Socially Responsible Investment in Universities and Colleges

Socially Responsible Investment in Universities and Colleges

Campus Sustainability Programme

Environment Association for Universities and Colleges – Scotland Branch

27 March 2007

John Forster Associates and IAB Consultants

August 2007

CONTENTS

1Introduction

2Organisation of event

3Participants

4Details of Programme elements

4.1Introduction

4.2Approaching fund management with SRI in mind - an overview

4.3Links between SRI and good governance

4.4Aberdeen Asset Management

4.5Baillie Gifford

4.6Oxford Investment Partners

4.7University of Edinburgh

4.8University of St Andrews

4.9USS Pension fund

4.10Final discussion

5Feedback

5.1Overall usefulness

5.2General aspects of event

5.3Sessions

5.4Take Away messages and future action

5.5Comment for CaSPr

6Resources

Appendix 1 CaSPr invitation

Appendix 2 Biographies of the contributors

Appendix 3List of attendees

Appendix 4Feedback form

General

Individual elements

About yourself

Conclusions

Next Steps – Future involvement and support

Future contact

Table 1 Programme as followed on day......

Table 2 Summary of individuals attending......

Table 3 Summary of institutions represented......

Table 4 Proportion of respondents from different institutions compared with all participants......

Table 5Average of Numerical ratings for general aspects......

Table 6Average of Numerical ratings for the usefulness of different sessions......

1Introduction

On 27 March 2007 the Campus Sustainability Programme (CaSPr) ran aneventat the University of Edinburghon Socially Responsible Investment (SRI) in Universities and Colleges. This document reports on the content of the event and the feedback given by participants. The report and presentationsare available on the Scottish section of the EAUC’s website

2Organisation of event

The event was run in conjunction with the University of Edinburgh Management School where it was hosted in their splendid and prestigious facilities. Invitations were issued to all colleges and universities within Scotland; a copy of the invitation is given in Appendix 1. The event was organised by a CaSPr Consultant, John Forster of John Forster Associates and the day chaired by Professor David Hatherly Head of the Accounting and Finance Group in the University of Edinburgh Management School.

The programme for the day as delivered is set out in Table 1 below:

Table 1 Programme as followed on day

09:45 / Coffee and registration
10:15 / Introduction to the day by the chair for the day – Professor David Hatherly
10:25 / The nature of responsible investment
10.25 / Approaching fund management with SRI in mind - an overview
James Clunie, Head of MSc in Finance and Investment, University of Edinburgh Management School
10.45 / Links between SRI and good governance
Alex van der Velden, Executive Director, Fair Pensions
11.00 / Discussion
11:15 / Refreshment break
11:30 / Fund managers' perspectives
11.30 / Aberdeen Asset Management Andrew Preston, Head of SRI
11.45 / Baillie Gifford Marianne Harper Gow, Corporate Governance and SRI Analyst
12.00 / Oxford Investment Partners Paul Berriman, Partner
12.15 / Panel discussion with fund managers
12:30 / Lunch
13:30 / Case studies - putting SRI into practice
13.30 / University of Edinburgh Melvyn Cornish, University Secretary and Head of Student and Academic Services Group and Camilla Potter Past President People and Planet Society
13.55 / University of St Andrews Derek Watson, Quaestor and Factor and Harry Giles Ethics and Environment Officer (Student)
14.20 / USS Pension fund David Russell, Head of Responsible Investment
14.40 / Panel discussion
15:00 / Where now with SRI in ScottishUniversities and Colleges?
15:25 / Tea and Close

3Participants

29 individuals attended the event, excluding the CaSPr consultant,comprising16 FHE staff, 5 HE students and seven from other organisations. A complete list of the institutions and individuals attending is given in Appendix3. Table 2summarises the types of institutions associated with the individuals attending and indicates whether or not the individuals were speakers.

Table 2 Summary of individuals attending

Description / Speakers / Non-Speakers / Total
HE Staff / 4 / 7 / 11
FE Staff / 0 / 5 / 5
HE Students / 2 / 4 / 6
Otherorganisations’ staff / 5 / 2 / 7
Total / 11 / 18 / 29

Compared with many events, this one had a comparatively high number of speakers (and a relatively low number of non-speakers). But the mix seemed to generate a very good discussion which led to positive outcomes for both FHE and for the other organisations present.

One of the intentions of the event was to get the sustainability message into senior management and beyond those with environmental responsibilities. Appendix 2 demonstrates that both this aims were achieved to a large extent. Of the total of 16 college and university staff present only three were from an environmental background and virtually all might be regarded as carrying significant responsibility in their institutions.

Table 3 indicates that there were ten different FHE institutions and six different other organisations.

Table 3 Summary of institutions represented

Description / Numbers
HE Institutions with staff present / 6
HE Institutions withStudents present / 5
Total HE institutions present / 7
FE Institutions with staff present / 3
Other organisations with staff present / 6
Total different organisations present / 16

4Details of Programme elements

All the presentations will be available on the EAUC website

4.1Introduction

David Hatherly, Professor of Accounting and Head of the Accounting and Finance Group in the University of EdinburghManagementSchool

David introduced the event and welcomed participants to the EdinburghManagementSchool. He said that SRI was topical, dynamic, very, very important and full of challenges and issues. He gave examples of some of the practical issues that arose; for example, how should one weight a company that produces Genetically Modified crops which on the one hand may be able to feed the world using few pesticides or on the other may expose the world to horrendous mutations and damage? He drew attention to the fact that it was much more difficult to make such investment decisions when acting not for oneself but as an intermediary for many investors. He wondered if we should perhaps take the conference title literally and invest in ourselves to bring sustainable technologies tomarket? Having described the programme to come, he stated that the intention for the day: an enthusiasm for SRI, an appreciation of its importance and above all knowledge of how it’s done and who can help you do it.

4.2Approaching fund management with SRI in mind - an overview

James Clunie, Head of MSc in Finance and Investment, University of Edinburgh Management School

James said:

• Socially responsible investing is investing that takes account of the societal, ethical and environmental concerns of investors;
• Much finance theory suggests that excluding stocks from portfolios for strictly SRI reasons hurts risk-adjusted returns. But SRI investing includes the following categories and not all involve excluding securities from portfolios.

• Negative screening
• Positive screening
• Best of sector
• Engagement - this approach need not limit the investment universe, and could be suitable under the neo-classical finance framework

•Fund managers typically have a ‘fiduciary duty’ to always act in the best interests of the beneficiaries. Implementation of this can have difficulties:

• Can a fund manager fulfil this duty by focusing on expected return, risk and SRI criteria simultaneously?
• What if not all the beneficiaries of a fund agree on the same SRI criteria?
• Although some global standards have emerged (e.g. United Nations principles for responsible investment), investors can still clash on how they define SRI.
• SRI criteria can change – note the recent US debate on ‘terror-free investing.’

• Trustees must evaluate the evidence on SRI investing to determine if it is safe to invest in this manner. Are trustees safe to impose SRI criteria on their fund managers?:

• University endowment trustees and pension funds might face multiple stakeholder interests (from beneficiaries, plan sponsors, students, donors, alumni etc.).
• Acting in the best interests of the scheme beneficiaries is required under trust law. but
• The UK Pensions Act 1995 requires trustees to have a policy on SRI, even if that policy is to ignore SRI issues.
• Charity law can enable investments that run counter to the aims of the charity to be excluded (e.g. cancer charities and tobacco stocks).

• Investing in stocks with strong or improving corporate governance is an extension of SRI investing. Some empirical studies have found positive abnormal returns from investing in well-governed companies.
• Corporate engagement is an increasingly popular SRI approach. However, there exist very different models for how best to engage with companies. Some corporate engagement approaches appear to have little to do with SRI investing! For example the attitude of some hedge funds.

4.3Links between SRI and good governance

Alex van der Velden, Executive Director, Fair Pensions

SRI is financially relevant and awareness of environmental, social and governance (ESG) Increasing investor transparency means that investing in a manner that is at odds with one’s organisational ethics or the investor beneficiaries has reputational risks.

Legal opinion is shifting in favour of SRI as ESG factors begin to impact portfolio performance, and The definition of investing in the “best interests” of members has evolved to mean “beyond merely their financial interests” (Freshfields Bruckhaus Deringer, , 2005)

Two Main approaches to SRI:

• Disinvestment/screening which must be taken into account if a company or an investment sector conflicts with a consensus of beneficiaries then this consideration
• Shareholder engagement

Both need to be based on SRI policy – which should take into account an organisation’s Corporate Social Responsibility policies and its members’ values and should deal with conflicting opinions/values.

Investor SRI Governanceinvolves:

• Policy and resourcing
• Engagement -Incorporate SRI into investment mandate, working effectively with fund manager
• Ensuring Best practice in Transparency Disclosure involving disclosure on a public website and in the annual report key issues

4.4Aberdeen Asset Management

Andrew Preston, Head of SRI

Andrew Preston explained Aberdeen Asset Management’s approach to SRI. He talked about the following:

SRI Drivers - government legislation; growth in understanding of environmental issues; a wider understanding of ESG issues in investment and investment community providing more detailed ESG reporting.

Three Approaches to SRI

• Negative/Positive screening,
• Best of Sector
• Engagement/Shareholder activism

Sustainability Indicesare important, two significant ones are the Dow Jones Sustainability Indices and the FTSE4GOOD

History of Aberdeen’s approach to SRI - Aberdeen Ethical World Fund from 1999 and the first “engagement” client from 2006. Aberdeen Ethical World Fund uses a wide range of screens – some relating to general management and environmental issues and others to the presence of specific areas such as nuclear energy, pornography etc

Investment process

• Regional team – visit Company and note quality (pass or fail) and price. The team undertakes ethical screening
• Global Equity/SRI team undertake comparative research, construct a model portfolio and add to the SRI portfolio

•“…ethical funds suffer no appreciable loss in returns per unit of market risk from restricting their investment universe to ethical securities…” *

4.5Baillie Gifford

Marianne Harper Gow, Corporate Governance and SRI Analyst

Marianne Harper Gow said:

Baillie Gifford are fund managers for pensions and endowments with a wide range of private sector and public clients. Their clients bring a diverse range of mandates but the company is signed up to the UN global compact.

The Company is engaged with SRI because we believe that it represents a responsible exercise of ownership rights, and it augments our investment process giving a focus on management quality and integrity. Additionally, Clients are increasingly interested in SRI.

SRI is managed through a specialist team – the corporate governance department whose responsibilities include voting at company AGMs and EGMs, engaging on governance and SRI issues and reporting to clients

The engagement process involves attending the AGM, undertaking a thorough analysis, Identifying material issues, discussing with investment team meeting with the company

Issues going forward will include:

• A greater emphasis on companies with operations in emerging markets (Corporate Governance, Environmental standards, Human rights and labour standards, Stakeholder engagement).
• Climate Change Relevant for all sectors
• Water resources - preservation

Exciting times ahead as we see SRI being seen as a proxy for good management, moves to have SRI engagement on a global basis and ensuring that SRI is an integrated component of the investment approach

4.6Oxford Investment Partners

Paul Berriman, Partner

Paul Berriman said:

Oxford Investment Partners Ltd (OXIP) is an independent fund management company whichreceived authorisation from the FSA in March and had been established to provide a new kind of investment vehicle for endowments, charities and high net worth individuals.

In the past, many investors have held at least 80% of their portfolio in equities, often managed by a single fund manager. OXIP believes that this level of concentration gives an unnecessary risk and in contrast, the OXIP fund is structured as a fund-of-funds, giving access to a broad range of talented underlying managers, specialising in different asset classes (including long/short, public and private equities, property, commodities, and all types of debt) and investing globally. In this way, we give our clients access to a much broader, diversified portfolio that should deliver more consistent returns over the long term accompanied by lower volatility. OXIP currently manage assetsfor five Oxford colleges. The management structure is also innovative as OXIP is owned jointly by the investment management team and the colleges themselves. The colleges are represented on the investment committee and they, like the management team, have invested their money in the fund. In this way, the interests of all parties are aligned.

Yale has had a similar approach for several years with a diversified portfolio, a wide number of fund managers and a heavy allocation to non-traditional asset classes. The Endowment’s long time horizon is well suited to exploiting illiquid less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate. This has resulted in much higher returns and lower volatility over the timescale than would have been achieved from an equities based portfolio. The high returns have enabled four million dollars to have been donated to conservation projects in South America. However the management of the fund is increasingly raising issues about lack of disclosure.

The challenge for OXIP as it develops to be able to access positions, act transparently and still achieve the returns for which the fund was established.

4.7University of Edinburgh

Melvyn Cornish, University Secretary and Head of Student and Academic Services Group and

Camilla Potter Past President People and Planet Society

The University has £200 million separate endowment trust. In 2003 Edinburgh’s People and Planet Group initiated a campaign to persuade the University to revise its approach to investments in the endowments so that there was more transparency and an opportunity to intervene to promote SRI This led to the current University policy being adopted which is set out in an “Approach to Socially Responsible Investment” which has been agreed by the Court. The Agreed approach gives a central role to theUniversity Court which can give the University’s Investment Committee, and hence the Fund Managers, guidance and instruction, on the way in which endowment funds are invested.

A key element in the approach is the agreement to ensure that information about the University’s investments should be published annually.

The approach also sets out the approach that can be followed if there is concern about the investments held by the University.

Any group in the University can draw the attention of the Central Management Group (CMG) to any investment held by the University that is considered ‘unethical’ – that is one “wholly contrary to the University’s value systems either as reflected in the Mission Statement, the Goals and the Corporate Plan or in relation to wider issues of social, environmental and humanitarian concern”. The CMG can then consider the nature and extent of the engagement being undertaken by the Fund Managers and explore if more engagement is needed. If further engagement does not assuage the concerns raised about a particular company the Court might decide that the University should disinvest and it was probable that The Investment Committee would want to make clear the financial consequences of such a decision.

4.8University of St Andrews

Derek Watson, Quaestor and Factor and

Harry Giles Student Ethics and Environment Officer

The University of St Andrews is committed to promoting sustainable development in all of its activities. But until recently, the University had a traditional approach towards managing its Endowment assets which are used largely to ensure that no one is prevented on financial grounds from benefiting from a St Andrews education. This traditional approach was challenged by the student body in January 2005 and in November 2005 the Principal agreed with the Students’ Ethical Investment Campaign that the University would work with them to develop an Investment Policy for the University’s Endowment Funds which took regard of areas of ethical concern. The Quaestor & Factor was asked to lead the development of this policy and a working group was formed consisting of the Quaestor & Factor, the President of the Students’ Association, four representatives of the student Ethical Investment Campaign and the Director of the Press Office. This group met six times between December 2005 and April 2006.

The group recognised that change must accord with the views of the University Community (current students, alumni, staff and other stakeholders) and that although the Ethical Investment campaign had been successful in raising awareness, there was no consensus on the way forward. It was agreed that a proposal would be developed, put to the Investment and Collections Committee, and then discussed widely with the various groups in the period through to March 2007. At this point, students would be asked to state their view in a referendum which would present a range of sustainable investment options alongside the current investment approach.

If after this process it was clear that there was willingness to proceed a firm proposal would be made to the Investment Committee and if approved, to the University Court.