The revelation is especially difficult for a church endowment fund priding itself on a strong ethical investment policy. For Justin Welby, leader of the world’s Anglican community, it takes the shine off his plan to encourage credit unions to be set up in churches across the UK and put payday lenders out of business.
It also echoes embarrassing discoveries of underlying portfolio holdings elsewhere. At the end of last year, Calstrs, the US public pension fund, discovered it had indirect holdings in gun manufacturing companies following the Connecticut school massacre.
Such inconsistencies raise the issue that investors should know what they have bought into, even indirectly through indices or underlying holdings. It also highlights the importance of putting a strong responsible-investment strategy in place.
Dutch pension funds learnt this lesson a few years ago. They ran into trouble in 2007 when a TV show revealed many of the country’s schemes were invested in cluster-bomb manufacturers, albeit indirectly.
“It was a real wake-up call. In our case it was through holdings in Textron, [the] producer of Cessna light aircraft that was also involved in cluster-bomb manufacturing,” says Pieter van Stijn, senior responsible investment adviser at PGGM, one of the largest pension administrators and asset managers in the Netherlands.
“We were not aware of that [before the TV programme],” he adds. Since then PGGM has divested its stake in Textron and changed its investment criteria to exclude companies manufacturing or trading in cluster bombs, anti-personnel mines, depleted-uranium munitions and nuclear weapons. Companies violating human rights and tobacco businesses are also on its long list of exclusions.
PGGM started an active engagement programme in 2007 with the companies in which it invests, preferring this approach when possible and divesting if it fails. One example is its divestment from Walmart, the biggest US retailer, at the beginning of July. Poor labour relations in its domestic market and the board’s lack of meaningful dialogue with shareholders were at fault, Mr van Stijn says.
However, with €140bn in managed assets, it is always possible to overlook something, he points out. PGGM now uses an external company to scrutinise its holdings on a regular basis to make sure it is fully aware of all its investments.
The pension scheme also avoids investing in broad-based indices where it is difficult to track all the subsidiaries and products of some large companies. Instead it prefers to invest in customised indices.
Regardless of whether a pension or other fund has an ethical investment policy, “every scheme must know what it is invested in”, says Peter Gent, head of governance reporting at Camradata, a consultancy and institutional investment analyst.
Keen to open the debate, FTfm approached several US endowment and investment funds such as the Rockefeller Foundation and Harvard endowment, but they did not take up the invitation to comment.
The Yale University endowment also declined to comment, saying it did not disclose its investments or discuss its investment strategy other than the information published on its website.
It was keen to point out, however, that it was “one of the first institutions to address formally the ethical responsibilities of institutional investors” in 1972.
The Church of England £5.2bn investment fund, which explicitly bans companies involved in payday lending, invests in Accel Partners, the US venture capital firm that led Wonga’s fundraising in 2009.
Such a lesson in portfolio awareness is “a reminder to investors that scrutinising their portfolios should be part of wider good-governance practice”, says Mr Gent.
While drilling down to underlying holdings is more difficult for investors in large multinational companies, especially pension schemes in pooled funds where there is no mandate, it is still required governance practice, he adds.
Strong governance reporting coupled with robust responsible investment analysis would help institutional investors to avoid the reputational harm the Church of England has just experienced, according to Chris Washington-Sare, Camradata’s head of marketing.
“Such screening processes are not [just] ‘nice to have’, but part of good fiduciary diligence,” he argues. Applying an environmental, social and governance strategy to an investment portfolio gives institutional investors “added insight into the exposures related to the geographic source of a company’s sales, assets and operating income”, he adds.
Knowing what is going on in your business is essential for any company or institutional investor, says Charles Tilley, chief executive of the Chartered Institute of Management Accountants and chairman of the integrated reporting task force at the International Integrated Reporting Committee.
He believes revelations such as the Church of England’s indirect investment in payday lenders flags up the need for change in corporate reporting. If companies are more transparent about how they tackle risk and opportunities, and relate to the wider environment, it would help the investment community to have a clearer picture of their holdings.
“You need to understand how you are making your money”, whether you are the investor or the investee company, he says.
Source: The Financial Times