Socially responsible investment at the University of Edinburgh

The University's approach to socially responsible investment was the object of a debate organized on the 3rd of April by EUSA and People & Planet. The discussion focused on the legality and feasibility of disinvesting from companies that are involved in unethical businesses, such as manufacturing of components for military drones, genetically modified foods, or fossil fuel companies. The panellists included Mr Julian Parrot, partner at Ethical Futures (a financial advisers firm specialising in ethical investments), Mrs Catherine Gilfedder, corporate social responsibility advocate at Reprieve (a London-based human rights organisation) and myself. The discussion was chaired by Mr Peter McColl, University Rector.

This debate is part of an ongoing campaign carried by People & Planet in conjunction with EUSA, aiming to steer the University towards a more ethical and sustainable investment strategy. The proposals advanced by the two organisations include the creation of an independent committee that would allow stakeholders throughout the University community to challenge investment decisions, and the right to have an elected student representative who will participate to the investment decision meetings. The campaign has also launched a petition calling for a review of the University's investment strategy. This movement is not without precedent in the University's recent history. In 2004 the University accepted a proposal of disinvestment from the tobacco industry, given the University's role as a major centre of medical research.

Two underlying themes emerged from this debate. On the one hand, there is the students' enthusiastic endorsement of the socially responsible investment / corporate social responsibility movement. There was a strong consensus among the participating students that the University should consider divesting from harmful companies and place its funds in companies involved in socially and environmentally beneficial activities. On the other hand, there are the legal restrictions, which raise difficult questions concerning the compatibility between trustees' duties and socially responsible investment strategies.

Institutional investors are dominant players in today's investor landscape. Their holdings amount to about 80% of the shares of listed UK companies. When organised as registered companies (such as insurance companies), institutional investors have free hand in considering ethical, governance and social (ESG) factors when deciding their investment strategy. Company directors have a duty to consider such factors when deciding how to promote the success of the company for the benefit of its members (s. 172 Companies Act 2006). The case of institutions organised as trusts (such as pension funds or mutual funds), however, is more ambiguous when it comes to ESG considerations. In the (in)famous case of Cowan v. Scargill [1985] Ch 270 at 286 Megarry VC argued that in a trust set up to provide financial benefits for the beneficiaries, the best interests of the beneficiaries are their best financial interests. Trustees of charities may exclude certain investments of questionable ethical nature, if such investments are contrary to the objects of the charity. Nevertheless, trustees must ensure that such exclusion would not create a risk of significant financial detriment (Harries v. Church Commissioners for England [1992] 1 WLR 1241 at 1247, per Nicholls VC).

The effect of screening out tainted investments is the crux of the problem for trustees of institutional investors. The standard investment criteria governing trustees' powers of investment require the creation of a diversified portfolio, with assets whose values fluctuate independently of one another. Screening out non-ethical fields, such as alcohol, tobacco, gambling, or weapons may leave trustees with insufficiently diversified portfolios, or may simply be bad business decisions. After all, ‘sin stocks' such as tobacco or weapons have been among the UK stock market's best performers in the early 2000s. Such stocks tend to generate stable and predictable cash flows and are considered safe investments in declining markets.

Recent developments in the law of fiduciary duties, however, may be a first step towards clarifying the extent of trustees' powers of investment. Following the recommendations of the Kay Review on UK Equity Markets and Long Term Decision Making the Law Commission undertook a review of the fiduciary duties of pension trustees, investment managers and other financial intermediaries with respect to investment decision-making. The terms of reference for this project mandate the Commission to evaluate the extent to which fiduciary duties permit or require such persons to consider, when developing or discharging an investment strategy, the following factors:

(a) factors relevant to long-term investment performance which might not have an immediate financial impact, including questions of sustainability or environmental and social impact;

(b) interests beyond the maximisation of financial return;

(c) generally prevailing ethical standards, and / or the ethical views of their beneficiaries, even where this may not be in the immediate financial interest of those beneficiaries.

The Commission's report, which is due in July 2014, will hopefully bring much needed clarifications for the socially responsible investment movement. Unfortunately, the Commission was empowered to draft a report with recommendations to the Government, but no draft bill adressing directly trustees' right to take into account ESG considerations when deciding on their investment strategy.