Doing Good by Investing Well? Pension Funds and Socially Responsible Investment


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Socially responsible investment became an approach that matches investments to ethical values. Thanks to their long-term horizon and asset size, pension funds are one of the main drivers of socially responsible investments.

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Doing Good by Investing Well? Pension Funds and Socially Responsible Investment

  1. 1. No. 1|2010International Pension PapersDoing Good by Investing Well?Pension Funds and Socially ResponsibleInvestment: Results of an Expert Survey
  2. 2. Allianz Global Investors International Pension Papers No. 1|2010 Contents Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Traditional and New SRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SRI and Pension Funds: A Case of Mutual Attraction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Promise and the Investment Performance of SRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Pension Funds and SRI: What to Expect in the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Future SRI Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SRI Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SRI Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Recent Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
  3. 3. Allianz Global Investors International Pension Papers No. 1|2010Key Points• Socially responsible investment has evolved from being an approach that matches investments to ethical values to one that considers the impact of long-term changes in the business environment on companies and their share price.• Thanks to their long-term horizon and asset size, pension funds are one of the main drivers of socially responsible investments.• A survey conducted by Allianz Global Investors and the Centre for European Economic Research (ZEW) among pension experts in France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom on the future of socially responsible investment in pension fund portfolios showed the following results: – On average, most of the pension experts surveyed believe that, in the future, SRI criteria will play an increasingly important role in how pension funds make investment decisions. While French and Dutch pension analysts were very optimistic, their British counterparts were quite pessimistic. – The majority of experts surveyed believe the SRI approach will be extended to include asset classes other than equities. Again, the French and Dutch participants were the most optimistic. Apart from Germany, most experts are expecting pension funds to become more active owners. – Environmental criteria are considered to be the most important element of the SRI concept. Respondents agreed that the growing SRI trend is being driven much less by the expectation of higher returns or lower risk as it is by public pressure. 3
  4. 4. Allianz Global Investors International Pension Papers No. 1|2010IntroductionA ccording to the American writer Henry David Thoreau, “goodness is the onlyinvestment that never fails.” The relation- interesting for pension funds. The second part of this paper presents the findings of a survey taken of European pension experts in 1 Socially responsible investment (SRI) goes by many names, eachship between goodness and investment is France, Germany, Italy, the Netherlands, of which indicates subtlenot only a literary theme, more and more Switzerland and the United Kingdom on the differences in investmentit is becoming a hot topic for asset owners likely future development of SRI2 and in- approaches, e.g. respon-and asset managers as well. In the past, so- cludes the following key results: sible investment (RI),cially responsible investment was mainly a sustainable investmentsubject for ethical investors. Today, it is an • On average, most of the pension experts (SI) or sustainable andinvestment strategy that promises to do good surveyed believe that, in the future, SRI responsible investmentwhile delivering good returns. This double criteria will play an increasingly impor- (also abbreviated SRI).dividend is considered to be rooted in a long- tant role in how pension funds make For the purposes of thisterm and more comprehensive take on the investment decisions. While French and study, we chose to usecorporate world that considers extra-financial Dutch pension analysts were very opti- socially responsibleindicators in security selection. But it is not mistic, their British counterparts were investment (SRI) as it isonly the corporate world that can be rated quite pessimistic. the most established termaccording to environmental, social and gov- and was the most likelyernance criteria (ESG). These criteria are • The majority of experts surveyed believe to generate a commonbecoming increasingly applicable to other the SRI approach will be extended to understanding amongasset classes as well (e.g. bonds, real estate). include asset classes other than equities. our survey participants. Again, the French and Dutch participants ESG (environmental, Any new investment idea is going to were the most optimistic. Apart from social and corporaterequire investors, and one that is focused on Germany, the majority of experts are ex- governance) issues arelong-term goals will likely to be very appeal- pecting pension funds to become more considered in theseing to the generally decades-long orientation active owners. approaches. Corporateof pension funds. In fact, pension funds are Social Responsibilityone of the most important drivers of socially • Environmental criteria are considered (CSR) includes the initia-responsible investment strategies. The first to be the most important element of the tives companies take inpart of this paper examines the principal con- SRI concept. Respondents agreed that the these same areas.cepts and evolution of socially responsible growing SRI trend is being driven less by 2 The survey was partinvestment (SRI)1 as well as SRI performance the expectation of higher returns or lower of a larger survey carriedand the reasons why SRI can be particularly risk than it is by public pressure. out by Allianz Global Investors in cooperation with the Centre of Euro- pean Economic Research (ZEW) on the future of defined contribution plans in Europe (see Allianz Global Investors, 2009: Defining the Direction of Defined Contribution: Results of an Expert Survey, Allianz Inter- national Pension Papers 4/2009, Munich >4
  5. 5. Allianz Global Investors International Pension Papers No. 1|2010Traditional and New SRIR eligious communities were the first group to use socially responsible invest-ing of sorts. In the United States, Methodists To put it differently, it can be argued that the business environment is in flux and companies are going to have to adapt http://publications. PensionResearch/and Quakers refused to invest in ‘sin stocks’ accordingly. Those that do so quickly will Pages/PensionStudiesandsuch as those related to alcohol, tobacco have a competitive advantage and generate Papers.aspx).and gambling. But there have been other outperformance for their investors. Since 3,4 See Louche, Célinereligious communities who have excluded – these extra-financial factors may have se- and Lydenberg, Steven,and continue to exclude – certain types of vere financial repercussions, SRI strategies 2006: Socially Responsibleindustries from their investment portfolios. use ESG criteria in addition to financial in- Investment: DifferencesThe Catholic Church, for example, refuses dicators to screen investments. And since between Europe andto invest in companies involved in contra- it is assumed that the changing business the United States, Vlerickception. Such religious-based approaches environment has long-term implications Leuven Gent Managementwere long the preeminent form of SRI, how- that will become obvious and material only School Working Paperever things began to change in the 1960s over time, SRI strategies encourage long-term Series 2006/22, Ghent.and 1970s. With the Civil Rights Movement, investments. For example, should regulationsthe environmental movement and the sub- be introduced as a response to climate changesequent Anti-Apartheid Movement came a that would make CO2 emissions more expen-renewed interest in SRI – giving birth to the sive in the future, then any company able tofirst SRI mutual fund in the 1970s – however lower CO2 emissions today would have a costwith an obviously different twist. Whereas advantage and possibly even a reputationalthe general focus on exclusion was similar benefit, which would then be reflected in itsto the religious approach, different moral future share price.criteria were applied. Companies were nowexcluded if they were involved in industries Clearly, the differences between theconsidered socially unethical, such as those old and new SRI strategies are significant.manufacturing land mines and cluster Traditional SRI strategies in the past focusedbombs or those conducting business with on the investors’ ethical and religious valuesSouth Africa in the 1980s.3 by excluding specific investment options regardless of their potential for return. Since the 1990s, environmental, social New SRI approaches look to generate out-and governance (ESG) issues have begun performance over the long term by incor-to dominate the SRI debate, particularly in porating ESG factors. Generally speaking,Europe. And with this new focus has come the new SRI approach, sometimes referred toa fundamental shift in the overall approach as sustainability investing, seems to be moretaken towards socially responsible investing. common in Europe than in the United States,Having moved away from ethically driven where greater emphasis is put on the socialexclusion, SRI now considers how a company purpose of SRI and personal values. Whereasapproaches environmental, social and gover- the main SRI actors in the United States arenance issues and what the impact is on in- retail investors and exclusionary screens arevestment performance. In other words, the popular, the focus in Europe is on financialconcept behind SRI assumes that the way in objectives and the main actors are institu-which a company tackles these issues and tional investors that promote quantitativeaddresses them in their corporate strategies measurements.4 The new SRI approach iswill have a substantial impact on their future applied to companies in all sectors withoutprofitability and – with it – share price. leveling moral judgment. A subcategory of the 5
  6. 6. Allianz Global Investors International Pension Papers No. 1|2010new SRI approach is thematic investments invested in – for example by supporting 5 See Eurosif, 2008:that focus on companies and sectors expect- investor interests and standpoints through European SRI Study 2008,ed to profit from changes in the business active voting and dialogue with management. Paris., such as water and renewable Investor engagement is a reaction to a variety publications/ The difference here to other SRI of corporate scandals and is being pursued by Core SRIs include strate-strategies is that investments are only made large public U.S. pension funds in particular. gies that use positivein one or a few related sectors and that ESG screening, negativefactors are not necessarily considered in There is a growing demand for SRI products screening or a combina-thematic investments. and strategies. According to the European tion of the two, as well Sustainable Investment Forum (Eurosif), as thematic funds. Broad Besides screening according to specific totals SRIs in 2007 amounted to €2.7 trillion SRI includes investmentSRI criteria, socially responsible investing is (17.6% of the European asset management strategies that incorpo-also closely linked to investor engagement, industry), with demand increasing depend- rate simple screeningwhich assumes that investors will take a ing on how the individual SRI was defined.5 (up to two negativemore active role in the companies they are criteria), engagement or integration (the explicit inclusion of ESG factors SRI strategies into financial analysis). In 2008, broad SRI assets SRI selection criteria and strategies differ in keeping with varying underlying goals. amounted to €2.2 trillion There are two main SRI approaches. These can also be combined. and core SRI assets to €512 billion. Positive screening: Identifies companies that are best performers according to selected extra-financial indicators. Primary motivation: financial (best-in-class approach). Negative screening: Excludes specific companies, industries or countries that are in conflict with the ethical attitudes of investors. Primary motivation: social.6
  7. 7. Allianz Global Investors International Pension Papers No. 1|2010SRI and Pension Funds: A Case of Mutual Attraction?D ue to their main characteristics – size, investment horizon and diversification –pension funds are often thought to be natural indeed, they may even benefit from it if the costs of pollution are externalized by the firm – pollution is something universal 6 See Mercer, 2006: Universal Ownership: Exploring opportuni-supporters of SRI strategies. SRI takes an owners have to consider. The argument here ties and challenges,explicitly long-term approach, incorporating is that while ‘normal’ investors can easily Conference Report fromstructural factors thought to impact a com- switch between single securities, universal April 10–11, Saint Mary’spany’s future development. Since pension owners are invested in the whole market so College of California,funds take a decades-long approach, SRI that the cost of pollution might crop up in Moraga, California.would be particularly appealing. And accord- some of their other investments.6 Given this 7 Other factors of concerning to the ‘universal owner’ hypothesis, pen- perspective, pension funds tend to favor SRIs to pension funds aresion funds have become so big that they are because they are good for the health of the political and regulatorynot as much invested in single companies corporate economy as a whole.7 initiatives designed toas they are in broad markets, making their foster SRI, especiallyinvestment performance dependent more The development of pension fund assets among pension funds.on how the aggregate market develops and over the past decades underscores the critical The key instrumentless on how individual companies perform. impact pension funds can have on the world’s here is improved SRITherefore, universal owners cannot escape financial markets. In 2007, pension funds disclosure. Since 2002,(negative) externalities – the negative eco- managed assets of $18.6 trillion, making German pension fundsnomic effect of how one company’s conduct them the third largest institutional investor are required to reportimpacts another company or the broader group on the world’s financial markets. to investors each yearpublic for which they do not have to pay. Though insurance companies and invest- on whether and how they ment funds managed $20.7 and $22.2 trillion, have included ESG factors Pollution is a classic example and pro- respectively, a substantial portion of this in their investments. Invides a good illustration of how externalities business was also directly and indirectly France, the savings fundscan impact universal owners. While other related to pensions. All in all, the OECD of French employeesinvestors may not be concerned with an indi- estimates that 60% of all institutional inves- are obliged to disclosevidual company’s pollution performance – tor assets are retirement related.8 their SRI strategy in their Annual Reports. UK pen- sion fund trustees are also SRI strategies of pension reserve funds required to spell out their investment principles, Pension funds – particularly large public pension funds such as those found in the United States – particularly with respect were among the first to put SRI strategies on the corporate and public agenda, especially in terms to SRI. of investor activism. Over the last few years, a different type of pension fund has been adding to 8 See OECD, 2009: Private the SRI trend, namely public pension reserve funds. The common goal of these publicly instituted Pensions Outlook 2008, funds is to support public pension systems, contributing to their financing when age-related pres- Paris. sures become a serious threat. Such reserve funds have been implemented in Australia, China, France, Ireland, Norway, South Korea, Spain and Sweden. While not all of these funds use SRI prin- ciples to make investment decisions, some of the important ones do. French and Norwegian funds are especially active in this area. According to Norwegian reserve fund regulations, reserve funds are subject to ethical guidelines established by the Ministry of Finance. An ethics council serves as an advisory body to recommend what types of investments should be excluded and the fund’s assets are managed by Norway’s central bank, which pursues > 7
  8. 8. Allianz Global Investors International Pension Papers No. 1|2010 a policy of active ownership. This policy aims to safeguard the fund’s financial interests and cali- brate its investments based on extra-financial criteria, including social issues such as child labor and children’s rights as well as climate issues. The French Fonds de réserve des retraites (FRR) is also pursuing a policy of active ownership whereby external investment managers are required to exercise their voting rights. The principles of socially responsible investing are part and parcel of the portfolio. The fund has allotted several specialized SRI mandates and encourages managers of its other equity mandates – particularly managers of European equities – to make extra-financial indicators part of the selection process and share data with each other. The specific mandates do not exclude individual companies, but rather apply a best-in-class approach. The Fonds de réserve des retraites goes even a step further. In 2006, a process was initiated that aims to assess the entire portfolio on the basis of extra-financial criteria. In 2008, the fund established a responsible investment strategy based on five objectives. Among these are putting even more effort into including SRI criteria in portfolio management, actively exercising shareholder rights, and improving safeguards against extra-financial risks.8
  9. 9. Allianz Global Investors International Pension Papers No. 1|2010The Promise and the Investment Performance of SRIT he relationship between socially respon- sible investments and performance –especially the prospects of outperformance – Therefore, analyzing extra-financial fac- tors could provide a more comprehensive picture. Maintaining a good reputation 9 See Jan de Graaf, Frank and Slager, Alfred, 2009: Guidelines foris a hotly contested issue. Taking a traditional can offer other competitive advantages Integrating Sociallyportfolio theory point of view, a SRI approach such as attracting customers or highly Responsible Investmentwould lower risk-adjusted returns because skilled employees. in the Investmentthe SRI screening process would reduce the Process, Amersfoort,overall investment universe. SRI proponents, • Eco-efficiency: Investing in green technol- Netherlands., believe the screening process pro- ogies by anticipating future regulations bstract=919108.vides other advantages that would generate can give companies a competitive edge 10 From the companyoutperformance. The idea here is that by and generate first-mover advantages, which perspective, however,including environmental, social and gover- can pay off significantly in the long run.10 such actions wouldnance criteria to evaluate companies, it is require making an invest-easier to identify companies that offer better Whether SRI strategies will actually per- ment, which could have aprospects and so generate alpha for investors. form better, equal or worse than conventional positive or negative effectIn other words, material issues addressed by strategies is an empirical question and a con- on profitability and shareSRI approaches are currently not factored into siderable amount of research has already price depending on thesecurity valuations, but will have a material been devoted to this question. However, any cost and benefits.impact in the future. Therefore, SRI strate- research is complicated by both the varying See von Arx, Urs andgies are thought to be capable of exploiting selection criteria used by SRI approaches and Ziegler, Andreas, 2008:these market anomalies and provide a tool their mostly short track records. In addition, The Effect of CSR onfor improved security selection.9 The follow- every industry has its own SRI challenge. Stock Performance: Newing is an overview of the most important ad- For instance, climate change and regulatory Evidence for the U.S.A andvantages ascribed to SRI approaches: reactions to it are likely to affect the automo- Europe, Working Paper bile industry more than the banking sector, 08/85, Swiss Federal• Changes in the business environment: which – in turn – is more likely to be affected Institute of Technology, Since SRI strategies focus on changing by corporate governance issues. Investment Zurich. business environments (e.g. climate performance might also be influenced more change, scarce resources) and a com- by some unobserved bias in stock selection pany’s reaction to them, any long-term (e.g. a bias towards small firms or growth investment approach that incorporates stocks) than by the SRI factors themselves. these extra-financial issues is expected to be better equipped to assess both a Given this complexity, it can come as no company’s future financial viability and surprise that empirical research has not yet the quality of its management, leading established a consensus on how SRI impacts to superior financial performance in portfolio performance. Results to date are the future. inconsistent. However, three prominent studies investigating the link between SRI• Intangible assets and reputation: and portfolio performance are representa- A related argument supporting socially tive. A meta study carried out by the United responsible investing is that intangibles Nations Environment Programme Finance such as brand, reputation, management Initiative (UNEP FI) and Mercer reviewed quality, and social and intellectual capital the results of 20 studies on how ESG factors are having a bigger impact on a company’s impact portfolio performance. Ten studies worth now than they did in the past. showed a positive relationship, seven a 9
  10. 10. Allianz Global Investors International Pension Papers No. 1|2010neutral and three a negative relationship, Studies on how SRIs impact portfolio 11 See UNEP Financesuggesting that performance downsides performance do not give a clear conclusion Initiative and Mercer,are not to be expected.11 A follow-up study of their alpha-generating capacity. However, 2007: Demystifyingreviewed the most recent studies carried out analyzing the effects of SRI accurately may responsible investmentbetween 2007 and 2009. Of the 16 new studies, not be possible until SRI approaches have performance, Châtelaine,ten reported a positive, two a negative to become more standardized, so that consis- France. http://www.neutral and four a neutral relationship.12 tent groupings are more likely. Empirical studies so far have all been plagued by the investment. Though In another study, the Centre for European varying measurement methods used, and this report reviews keyEconomic Research (ZEW) reviewed SRI the different understandings and concepts academic and brokerequity indices and compared them to their of what SRI actually is. While some focus on research on ESG factors,benchmarks. Though there was not a signifi- social concerns, others focus on environmen- it should be noted thatcant difference in performance, the study tal concerns. To make it even more difficult, the studies revieweddid find that most SRI indices carry a higher performance is compared to different bench- investigated variousrisk.13 And finally, a recent study carried out marks. While this clearly allows investors geographical regionsby the EDHEC Risk and Asset Management to choose the investment strategy that best and applied different SRIResearch Centre that focused on SRI funds fits their preferences and values, it makes definitions or focused ondistributed in France found a more negative comparing the greater SRI concept more different components.relationship. The great majority of funds complicated. 12 See Mercer, 2009:under investigation showed negative alpha, Shedding light onthough not at a significant level. Only a few responsible investment:SRI funds exhibited positive alpha, but also Approaches, returns andnot at a significant level.14 However, these impacts, London.findings are disputed.15 13 See Schröder, Michael, 2005: Is there a differ- ence? The performance characteristics of SRI equity indexes, Discussion Paper 05-50, Centre for European Economic Research, Mannheim. 14 Amenc, Noël and Le Sourd, Veronique, 2008: Socially Responsible Investment Performance in France, EDHEC Risk and Asset Management Research Centre. http:// edhec_publications/all_ publications/RISKArticle. 2009-01-20.0956? newsletter=yes.10
  11. 11. Allianz Global Investors International Pension Papers No. 1|2010Pension Funds and SRI: What to Expect in the FutureG iven that pension funds are one of the most notable SRI drivers, their be-havior will have a tremendous impact on the The survey addresses the following questions considered crucial to the further development of SRI among pension funds: 15 A follow-up study conducted by Altedia Consultants focused onfuture of SRI. To gain a better understanding more than 200 SRI fundsof current trends, their drivers and future • Will SRI continue to grow and will it be over a three-year period.developments, it seemed natural to ask the expanded to other asset classes? The results of this follow-opinions of experts closely involved in pen- up study found that notsion fund strategies. • What is driving the growing trend towards only did best-in-class SRI SRI among pension funds? funds perform in keeping Therefore, SRI-specific questions were with market indices andembedded into a larger survey having to • What are the most important components their own benchmarks,do with the future of defined contribution in of the SRI concept? volatility was also lower.Europe carried out by Allianz Global Investors 16 See Allianz Globalin cooperation with the Centre for European Investors, 2009: DefiningEconomic Research (ZEW). The survey in- the Direction of Definedcludes the insights of 216 pension experts in Contribution in Europe:academia, pension funds, asset management Results of an Expertand insurance companies, consultancies, Survey, Allianz Inter-associations, international organizations national Pension Papersand regulatory agencies from Europe’s six 4/2009, Munich. http://largest retirement markets (France, Germany, publications.allianzgi.Italy, the Netherlands, Switzerland and the com/en/PensionResearch/United Kingdom).16 The assumption here Pages/PensionStudiesandwas that, given their particular expertise and Papers.aspx.knowledge, they would have a better under-standing of current trends and their drivers,making their predictions more credible.Experts can, of course, be wrong. However,if nothing else, their predictions provide abenchmark against which future develop-ments can be measured. 11
  12. 12. Allianz Global Investors International Pension Papers No. 1|2010Future SRI GrowthT here is no denying that SRI has captured the attention of many pension funds andgained considerable acceptance. According British respondents. Italian analysts on the other hand are more skeptical – only slightly more than one third can imagine 17 It should be noted that the percentage of respondents taking ato survey participants, the future outlook the scope of SRI principles increasing. The neutral position wasis positive, with most experts anticipating a active ownership of pension funds – that high in some countries,further upswing of SRI approaches in pension is, exercising shareholder rights and moni- especially in Italy andfund investing. However, there is a wide vari- toring management – is widely expected the Netherlands, andation among countries. This is mirrored in to increase in importance. Around 60% of amounted to over the individual countries appraised the Italian, Swiss and British experts are pre-prospects of SRI approaches being expanded dicting this, with considerably more in theto include asset classes other than equities. Netherlands and France. Germany is theAnd despite the expected upswing in SRI exception. Less than 40% of the Germanapproaches, the minority believes that re- experts surveyed are expecting pensionturn enhancement and risk reduction are funds to become more active owners in thethe main drivers. companies in which they are invested. Future growth: A majority of the analysts Risk and returns: Given the positive(60% on average) believe pension funds will general outlook for SRI, surprisingly fewinclude SRI criteria more and more in their experts believe SRI will be driven by theinvestment decisions. However, this overall expectation of higher returns or lower risk –average masks unusually wide country- two of the leading arguments in its favor.specific discrepancies. Almost 90% of the On average, only 17% believe that an expec-French respondents are optimistic about the tation of higher returns is driving SRI.future implementation of SRI approaches. Again, the French brought in the mostAnd while Dutch (80%) and Italian (62%) favorable results, but even that was onlyexperts share their optimism, their German 20%. And though there is a wider beliefand Swiss counterparts (54% and 46% respec- that risk reduction will drive SRI, with antively) are more reserved and feedback from overall average of 24% (high: 40% in France;the United Kingdom was vague – slightly less low: 6% in the United Kingdom), it is stillthan a third expect the importance of SRI to quite muted.17increase in British pension funds. Expanding asset classes and activeownership: So far, SRI has mostly been in-volved in equities and analyzed the extentto which listed companies address environ-mental, social and governance concerns.However, SRI need not be limited to equities.SRI can also be used for other asset classessuch as bonds, real estate or private equityand many of the analysts are expectingexactly that to happen: an overwhelmingmajority of respondents in France (87%),77% in the Netherlands, 57% in Germany,54% in Switzerland and exactly half of the12
  13. 13. Allianz Global Investors International Pension Papers No. 1|2010Figure 1: Future SRI growth Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Pension funds will increasingly invest in accordance with SRI criteria SRI will be increasingly expanded to assets classes other than equities Pension funds will become more active owners in the companies they invest in Expectations of higher returns will be the main driver of pension funds’ SRI investments Risk reduction will be the main driver of pension funds’ SRI investments European average France Germany Italy Netherlands Switzerland United KingdomQuestion: How strongly do you agree with the following statements? 13
  14. 14. Allianz Global Investors International Pension Papers No. 1|2010SRI DriversA ny positive trend has its drivers. In the case of SRI, these drivers can be the play-ers directly associated with pension funds plan participants are not expected to be par- ticularly interested in having pension assets invested in SRI-related funds. Plan sponsors(e.g. beneficiaries, plan sponsors or pension in France are expected to be big supportersfund managers) or outside stakeholders (e.g. of SRI, with over 70% of French analyststrade unions, governments or public opinion). expecting them to drive future SRI demand.The results of our survey show that externalstakeholders are given the most credit for thetrend in pension funds investing in SRI, withthe key driver being public opinion followedby trade unions. And though internal playersare considered less important, plan partici-pants are considered to play the largest roleamong them. Public opinion/trade unions/govern-ments: Public opinion is considered to bethe single most important factor driving SRI(78% on average). In France and the Nether-lands, 94% and, respectively, 95% agree, andin Germany, Switzerland and Italy more than70% agree. These results indicate that even ifSRI is not thought to lower investment risk,reputational risk seems to be a major issue forpension funds. Most of the experts surveyed(64%) believe trade unions are the secondmost important group of stakeholders sup-porting SRI approaches. This is particularlytrue in France (86%) and Italy (77%). In com-parison, governments and regulators areconsidered to have much less of an impact.On average, less than 50% believe the govern-ment is driving the demand for SRI. Plan participants/sponsors/pension fundmanagement: Compared to external stake-holders, survey participants found internalstakeholders to be of secondary importance.Of those surveyed, 55% believe plan partici-pants will drive SRI demand, 46% believe itwill be driven by plan sponsors and 45% bypension fund management. Plan participantsin France, Switzerland and the Netherlandsare considered to be most open to SRI ap-proaches. However in Germany and Italy,14
  15. 15. Allianz Global Investors International Pension Papers No. 1|2010Figure 2: SRI drivers Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Public opinion Trade unions Government/regulator Plan participants Plan sponsors Management of pension funds Other European average France Germany Italy Netherlands Switzerland United KingdomQuestion: Who do you think will drive the demand for SRI in DC plans? 15
  16. 16. Allianz Global Investors International Pension Papers No. 1|2010SRI CriteriaT he SRI field has generated a broad array of concepts and approaches. This is dueto the fact that many extra-financial indica- Regarding social criteria, only 37% of experts surveyed in the United Kingdom believe they will play a decisive role in pension fund in-tors have the potential to impact companies. vestments. Other countries showed more There are also many ethical attitudes that positive results. Highest among these werecould impact investment strategies. The main France (93%), Switzerland (79%) and thecategories of concern are environmental, Netherlands (77%), followed at around 60%social and governance (ESG). Since there is by Germany and Italy. As for corporate gov-no general consensus on how these criteria ernance, again French respondents cameshould be weighted or whether there is some in strong at 93%, followed by some 70% intype of hierarchy between them, this survey the Netherlands and Italy. Other countries, explored their relative importance. In addi- however, were less confident that corporatetion to considering general SRI factors when governance will play a significant part inmaking investor decisions, themed sustain- investment decisions.ability investments are often included amongSRI. Such investments exploit investment Ethical criteria/thematic investments:opportunities that arise mainly from envi- In most cases, using environmental, socialronmental change, for example investing and corporate governance criteria to screenin renewable energy or water. The results of companies provides a more comprehensiveour survey show that environmental criteria picture of the companies under investigation.are considered to be the most important This in turn may provide an informationcomponents of socially responsible invest- advantage for selecting investments. Theing, followed by social and governance. ultimate goal here is outperformance. EthicalThematic investment strategies were given approaches, on the other hand, functionequal importance. Most analysts agree that differently. An ethical approach is orientedethical criteria carry less weight. towards specific moral values. These invest- ment portfolios exclude any company SRI criteria: Experts clearly believe that whose business runs contrary to the moralenvironmental criteria play the most impor- convictions of its investors. Though sociallytant role in SRI. On average, 81% believe responsible investing has its roots in suchenvironmental concerns will play a decisive values-oriented approaches, they have lostrole in pension fund investments in the near their importance. Only a third of respondents future. Astonishingly, 100% of French experts believe ethical or religious-based investmentagree as do 88% of their Italian and 86% of approaches will play an important role intheir Dutch counterparts. And even though future pension fund investments.fewer agreed in the United Kingdom, it wasstill 57%. Corporate governance and social The outlook is quite different for thematicconcerns gave a similar, though not quite sustainability funds. On average, 69% of as astonishing, picture. On average, almost experts surveyed anticipate these types of70% of the experts surveyed consider both of investments to experience growing impor-these criteria important. tance. France, Germany, Italy, Switzerland and the Netherlands are the most convinced Overall, the French respondents were the (67– 80%). At 45%, the British experts arestrongest believers in social and governance again the most skeptical.criteria; the British were more skeptical.16
  17. 17. Allianz Global Investors International Pension Papers No. 1|2010Figure 3: SRI criteria Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Environmental criteria Social criteria Corporate governance criteria Ethical/religious criteria Themed sustainability funds (water funds, renewable energy, etc.) Other None. SRI will not play a major role. European average France Germany Italy Netherlands Switzerland United KingdomQuestion: From today’s point of view, how important do you rate the following criteria of the SRI concept for investment decisions of pension funds in yourdomestic market within the next 5 years? 17
  18. 18. Allianz Global Investors International Pension Papers No. 1|2010ConclusionT he survey results are a double-edged sword as far as the acceptance andfuture of SRI among pension funds are con- to screen and select stocks are not able to claim better performance during every phase of every financial market cycle. Therefore,cerned. On the one hand, European pension more detailed research into SRI performanceexperts believe this approach will become during different market phases and the com-increasingly important to pension funds ponents that drive SRI performance couldover the next years and will be expanded to clarify this issue, leading to a better commonother asset classes than equity. On the other understanding of what socially responsiblehand, this trend seems to be driven by factors investing actually involves.most SRI proponents would consider lessthan ideal. Results show that most pension Simply reviewing past performance mayexperts remain wary of the assumed invest- not give a complete picture. It is possible thatment advantages and believe SRI is primarily the benefits of SRI will be more compellingdriven by public opinion. This is an interest- in the future once foreseeable changes ining result as it suggests that reputation and the business environment take hold, whichreputational risk are crucial motivators. would then make them even more material for company profitability and security prices. Future financial research needs to deter- Even so, taking a purely financial approach tomine what can actually be expected from SRI socially responsible investing might bypassinvestments. The expectation that socially a key element, which dates back to its veryresponsible investing automatically results beginning – namely the combination ofin better investment performance could be financial and societal benefit.exaggerated. After all, other methods used18
  19. 19. Allianz Global Investors International Pension Papers No. 1|2010Recent PublicationsInternational Pension Studies Sustainability Index 2009 December 2009Defining the Direction of Defined Contribution in Europe: Results of an Expert Survey November 2009Retirement at Risk II: Challenges for U.S. Baby Boomers Approaching Retirement October 2009How the financial crisis affects pension funds: what analysts expect September 2009 Private household financial assets: the golden days of the past are a long way off August 2009Investment Regulations and Defined Contribution Pensions July 2009Funded Pensions in Western Europe 2008 February 2009Retirement at Risk: The U.S. Pension System in Transition January 2009Pension Trends in Emerging Markets – The Rise of DC Plans and Its Consequences November 2008Funding Unfunded Pensions: Governance and Investments of Asian Reserve Funds September 2008Evaluating the Impact of Risk Based Funding Requirements on Pension Funds May 2008International Pension Issues funds and the financial crisis July 2009Western Europe: Fiscal pressures-ageing costs still on the horizon April 2009United States: Severe setback in financial and retirement assets March 2009Germany: Households financial assets dive January 2009 Allianz Global Investors AG, International Pensions, Seidlstr. 24-24a, 80335 Munich, Germany | International.Pensions@allianzgi.com | Author: Dr. Alexander Börsch, Senior Pensions Analyst, Allianz Global Investors AG, alexander.boersch@allianzgi.comEditor: Marilee Williams | Layout: volk:art51 GmbH, Munich | Printing: Christian Döring GmbH, Munich | Closing Date: January 15, 2010The entire content of this publication is protected by copyright with all rights reserved to Allianz Global Investors AG. Any copying, modifying, distributing or other use of the content for any purpose without the prior written consent of Allianz Global Investors AG is prohibited. The information contained in this publication has been carefully verified by the time of release, however Allianz Global Investors AG does not warrant the accuracy, reliability or completenessof any information contained in this publication. Neither Allianz Global Investors AG nor its employees and deputies will take legal responsibility for any errors or omissions therein. This publication is intended for general information purposes only. None of the information should be interpreted as a solicitation, offer or recommendationof any kind. Certain of the statements contained herein may be statements of future expectations and involve known and unknown risks and uncertainties,which may cause actual results, performance or events to differ materially from those expressed or implied in such statements. 19
  20. 20. www.allianzglobalinvestors.comAllianz Global Investors AGInternational PensionsSeidlstr. 24 -24a80335 Munich, Germany