Pension funds run the risk of inflicting 'reputational risk' on their sponsor companies if they fail to invest ethically, the head of the UK Sustainable Investment Foundation (UKSIF) has told Pension Funds Insider. At the same time a major group of active investors has called on governments to introduce decisive legislation to combat climate change.

Speaking to mark the occasion of National Ethical Investment Week, UKSIF Chief Executive Penny Smith said "if a company pension fund is not taking account of environmental and social issues to the same extent of the employer, then they are running the risk of causing reputational damage to the plan sponsor".

Smith warned that "in an environment in which the plan sponsor covenant is a matter of increasing concern for trustees, that doesn't seem appropriate".

She says that UKSIF has found that companies which take a lead on good environmental and social practice often have pension funds whose investments "don't match up" with those principles. "The trustees of these funds may not be doing as much as they can to ensure their investment mangers take account of environmental, social and governance issues in their investment issues," Smith says.

As part of National Ethical Investment Week, UKSIF commissioned YouGov to carry out a survey on savers' and investors' attitudes to ethical investing.

The survey claims that 42% of UK adults want to "make a difference" to society and the environment through their savings and investments.

Interestingly, 23% of those surveyed said they feel their pension funds do too little to tell them about responsible ownership, perhaps a high number given that responsible investing is generally not a topic of household debate.

Smith told Pension Funds Insider that "trustees should understand the needs of their members and plan sponsors on this." While she says that while there has historically not been a high level of member engagement with pension funds, "those members who raise their voices are likely to be heard".

The YouGov survey also found that 58% of adults would like their employer's pension schemes to match the standard of NEST on managing social and environmental issues. Smith argues that appealing to people's good sides can inspire them to save for a pension and engage with their scheme.

She says "as we look at defined contribution moving forward it is even more important to engage employees on responsible investment to make people understand their pension savings".

Close to 40 events are being held across the UK to highlight responsible investing as part of the 2011 edition of National Ethical Investment Week from 16 to 22 October.

International call to climate action

At the same time three major continental investment groups have joined forces to up the pressure on governments to act decisively to combat global warming at the United Nations Framework Convention on Climate Change this November.

The group has called for "an urgent need for policy action which simulates private sector investment into climate change solutions, creates jobs and is essential for ensuring the long-term sustainability of the world economic system".

Along with tougher targets on greenhouse emissions, a statement asked for governments to provide incentives that compensate for the risk of investing in new green technologies.

One of the three continental groups to sign the statement is the European Institutional Investors Group on Climate Change (IIGCC), which counts amongst its members UK investment houses and local government pension funds such as Legal & General, F&C and the West Midlands Pension Funds.

Stephanie Pfeifer, Executive Director at the IIGCC said: "Policy risk has a critical influence on investment in low-carbon growth areas such as renewable energy. Attracting capital at the scale required to meet climate change goals will only be possible when low carbon investments are seen as attractive relative to higher carbon investments.

"Determined leadership on national and international climate and energy policy will be fundamental in shifting this risk/return balance in favour of low carbon investments."

North American and Australasian regional investment groupings are also backing the call with the support of two UN initiatives. All in all, the alliance claims €20 trillion of assets and 285 investors, making it the "largest ever grouping, by both number of signatories and assets under management, to call for policy action on climate change."

The statement is further proof, if it were needed, that the responsible investing community is becoming increasingly vocal. They will now hope that the expected protracted negotiations in Durban later this year at the UN convention provide a legislative boost to their ideals.

First published: 19.10.2011

dbillingham@wilmington.co.uk