In his latest Budget, the Chancellor of the Exchequer has handed out something of a goodie bag for pensioners and those saving for their retirement. Given its likely effect on voting intentions, you could even call it a party bag. As a corrective it is certainly welcome, after the beating pensions and savings have taken during the present financial crisis, both directly from the collapse of the investment market and indirectly from the remedies imposed by central banks and government.

BudgetIf the crisis itself raised questions about the ethical conduct of those engaged in financial services, it also prompted many of us in the consumer camp – including ICLR – to review our own approach to money and its management.

The Incorporated Council of Law Reporting for England and Wales (ICLR) is a charity, and as such feels it should adopt in its selection of investments, both as a company and in managing its pension fund, a broadly ethical investment policy. The purpose of this post is to set out what we feel that policy should be, and to declare, publicly and transparently, our intention to abide by it ourselves and to require our advisers to do so on our behalf.

What it means

The word “ethical” simply means: of or pertaining to ethics, or the study and discussion of moral choices. In the context of making investment decisions, it is generally understood to refer to an investment strategy or a process of selection of investments which takes into account such matters as the nature of the business invested in and the conduct of its management towards its own workers, third parties affected by its operations, and the environment. Other descriptions for the same or similar strategy include:

  • “Socially responsible” investments (SRI) (which tend to focus on conduct rather than the subject matter of the business)
  • “Sustainable” investments (which tend to focus on the resources used and the environment).
  • “Green” investments (which despite the name focus on both environmental and social concerns).

How it works

However it is described, the strategy can work in one or both of two ways:

  1. Screening, either negatively (to exclude certain activities) or positively (to support certain activities).
  2. Activism, or engagement by investors with management.

The second of these options is only achievable either by large investment funds, who can buy and sell shares in sufficient volume materially to affect the value of the businesses invested in, or by organised groups or associations of individual investors carrying out noisy public relations campaigns or boycotts. For a small fund such as ICLR’s pension, the first option is the only viable approach. Its screening strategy will need to be implemented by its advisers and agents, and should also be a matter of public record: accordingly, it needs to be simple, clear and unambiguous.

Ethical investing for ICLR

As a charity, ICLR’s mission is ‘To support the legal profession and the administration of justice by providing the official law reporting service in a convenient form and at a moderate price.’ However, it is not suggested that its investment strategy should mirror these aims; merely that, in managing its funds for the benefit of current and future pensioners, it should not act inconsistently with its status and objectives as a charity.

Nor should it be forgotten that the trustees owe a primary duty to secure the financial wellbeing of the trust fund for the benefit of the current and future pensioners, and would be in breach of that duty if they adopted a too restrictive approach to investment selection such as to give rise to a significant risk of financial detriment to the trust fund.

Accordingly, it is proposed that ICLR should adopt a simple policy of screening which would satisfy the desire to adopt an ethical investment approach whilst not unduly restricting the exercise of discretion by the pension trust’s investment advisers.

Screening factors

Screening factors can be either positive or negative. The important thing is that they should be clear and easy to apply in relation to any proposed investment, without requiring them to be absolute. The factor should be applied on the basis that it is substantially engaged. Thus, a negative factor against tobacco products would prevent investment in BAT, whose entire business model is based on the sale of tobacco products, but not in a retailer such as Tesco merely for selling packets of cigarettes among numerous other products. Likewise, a positive factor such as renewable energy use could be applied provided the company in question had made an express commitment to using renewable energy without requiring it to be getting all its energy from renewable sources.

The factors which it is proposed that ICLR should adopt are as follows:

Positive (something actively to be encouraged)

  • Renewable energy use
  • Sustainable use of materials
  • Good record on corporate governance

Negative (something to be avoided)

  • Armaments
  • Tobacco
  • Pornography
  • Products (non-medical) tested on animals
  • Financial products encouraging unsustainable personal debt
  • Products mined or manufactured using oppressive labour practices

Given that these factors are to be applied by a third party, namely ICLR’s investment advisers, acting on a discretionary basis, there will inevitably be a process of feedback and refinement. The investment advisers will report back to the trustees on the investments made, and the trustees will be able to monitor the selection process and comment on individual investment choices if they feel there has been any divergence from the ethical policy. The trustees themselves reserve the right to revise or permit some variation from the policy in order to ensure compliance with their duties as trustees to the beneficiaries and with any regulatory requirements imposed by law.