Manchester University's Superannuation Scheme holds more than 200,000 shares in BAE Systems, Europe's largest arms exporting company.
The investment committee has received appeals from staff and students and from outside campaigners, calling for ethical investment of university funds. "The university pension scheme is run in line with trust law. We have to put the financial interest of the members first," says John Peate, the investment committee secretary. But after taking legal advice, the investment managers came up with a way of pursuing ethical objectives without necessarily harming financial gain.
"There is only so far that investment managers can legally go along the 'exclusion route'," says Peate. "We decided to ask our fund managers to encourage the companies we invest in to pursue ethical policies - through corporate governance or by shareholder pressure."
This "active engagement" approach is already part of the fund management principles of the Church of England and of the Sainsbury supermarket chain's pension scheme. "Active engagement" might include meetings with representatives of companies, asking questions at shareholder meetings about ethics, and using large shareholding voting rights to propose motions at annual general meetings.
The University of Glasgow accepted new guidelines for the investment of pensions and central funds earlier this month, just in time to comply with the new government requirements. The trustees of the pension scheme wrote a statement that was finally passed by the university court on June 28.
"For a long time, student, staff and lay members all thought ethical investment was a good idea," says Mike Brown, a spokesman for Glasgow University. The issue was raised by students and staff through their representatives on the university court. A working party was set up to explore the options. It recommended that investment managers be "actively encouraged to take account of social, environmental or ethical considerations insofar as they believe such considerations will benefit performance and/or reduce risk".
In addition, the trustees have prohibited direct investment in the tobacco sector. "We are a university with a major medical school," says Brown. "We're also based in the west of Scotland, which is renowned for major tobacco-related health problems. Though there was lobbying from the staff and students, the new approach to ethical investment came right from the top."