This section provides background on the rationale behind the fund’s approach to responsible investment (RI), outlining USS’s fiduciary duty, the legal advice USS has received on ethical screening and highlighting the global trend towards RI.
USS commitment to RI
USS first developed a responsible investment (RI) policy in 1999 and appointed an in-house responsible investment adviser the following year. USS’s commitment to RI is demonstrated through progressive policies, an in-house dedicated team and involvement and leadership in key industry projects. The proactive approach taken by USS has led to industry recognition and to the fund playing a founding role in several projects including the Institutional Investor Group on Climate Change, UN Principles for Responsible Investment, Enhanced Analytics Initiative, International Roundtable on Executive Remuneration and Pharma Futures.
Fiduciary duty & RI
USS is a multi-employer pension fund with around 400 member institutions (from UK universities and other higher education and research institutions), governed under trust law to invest and pay pensions for over quarter of a million individuals. In common with other UK based occupational pension funds, our RI policy must be consistent with our legal responsibility. This means treating the financial interests of our members as paramount and managing the fund consistent with proper diversification and prudence.
USS is unlike retail ethical or socially responsible investment funds which enable individuals to express their personal values in their investments. USS is not permitted to make investment decisions based purely on an ethical or moral stance. The fund has developed an active engagement approach and does not undertake ethical screening or operate exclusion policies. The rationale against a divestment approach is expanded in the following section and considered in the legal guidance provided USS’s lawyers in September 2006.
Legal advice to USS on RI exclusions, DLA Piper, Sept06
Nevertheless, USS’s trustees believe that the fund can and should take ethical, environmental, governance, etc., issues into account in its investment-decision making where these issues are material to performance: this is the basis of the fund’s responsible investment policy.
Global trend towards RI
There is increasing pressure on pension funds and other institutional investors to be active and responsible owners:
- Guidance from the Association of British Insurers in 2007 made clear its view that investors should pay more systematic attention to social, ethical, environmental and other “non financial risks” and issued the ABI’s Responsible Investment Disclosure Guidelines.
- In March 2009 the National Association of Pension Funds (the representative body for pension funds in the UK) released its Responsible Investment Guidance (NAPF RI Guidance), which reinforces the importance environmental, social and governance issues have for pension funds as long term investors.
- In November 2009, the Institutional Shareholders Committee issued a code of conduct for institutional investors (the ISC Code on the Responsibilities of Institutional Investors) calling for beneficial owners to take their responsibilities of ownership more seriously and to monitor, engage and vote at investee companies.
- Internationally, the United Nations sponsored Principles for Responsible Investment, provide a framework within which pension funds and other investors can develop their own RI processes.
By 2008, at least eight countries in Europe, including the UK since 2000, had specific RI regulations for their pensions system. US public pension funds are also major players in the debate about corporate governance and environmental performance. USS’s sister funds in the US (TIAA-CREF) and Australia (UniSuper) have also made commitments to RI. In addition, large pension funds from around the world, including ABP and PGGM (The Netherlands), CPP (Canada), FRR (France), New Zealand Super, and the Future Fund (Australia), have added resources to their RI functions.
USS Rationale and Aims
USS aims to work with investee companies and assets, and fund managers to encourage responsible corporate behaviour based upon the belief that:
- Management of such issues is good for long‐term corporate performance and
- Better management of these issues protects and enhances the value of the fund's investments.
More specifically we aim to:
Identify good corporate management
In this highly complex, competitive and globalised market with a high degree of media transparency, corporate leaders need attitudes and skills that were not considered essential a decade ago. Today’s corporate leaders need to manage relationships with a wider range of stakeholders who can affect the company’s ability to operate successfully, it’s “licence to operate”. They need to retain and motivate workers, foster innovation and manage teams across different continents and global cultures. USS believes that the ability of senior management to deal with factors such as corporate responsibility and corporate governance effectively is a useful indicator of management’s ability to rise to the opportunities and challenges related to globalisation.
Prevent or avoid value destruction
If a company systematically mishandles environmental, ethical, governance or human capital issues, this can be an early indicator of wider management or financial problems which may not yet have come to light. There is also good evidence that poor corporate governance decisions affect the interests of long-term investors. USS exists to safeguard the long-term interests of our participating institution and individual members and pensioners. Part of our fiduciary duty, therefore, is to take appropriate action if there are concerns about corporate governance issues or mis-management of other extra financial risks including environmental and social factors (click here for our definition of extra financial factors).
Make more accurate valuations and better stock selection decisions
The fund believes that excess returns are available to those investors who take a long-term view and are able to identify when the market is overlooking the role played by extra-financial factors in corporate and asset price performance. By integrating extra-financial factors into our investment methodology, USS seeks to identify mis-priced assets and enable our portfolio managers to make better investment decisions to protect and enhance long-term performance.
USS is a large and immature fund with long-term liabilities. It therefore has a particular interest in ensuring the durable success of the global markets in which we hold investments.
Respond to the implications of being a Universal Investor
USS as one of the largest global pension funds can be considered a Universal Investor. Universal investors have holdings that are so diversified that their investment returns are impacted by the returns from the economy as a whole, as much as any specific industries or companies. Thus, the Fund has an interest in ensuring that externalities and market failures (for example, in the form of pollution or systemic / weak corporate governance controls) do not affect market wide long term economic performance.
Meet the real needs of our members
USS believes that its members want to retire into a world characterised by a healthy environment, vibrant economy and peaceful society. The assets we own and oversight we wield as a responsible owner will play an important role in determining the future our members face and thus, the real value of their retirement income.
Respond to member and societal expectations of responsible ownership
In 2004, USS undertook a survey of the views of the funds’ members on responsible investment. Over 90% of respondents agreed that it was important for a large scheme such as USS to have a policy on Responsible Investment. Members continue to demonstrate their support for an active approach to responsible investment through their communications with the fund.
Rationale against divestment from controversial companies or sectors
USS is a multi-employer pension fund with around 400 member institutions, governed under trust law to invest and pay pensions for many individuals. In this regard, it is unlike retail ethical or SRI funds marketed to the general public which enable individuals to express their personal values in their investments. USS is also not comparable to a pension fund of an organisation that has a religious or social change mandate or an employer that has a strong reputational reason for excluding particular companies.
Like other UK occupational pension funds, our RI policy must be consistent with our legal responsibility under trust law and the fiduciary duties that this entails. This means treating the financial interests of the fund as paramount and managing the fund with proper diversification and prudence. USS is therefore obliged to invest in a wide spectrum of companies and, because of the size of our fund, this inevitably involves having holdings in major international corporations, some of which, because of the places they operate or activities they are involved in products they produce, will be of concern to some of our members.
The legal advice that USS received in 2006 is that it is not permitted to make investment decisions based purely on an ethical or moral stance and cannot screen out companies or sectors for non-financial reasons.
Through engagement, rather than disposal, the fund seeks to use the influence of ownership to improve corporate practice. The sale of shares in a controversial company is unlikely to address the deeper concerns and issues relating to the particular sector in which that company operates. Indeed, significant disposal of shares in one company by a large investor could create attractive buying opportunities for other investors who are likely to have much less interest in encouraging the company to be more responsible. In addition, through the funds’ market wide activities, USS seeks to influence public policy and industry best practice standards where there is a particular role for investors.
USS seeks to be neither soft on poor corporate social responsibility (CSR) performance, nor unrealistic about how far or how fast we can expect a company to move. If USS considers that a company is not meeting appropriate corporate responsibility or governance standards, and that this is damaging a company’s reputation or in other ways putting at risk the value of our investment, we will use our influence as owners to encourage the company to improve its practices. We encourage companies to pay particular regard to legal standards and good practice norms. If there is a serious issue and the company fails to act, then we would make representations to the company expressing our concerns and may vote against the company management at a shareholder meeting. Our investment teams are kept aware of such engagements so that they can evaluate the risk to our assets.