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Engagement means nothing without an effective definition, says Mike More. ...
Engagement means nothing without an effective definition, says Mike More.
David Steel, the former Liberal Party leader, once famously remarked proportional representation was 'an idea whose time has come'.
Judging by the professional and media attention over the last couple of years, socially responsible investment is certainly an idea whose time is coming.
The government's initiatives, including the requirement for a statement of investment principles, have started to push SRI into the mainstream.
For local government schemes two recent themes spring to mind. First, modernisation is making us all emphasise the 'cross-cutting' nature of issues.
Second, there is now the statutory duty to provide social, environmental and economic well-being. In this context, it would surely be astounding if local government schemes did not give serious attention to how they approached SRI.
For the world at large, the issue is moving on. There is increasing evidence that company valuations are adversely affected by poor environmental performance. A sound and rigorous approach to these issues is characteristic of a well-managed enterprise.
The tools and techniques of SRI are changing. Positive and negative screening is generally seen as legally difficult when taken against the fiduciary duty of schemes. We now talk of 'engagement'.
But have we yet defined the purpose of engaging with companies on SRI, and if not, how will we ever know whether doing so is worth it?
Second, if we are to define the purpose of engagement then two broad alternative models spring to mind:
-A predictive model, which looks at all the factors - including social, environmental and ethical factors, which determine the investment potential of the company.
-An influencing model, which tries, as an institutional investor, to influence the behaviour of the company, perhaps in the end by withdrawing funds.
In principle, the predictive model fits well with the fiduciary duty. But developing an overall risk assessment model seems fraught with intellectual and technical difficulties. It is easy to pick up on cases of share value adversely affected by SRI issues, but not so clear this all adds up to a robust mechanism for investment choice.
With the influencing model, the question is just what degree of influence a fund can have, especially if an objective is unique to just one fund.
Finally, my reading of the SRI surveys concluded since SIPs suggests that local authorities are pushing harder at this than the corporate sector. But there is much greater reliance on voting agencies for engagement than on fund managers.
Isn't this precisely the wrong way round? If we are to move to a much more broadly based risk assessment of what constitutes a good investment then surely only the fund managers can do it? After all, they are the ones who talk directly to companies.
SRI is at an important point. Is it an 'idea whose time has come'? probably yes - but there is a huge amount of work to do, mainly I think with fund managers.
-Mike More, director of resource management, Suffolk CC.
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