On the responsible investment disclosure practices of the world’s largest pension funds

Description
This study seeks to measure the level of responsible investment (RI) disclosure of the
world’s largest pension funds.

Accounting Research Journal
On the responsible investment disclosure practices of the world's largest pension funds
Robert J . Bianchi Michael E. Drew Adam N. Walk
Article information:
To cite this document:
Robert J . Bianchi Michael E. Drew Adam N. Walk, (2010),"On the responsible investment disclosure
practices of the world's largest pension funds", Accounting Research J ournal, Vol. 23 Iss 3 pp. 302 - 318
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On the responsible investment
disclosure practices of the world’s
largest pension funds
Robert J. Bianchi, Michael E. Drew and Adam N. Walk
Grif?th Business School, Grif?th University, Nathan, Australia
Abstract
Purpose – This study seeks to measure the level of responsible investment (RI) disclosure of the
world’s largest pension funds.
Design/methodology/approach – The public disclosure of environmental, social and governance
factors by the world’s largest pension funds re?ect their genuine commitment to this new investment
paradigm. The UNPRI criterion is employed to measure the level of public disclosure. One hour was
allocated to every asset owner’s web site to search and collect public information.
Findings – Overall, the level of public disclosure of RI activities is not proli?c. The study is
negatively in?uenced by North American pension funds who dominate this sample. Public disclosure
practices are positive for European funds. The size of funds under management positively in?uences
the public disclosure and re?ects their leadership role in the industry.
Research limitations/implications – Limitations include: the largest pension funds are
dominated by North American funds and re?ect the impact of fund size. The results are from the
largest pension funds and may not be representative of the entire industry; the positive ?ndings from
European funds re?ect a material subset of the global asset owners; and, we do not engage directly
with the funds in question. Measurements are sourced from public disclosure.
Originality/value – The lack of public disclosure of RI by North American funds suggests that
these institutions do not believe that it is important to investors. It suggests that these asset owners
have not yet been exposed to the same in?uences as European funds. Given that North American
funds together own substantial interests in listed corporations, they are much more important to
in?uence than corporations.
Keywords Social responsibility, Investments, Economic sustainability, Ethical investment
Paper type Research paper
Introduction
In recent years, the global ?nance industry has witnessed the rise of environmental,
social and governance (ESG) factors as potentially important criteria in the investment
decision-making process. The emergence of organisations and initiatives including the
United Nations Principles for Responsible Investment (UNPRI), the Carbon Disclosure
Project, the Investor Group on Climate Change, Enhanced Analytics Initiative,
International Corporate Governance Network, Investor Network on Climate Risk,
Coalitionfor EnvironmentallyResponsible Economies, Council of Institutional Investors,
Institutional Investors Group on Climate Change and many others, have provided
impetus to ESG factors as inputs when making RI decisions.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors thank the two anonymous reviewers for their comments and suggestions. They are
also grateful for the comments and feedback from the 2009 symposium participants of the Asia
Paci?c Centre for Sustainable Enterprise, Grif?th Business School.
ARJ
23,3
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Accounting Research Journal
Vol. 23 No. 3, 2010
pp. 302-318
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011092619
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The ideal of responsible investing has been largely de?ned within the realms of
socially responsible investing (SRI), ethical investments and corporate social
performance. The recent emergence of ESG factors attempts to more clearly de?ne
the various aspects of RI decision making. The question remains whether the custodians
of the largest pools of long-term savings are genuinely committed to the new ESG
investment paradigm? This study contributes to the debate by examining the current
ESG disclosure practices of the world’s largest pension funds.
The ?ndings from this study reveal that the disclosure practices of the world’s
largest pension funds are mixed depending on whether they are geographically located
in North America or Europe. The ?ndings reveal that North American funds exhibit
poor outcomes in terms of RI disclosure to the general public. Conversely, European
funds are found to be advocates of the public disclosure of ESG practices. We also ?nd
that the level of funds under management (FUM) is a strong explanatory variable to
higher levels of RI disclosure to the general public.
The ?ndings from this empirical study are relevant given the recent global ?nancial
crisis which has made decisions about the allocation of scarce resources and
commitment towards RI disclosure more acute. The remainder of this study is organised
as follows. The next section provides a brief survey of the literature. In the third section,
we explore the concept and de?nition of RI. We then present the data collection process
employed in this study. The methodology section outlines how RI is quanti?ed and
measured for each fund. We then analyse the results and provide concluding comments.
Literature survey
Whilst the ideals of ESGfactors andRI are beingdrivenbyrecent institutional initiatives
(such as the UNPRI), the academic literature has examined the various de?nitions of
these investment paradigms for some time under the different strands of research
including SRI, ethical investing and the ?nancial performance effects of corporate social
performance. The works of Lee et al. (2009) and Statman and Glushkov (2009) inform us
that there are three prevailing hypotheses (i.e. advocates, critics and the neutral
proponents) that dominate the ESG and RI debate in the ?nancial economics literature.
Numerous empirical researchers advocate SRI, ethical and ESG approaches as they
have demonstrated that a value creation proposition can be attained under this new
investment philosophy. The two theoretical rationales that underpin the case for
responsible investing is to ?rst seek new investment opportunities that deliver higher
rates of returns to investors and second the long-term accumulation of RI-based
businesses, and investment models remains a prudent method of risk management by
avoiding investments that may be susceptible to risky outcomes.
The empirical literature has lent support to these hypotheses including Gompers et al.
(2003) who reveal evidence of a risk premiumbyowningstocks with high-corporate social
performance metrics and shorting a portfolio of stocks with low-corporate social
performance metrics. Others such as Derwall et al. (2005) reveal the presence of an
“eco-ef?ciency” risk premium in SRI portfolios of US stocks from 1995 to 2003. More
recently, JirapornandGleason(2007) have discoveredgovernance effects instocks returns
whereby anincrease incorporate leverage results ina reductioninshareholder rights. The
workof Koner andCohen(2001) shows that poor environmental performance is negatively
correlatedto the intangible asset value of a ?rm. Other studies, suchas Richardet al. (2007)
showthat racial diversity within a ?rmis associated with positive ?nancial performance.
Responsible
investment
disclosure
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The opponents of SRI, ethical investing and corporate social performance methods
argue that the newinvestment paradigmis a cost and risk burden to investors and ?rms.
From a Markowitz (1952) perspective, modern portfolio theory informs us that RI is a
smaller subset of the investment universe that forms the market portfolio. A higher
allocation or concentration towards RI will result in insuf?cient portfolio diversi?cation
for the investor resulting in unnecessary levels of portfolio risk. The second theoretical
criticismcomes fromresearchers suchas Heinkel et al. (2001) whopostulate that investors
who avoid companies that are agnostic to ESGprinciples tend to keep the prices of these
companies low, thereby resulting in higher expected returns. The third theoretical
criticismis that the additional cost burden to analyse and screen RI investments will give
rise to higher management fees resulting in lower investment returns.
The empirical studies that critique the shift towards RI include Hassel et al. (2005)
who estimate that environmental investments lead to increased corporate costs which
translate to a reduced market value of the ?rm. Galema et al. (2008) ?nd that SRI
screening forms portfolios with lower book-to-market ratios which has signi?cant
effects on stock returns and reduces alpha. More recently, Hong and Kacperczyk (2009)
show that “sin” stocks (i.e. gambling, alcohol and tobacco ?rms) earn a statistically and
economically signi?cant excess return of 2.5 percent per year in global stocks from
1985 to 2006 in comparison to the market return. From a managed fund expense
perspective, Drew (2003) informs us that higher management fees translate into a drag
in performance within the pension management industry. The empirical evidence from
the critics provides a balancing offset or challenge to the RI advocates.
The thirdand?nal strandof literature suggests that the RI paradigmprovides neutral
outcomes towards investment and ?nancial performance. For instance, Cortez et al.
(2009) ?nd that European funds can screen investments based on social criteria without
compromising ?nancial performance. Bauer et al. (2005) ?nd no evidence of statistical
differences in the risk-adjusted performance between ethical and conventional mutual
funds in the USA, UKand Germany in the 1990s. Others such as Statman (2006) estimate
that the Domini 400 Social Index generated a higher return than the S&P 500 from 1990
to 2004, however, the outperformance is not statistically signi?cant. Overall, it is clear
that the evidence that support all three hypotheses in the literature leaves the question
of the value of ESG approaches to investors as moot.
Whilst the literature has focussed on the ?nancial and investment performance of
corporate social responsibility, ethical, SRI and ESG behaviour, there is a paucity of
research that measures whether this newparadigmis being taken seriously by the asset
owners[1] themselves. More speci?cally, is the emerging trend towards sustainable
?nance and investment being treated with importance by those who are the ?duciaries
of the world’s largest pools of long-term savings?[2] Hawley and Williams (2000) and
Monks (2001) acknowledge the global concentration of large pools of savings through
trust institutions via the pension fund industry. Given this concentration, the shift
towards a more sustainable world can only be actioned if ESGinvestment principles and
practices are meaningful to the pension fund industry.
One way the paradigm shift toward ESG principles by pension funds can be
demonstrated is by the public disclosure of these investment practices to their clients
and to the general public. The Securities and Exchange Commission (2008) themselves
have articulated the use of web sites as an important tool for the disclosure of
important corporate information. If RI is indeed a good, we would expect to observe
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these asset owners “trumpeting” their strong support of, and commitment to, these new
investment initiatives and practices via disclosure to the general public.
A second expectation of ours relates to leadership within the pension fund industry.
Asset owners with the largest sums of FUM hold more responsibility and in?uence as
?duciaries of these long-termsavings incomparison to smaller asset owners. Large asset
owners tend to yield greater media attention both within the ?nance industry, and the
global economy more broadly. By virtue of the signi?cant interests that these funds hold
in all varieties of investments, especially listed corporations, they also tend to have a
tangible impact on decision making in the economy. For instance, if a senior investment
professional at the California Public Employee Retirement System, one of the world’s
largest asset owners with $254.627 billion under management, was to request a meeting
the Chairman of the Board of a listed corporation, the authors would contend that such a
meeting would very likely take place. The same probably cannot be said for a smaller
asset owner of, say, $1 billion. By extension, there is an expectation that larger funds are,
or at least should be, the motivational force to lead the pension fund industry towards
these newESGbased principles and RI practices. Testing to see whether the size of FUM
is a proxy for public commitment to ESGprinciples is one of the subjects of this study[3].
Given the positive “corporate kudos” that is derived from ESG, asset owners that
incorporate this new investment paradigm gain a competitive market edge via:
.
?rst mover advantage; and
.
the development of innovative investment products.
It is expected that the ESG activities of these asset owners be publicly disclosed for all
to see. Furthermore, one would expect to observe the increasing importance of these
ESG investment principles and practices as the proportion of FUM increases.
A further matter of interest to policymakers is the potential for clear geographical
variation in ESGapproaches to investment. One popular notion to be tested in this study
relates to the expectation that asset owners from Europe would show greater
commitment to ESG principles than, say, North American asset owners controlling for
size. Potential explanations include Europe’s social economic models which tend to go
beyond narrow economic de?nitions of utility, Europe’s demonstrated commitment to
social goods, and Europeans’ willingness to subscribe to a range of treaties and
agreements in particular relating to environmental issues (e.g. the Kyoto Protocol).
Given these factors, we expect see a greater degree of commitment to ESG principles
from European asset owners.
This study examines the public disclosure of RI activities of the world’s largest asset
owners, also often described as “institutional investors”. Strictly speaking this category
includes a range of fund types such as pension funds, buffer funds and sovereign wealth
funds, which may hold assets for different purposes. The Pensions and Investments
(P&I)/Watson Wyatt World 100: The Largest Pension Funds 2009 survey, which is used
extensively in this study, leaves the reader expecting a list comprised of only pension
funds. In reality, the list includes both buffer funds (e.g. Sweden’s AP Fonden) and
sovereign wealth funds (e.g. Australia’s Future Fund), and hence the term “pension
fund” is used loosely throughout. As at 31 December 2008, Watson Wyatt Worldwide
(2009) reported that the assets of the 11 largest pension markets at an estimated US
$20,417 billion. To contextualise this result, the current value of pension fund assets
constitutes 61 percent of the average GDP of the eleven markets at year-end 2008.
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Responsible investment
Global investors are becoming increasingly aware of the potential impact of a myriad
of issues such as climate change, human rights and corporate governance practices on
an investment proposition. In recent years, the new umbrella term, “responsible
investment” or RI has emerged in the ?nance industry to describe these effects on the
conventional evaluation of an investment or ?nancing proposition[4]. Because large
pension funds hold signi?cant interests in companies and investment projects around
the world, RI is seen by industry as a key element in advocating higher standards of
practice amongst global investors and shifting capital to these areas in the future.
Whilst the RI terminology is entering mainstream, the challenge is to clearly de?ne
it given the ever-changing environment in the asset management industry. The
introduction of new investment strategies including positive/negative screens of ?rms
and sectors, new standards for corporate governance and various de?nitions of ethical
and SRI makes it dif?cult to construct a formal de?nition of RI[5].
Despite the dynamic nature of RI, some international consensus has emerged in the
form of the UN-backed Principles for Responsible Investment (PRI). The PRI is an
internationally agreed framework to assist the global investment industry in
incorporating ESG issues into the investment decision-making process. There are six
principles in the PRI that are voluntary and aspirational in nature but require higher
investment and disclosure standards by organisations that are signatories to these
commitments[6]. The emerging importance of ESGissues is re?ected inthe rapidgrowth
of the PRI with 470 PRI signatories with assets under management of over US $18 trillion
as at July 2009 to up to 765 signatories in one year in July 2010. Given these statistics, this
study examines the public disclosure of ESG practices as outlined in the PRI of the
world’s largest pension funds. We proceed to detail the data employed in this study.
Data
This study employs the P&I (2009) list of the largest 300 pension funds in the world
ranked by FUM in US dollar terms as at 31 December 2008 which was published in
January 2009. From this independently compiled list, we examine the top 100 largest
pension funds as a proxy for global asset owners[7]. The data from P&I (2009) provide
the fund names, their world ranking based on FUM, their country of domicile and their
total FUM in US dollar terms.
We summarise the data by classifying each fund into their respective geographic
region. From the sample of the top 100, we exclude a single fund from the African
region and two funds from the South American region to complete the ?nal sample of
97 funds for the analysis in this study.
The summary of the 97 funds are reported in Table I and we reveal some interesting
observations. Panel Aof Table I shows that the 97 funds employedinthis sample manage
41.2 percent (i.e. $8.4 trillion) of the $20.4 trillion of total pension assets under
management as reported in the Watson Wyatt Worldwide (2009) survey. The signi?cant
level of assets under management as a proportion of total pension assets in each
geographical regionsuggests that the 97 funds inthis studynot onlyrepresent the largest
funds but they represent a signi?cant proportion of total global pension fund assets.
Panel B of Table I shows that the 24 funds in the top quartile control $4.673 trillion of
funds which represents more than half of the $8.4 trillion of FUM in the sample and a
staggering 23 percent of total world pension fund assets under management. As a result,
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it is important to acknowledge that the funds in this study are in fact the largest funds in
each geographical region, however, they may not be representative of the overall global
pension fund industry. Put simply, the public disclosure practices revealed in this study
may in fact be representative of the behaviour of large pension funds rather than the
global pension fund industry as a whole.
Panel A of Table I also shows that North American funds dominate the top 97 with
52 funds managing US $4.022 trillion. Panel A also reports that the second highest
region with pension funds is Europe with 30 funds controlling US $2.087 trillion of
FUM. Europe and North America account for 82 funds managing US $6.109 trillion or
nearly 71 percent of FUM being managed in the sample. It is clear that both North
America and European based funds dominate this sample of the largest pension funds
in the world even though the Government Pension Investment Fund of Japan is ranked
No. 1 in the sample with US $1.072 trillion of assets under management which
represents one-eighth of total FUM in the data sample.
Methodology
The methodology of this study is designed to complement the UNPRI. Whilst there are
some pension funds in this sample that are PRI signatories, there are many that do not
voluntarily adopt the PRI. The design of this methodology is to measure the level of RI
information that is disclosed to the general public. It is our contention that a pension
fund which is a serious advocate of RI will do its utmost to communicate their RI
philosophy and commitment to as many people as possible via their web site. Some of
these ESG standards are internally driven while others are determined by the pension
fund in conjunction with collaborative input from external organisations/institutions.
The objective of this methodology is to capture the public disclosure of each of these
six PRI-based outcomes.
Geographical
region
Number
of funds
Total FUM in data
sample (US $
millions)
Total pension
assets in each region
(US $ millions)
Total FUM in data
sample as percentage of
total pension assets
Panel A: funds sorted by continent
North
America 52 4,022,022 13,165,000 30.6
Europe 30 2,087,232 3,747,000 55.7
Asia Paci?c 15 2,289,287 3,449,000 66.4
Total 97 8,398,541 20,361,000 41.2
Panel B: funds sorted by quartiles
Q1 24 4,673,221
Q2 24 1,716,589
Q3 24 1,148,718
Q4 25 860,013
Notes: Panel A presents the 97 funds in the study sorted by geographical region and we report the
respective level of FUM. The fourth column in this table reports the size of pension assets under
management in each geographic sector as reported in the Watson Wyatt Worldwide (2009) survey.
The ?nal column in this table reports the total FUM in each geographical region in this sample as a
percentage of the total pension assets in each region. Panel B reports the funds sorted by quartiles and
their respective FUM
Table I.
Summary of
pension funds
Responsible
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We analyse the level of RI practice by these pension funds based on the information
that the funds themselves disclose to the general public. For each pension fund, we enter
their web site to search and ascertain their level of public disclosure of RI activities. We
allocated 60 minutes of internet time in their web site between the dates of 1st June and
15th August 2009 and collected information that was readily available to the general
public. We argue that a genuine advocate of RI would ensure that their ESG based
information is easy to access on their public web site. For each of the six PRI principles,
we de?ne tangible levels of public disclosure as important RI information that would be
expected on the web site of each pension fund. The six observable outcomes are detailed
as follows:
Observable Outcome 1. Public reporting of any ESG-related investment analysis
and decision-making processes.
Observable Outcome 2. Public reporting of ESG-related ownership policy
decisions.
Observable Outcome 3. Public reporting of ESG standards demanded from the
entities they invest in.
Observable Outcome 4. The entity is a signatory to the PRI?
Observable Outcome 5. If a PRI signatory, the pension fund enhances/promotes the
PRI through collaboration via its information to the general
public. For non-PRI signatories, the pension fund
enhances/promotes RI dialogue via their engagement in
other collaborative RI initiatives which are disclosed to the
general public.
Observable Outcome 6. If a PRI signatory, the entity provides a PRI annual report to
the general public. If a non-PRI signatory, the entity
provides a RI annual report summarising their ESG
activities to the general public.
Logit and multinomial model speci?cations
To analyse the data in this study, we ?rst employ a logit regression framework. This
regression analysis is employed to examine:
.
the presence of a relationship between the level of RI public disclosure and the
level of FUM of each asset owner; and
.
whether there is any discernible geographic variation in responses to RI issues
amongst asset owners.
Logit analysis is a commonly used technique where a set of dichotomous (binary)
outcomes (i.e. 0 or 1) can be related to a set of explanatory variables. In the ?rst case,
we can test whether the public disclosure of RI practices by pension funds is dependent
upon the level of FUM. To estimate this relationship, we can mathematically express it
as follows. Let N be the total number of observations (i.e. 100); M is the number
of explanatory variables; x
ij
is the value of the jth variable for the ith observation;
Y ¼ Y
1
; Y
2
; . . . ; Y
N
is the dependent variable which represents the RI criteria
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outcome: Y
i
¼ 1 for satisfying the RI criteria, Y
i
¼ 0 for not satisfying the RI criteria.
The model in its general form can be expressed as:
PrðY
i
¼ 1Þ ¼ Fðx
i1
; x
i2
; . . . ; x
iM;
b
1
; b
2
; . . .Þ
That is, the probability that Y
i
¼ 1 is a function of that observation’s x
ij
values and of b
1
,
b
2
, etc. which are parameters estimated from the sample data. The form of the
probability function F is assumed although alternative speci?cations of F may be tested
in order to select the most appropriate form of F.
The assumed functional form in the logit model is the logistic function which can be
written as:
PrðY
i
¼ 1Þ ¼ P
i
¼
1
1 þe
2W
i
; i ¼ 1; . . . ; N
where W
i
¼ b
0
þ
P
M
j¼1
b
j
x
ij
is a linear combination of the independent variables and a
set of coef?cients B ¼ ðb
0
; b
1
; . . . ; b
M
Þ which are to be estimated. In this model, we
assume that there is a simple linear combination of W independent variables that is
positively related to the probability of public disclosure of RI. That is, the higher
value of W
i
, the higher the probability of public disclosure of RI activities conditional
on the pension fund’s value of x. The coef?cient vector B of this linear combination is
not known a priori, but must be inferred from the known values of xs and Ys. In this
?rst model, we employ FUM as the independent variable to examine whether RI public
disclosure is dependent upon the size of assets under management. To obtain the
parameter estimates of the model, maximum likelihood estimation is used.
A similar speci?cation is applied to the second model, which seeks to identify
geographical variation in asset owner responses to RI issues. In model two, the
dependent variable remains the RI criteria outcome as in model one. There are two
independent variables:
(1) a binary variable where X
i
¼ 1 where the asset owner is European, and X
i
¼ 0
where the asset owner is non-European; and
(2) the FUM variable from model one in order to control for size.
We also conduct an auxiliary regression of this second model where the binary
independent variable takes the value of unity where the asset owner is North American
and zero where the asset owner is not North American.
In this study, we also employ a multinomial regression to examine the total score of
each fund. For the multinomial logit regression speci?cation, Y ¼ Y
1
; Y
2
; . . . ; Y
N
is
the dependent variable which represents the RI criteria outcome for values ranging
from 0 to 6 and can be expressed in its general form as:
PrðY
i
¼ 0; 1; 2; 3; 4; 5; 6Þ ¼ Fðx
i1
; x
i2
; . . . ; x
iM;
b
1
; b
2
; . . .Þ
Results
The surveyresults of eachfundis collectedandsummarisedinTable II. Outcome 1 reports
the most elementary public disclosure of ESG practices of all funds. Panel A of Table II
reports that 46 percent of funds (i.e. 45 out of 97) were foundtodisclose this basic level of RI
information on their web site. Panel Bof Table II reports that 21 of the 30 European funds
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(i.e. 70 percent) meet this criterion while only 20 of the 52 North American funds
(i.e. 38 percent) disclose elementary discussion of ESG investment factors to the general
public. These observations suggest that European pension funds are more committed to
providing the public disclosure of RI information than their North American peers.
Outcome 2 measures the public reporting of active ownership decisions and Panel Aof
Table II reports that 34 percent of funds (i.e. 33 out of 97) in the sample met this disclosure
criterion. Panel B of Table II shows that 17 out of 30 European funds (or 57 percent)
provided public reporting of active ownership whilst only 15 out of 52 North American
funds (or 29 percent) show similar disclosure. Once again, these ?ndings indicate that
the public disclosure of active ownership is low, however, European funds tend to
provide a higher level of public information than their North American colleagues.
Panel C of Table II reports that 13 of 25 funds (or 52 percent) in the top quartile (based
on FUM) demonstrate public reporting of active ownership while only six of 25 funds
(or 24 percent) of the bottom quartile disclose the same information. This outcome lends
support to the notion that larger pension funds generally display a higher degree of
public RI disclosure, however, this will be addressed in subsequent sections of this study.
Overall, we can conclude that the North American region provides limited public
disclosure of active ownership decisions in comparison to Europe.
Outcome 3 quanti?es the public reporting of ESG standards demanded from the
entities they invest in and Panel Aof Table II reveals that 26 of the 97 funds (or just over
one-quarter surveyed) disclose this information to the general public. Panel Bof Table II
shows there are 14 European funds from a total of 30 (i.e. 47 percent) that meet
this criterion, while 11 out of 52 North American funds (i.e. 21 percent) provide an
equivalent level of public disclosure. Again, this criterion reveals that North American
pension funds fall short in this form of public disclosure in comparison to their
European counterparts. Panel C of Table II reports that ten funds in the top quartile
Criteria
No. 1
Criteria
No. 2
Criteria
No. 3
Criteria
No. 4
Criteria
No. 5
Criteria
No. 6
Panel A: number of funds that meet criteria
Total 45 33 26 24 30 13
Panel B: sorted by continent
North America 20 15 11 8 14 3
Europe 21 17 14 15 15 9
Asia Paci?c 4 1 1 1 1 1
Panel C: sorted by quartile
Q1 16 13 10 9 11 5
Q2 10 9 7 3 5 2
Q3 11 5 3 5 8 0
Q4 8 6 6 7 6 6
Panel D: sorted by FUM (US $ millions)
Criteria met 4,969,717 3,298,682 3,620,874 3,340,944 3,861,100 2,364,980
Criteria not met 3,428,824 5,099,859 4,777,667 5,057,597 4,537,441 6,033,561
Notes: This table summarises the public disclosure ?ndings of the 97 funds. Panel A reports the
number of funds that satisfy each disclosure criterion. Panel B classi?es each of these funds based on
geographical continent. Panel Cclassi?es these funds based on their quartile measuredby FUM. Panel D
measures the total FUM being managed by funds that meet or fail to disclose each criterion
Table II.
Summary of public
disclosure results
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(i.e. 41.6 percent) meet this criterion of public disclosure. Conversely, only six funds in
the bottom quartile satisfy this criterion. Panel C of Table II appears to suggest that the
largest funds classi?ed by FUMseemto be provide RI disclosure leadership, and greater
transparency amongst those surveyed.
Outcome 4 measures whether the entity is a PRI signatory. Panels Aand B of Table II
showthat 24funds meet this criterionof which15funds are basedinEurope. These 24PRI
signatories control approximately 40 percent of total FUMin this sample. An interesting
observation from Panel C of Table II is that the 24 PRI signatories are concentrated
in the top quartile (nine funds) with fewer funds in the remaining quartile categories.
Outcome 5 captures a pension fund’s public disclosure of the promotion of RI
dialogue and initiatives with other entities. Panel Aof Table II reveals that 31 percent of
the 97 funds met this disclosure criterion. About Fifteen out of 30 European funds
(i.e. 50 percent) disclosed information that met this criterion in comparison with only
14 of the 52 North American funds (i.e. 27 percent). An interesting observation from
Panel C of Table II is that 11 of the 24 funds (i.e. 46 percent) in the top quartile of FUM
satis?ed this criterion. Many pension funds in the top 97 met this criterion through their
participation and membership of other ESG-related initiatives including those listed in
the Introduction section of this study. The purpose of these organisations is to enhance
awareness and develop new ESG-type standards through collaborative dialogue with
other investors and market participants. Pension funds that were not signatories of the
PRI or one or more of these other organisations generally met this criterion by enhancing
and promoting RI through their own corporate activities.
Outcome 6 measures whether the pension fund discloses a PRI or RI annual report
to the general public. Panel Aof Table II reports that only 13 of the 97 funds in the sample
satis?ed this criterion. Panel B of Table II shows that 9 out of 30 European funds (or
30 percent) and only 3 from52 North American funds (or 6 percent) provided a RI annual
report to the general public. Interestingly, Panel C of Table II reveals that the funds who
produce RI annual reports tend to be categorised in the top and bottomquartile in terms of
FUM. We also observe that 10 of the 13 funds (i.e. 77 percent) that publish a RI annual
report are PRI signatories. The ?ndings fromOutcome 6 suggest that pensionfunds donot
feel that it is necessary to disseminate RI activities through a RI annual report. Another
interesting ?nding is that the pension funds who provide RI annual reports to the general
public are overwhelmingly PRI signatories, however, it is clear that the disclosure of this
type of reporting is not yet an industry standard in the global pension fund industry.
Equality tests
The ?ndings in Table II suggests the strong in?uence of the North American and
European funds in this sample and the strong effect that seems to be present on the top
quartile of funds with the largest FUM. To examine whether these effects are
statistically signi?cant, Table III reports the non-parametric tests for equality of median
and variance. Panel Aof Table III sorts the funds based on their continental location and
we estimate the non-parametric Mann-Whitney equality of median test. Panel Areveals
that the difference in expected scores of European funds are statistically signi?cant in
comparison to their counterparts in North American and Asia Paci?c. Put simply,
European funds tend to exhibit higher and statistically signi?cant scores for public
disclosure of RI practices in comparison to North American and Asia Paci?c funds. It is
clear that European funds tend to value the public disclosure of ESG factors in
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the investment process more than their US counterparts. Panel B of Table III reports the
non-parametric Siegel-Tukey test which shows insigni?cant differences in the
dispersion of scores between North American, European and Asia Paci?c funds.
In a second analysis, we test the strength of the overall RI scores based on FUM, we
estimate the same equality tests on the funds classi?ed in their respective FUM
quartiles. Panel C and Dof Table III showno statistical difference in median or variance
in funds when classi?ed in their respective FUM quartiles. Thus, we cannot draw any
conclusions that FUM is or is not a variable that can be associated with the public
disclosure of RI.
Multinomial estimation
We estimate a multinomial logistic regression that simultaneously examines whether
the total scores of each fund can be explained by the size of FUM and the continental
locations of Europe and North America. The multinomial regression results in Table IV
indicate that both FUM size and the European location are statistically signi?cant with
large and positive coef?cient estimates. Table IV also reveals that the parameter
estimate for the location of North American funds is positive and large, however, it is
statistically signi?cant at the 10 percent level only.
Overall, the ?ndings in Table IVcontribute to the weight of evidence that a European
fund domicile seems to be a strong and reliable explanatory variable for overall scores of
RI public disclosure. The multinomial regression also provides evidence that suggests
that FUM is a signi?cant explanatory variable, even after controlling for location.
North America Europe
Panel A: grouped by geographical location – equality of median tests
Europe 3.081
* *
n/a
Asia Paci?c 1.158 3.070
* *
Panel B: grouped by geographical location – equality of variance tests
Europe 1.268 n/a
Asia Paci?c 0.939 0.320
Panel C: grouped by FUM quartiles: equality of median tests
Q1 Q2 Q3 Q4
Q1 –
Q2 0.175 –
Q3 0.433 0.691 –
Q4 1.588 1.856 1.041 –
Panel D: grouped by FUM quartiles: equality of variance test
Q1 –
Q2 0.396 –
Q3 0.489 1.053 –
Q4 20.003 0.589 0.5590 –
Notes: Statistical signi?cance at:
*
5 and
* *
1 percent levels, respectively; this table presents the test
statistics of various equality tests of medians and variances. Panels A and B report the hypothesis
tests from the total score out of six (from the six PRI-based outcomes) of each fund categorised in their
respective continental/geographical locations of North America, Europe or the Asia Paci?c. Panels C
and D report the hypothesis tests based on funds in their respective quartiles ranked by FUM. Panels
A and C present the non-parametric Mann-Whitney equality of median tests. Panels B and D report the
non-parametric Siegel-Tukey difference in scale (variance) test
Table III.
Equality tests
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This ?nding leads to the obvious question about why larger pension funds might
demonstrate a greater commitment to ESG issues. Potential explanations may include:
greater access to resources including specialised ESG expertise, more established and
capable investment governance arrangements, and/or a predisposition, by virtue of size,
to taking positions of leadership amongst asset owners. Given the inconsistent ?ndings
in comparison to the equality tests, we pursue another regression which examines the
results of the individual scores of each fund.
Logit estimation
As a ?nal analysis, we examine the individual results of each fund and examine
whether size of FUM or continental location are explanatory variables to these scores.
Table V reports the logit regression results by employing the six criteria results as the
dependent variable with various independent variables. Panel A of Table V reveals
that the size of FUM is a statistically signi?cant explanatory variable of public
disclosure for Criteria 1, 3 and 5 but not for 2, 4 and 6. It is not immediately clear why
this is the case, however, this inconsistency may explain why FUM size was found to be
an insigni?cant variable in the equality tests yet it is a signi?cant explanatory variable
in explaining the overall scores in the multinomial regression results.
Panel B of Table V suggests that European funds are a statistically signi?cant
variable at explaining an af?rmative criterion score in this sample. This result lends
further support to suggest that this is the most important explanatory variable of
public RI disclosure in this sample. Conversely, Panel C of Table V reveals that
North American funds are an insigni?cant variable at explaining the public disclosure
of RI information with the exception of Criteria 4 and 6. Overall, the conclusions to be
drawn from Table V are that the size of FUM and European funds are generally strong
explanatory variables of RI disclosure to the general public.
Findings
The ?ndings from this study on the public disclosure of RI practices reveal a number of
themes that relate to issues of transparency, fragmentation, geography and fund size.
First, the activities observed from the web sites of this sample suggests that,
while pockets of excellence exist in terms of public disclosure, the ongoing dichotomy
between a relatively homogenous, aspirational set of RI goals and a heterogeneous set
Regression coef?cients
Coef?cient estimate/
SE/p-value Log likelihood LR statistic LR p-value Adj. R
2
Intercept 25.920/1.333/0.000 2250.949 129.922 0.000 0.263
Log (FUM) 0.504/0.118/0.000
* *
European fund 1.433/0.368/0.000
* *
N.American fund 0.669/0.396/0.092
Notes: Statistical signi?cance at:
*
5 and
* *
1 percent levels, respectively; this table presents the
multinomial regression employing a quasi maximum likelihood estimation with the quadratic hill
climbing optimization algorithm. The dependent variable in the estimation is the total scores from zero
to six for the 97 funds. The three independent variables in the estimation are the log of FUM, the
binary criteria (i.e. 1 or 0) for European funds and the binary criteria (i.e. 1 or 0) for North American
funds. Standard errors (SE) are based on Huber/White robust covariances
Table IV.
Multinomial regression
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Criteria
Regression
coef?cients
Coef?cient estimate/SE/
p-value
Log
likelihood
LR
statistic
LR
p-value
McFadden
R
2
Panel A
1 Intercept 28.534/3.686/0.021
Log(FUM) 0.756/0.332/0.023
*
266.446 5.098 0.024
*
0.037
2 Intercept 29.025/21.967/0.049
Log(FUM) 0.753/1.819/0.069 261.595 5.017 0.025
*
0.039
3 Intercept 210.772/3.929/0.006
Log(FUM) 0.877/0.348/0.012
*
255.189 6.273 0.012
*
0.054
4 Intercept 27.612/4.139/0.066
Log(FUM) 0.585/0.367/0.111 254.834 2.799 0.094 0.025
5 Intercept 28.638/22.358/0.018
Log(FUM) 0.705/2.163/0.031
*
259.738 4.345 0.037
*
0.035
6 Intercept 29.808/5.513/0.076
Log(FUM) 0.707/0.485/0.145 237.639 2.829 0.093 0.036
Panel B
1 Intercept 20.588/0.249/0.019
European fund 1.435/0.470/0.002
* *
263.949 10.091 0.001
* *
0.073
2 Intercept 21.137/0.279/0.000
European fund 1.405/0.461/0.002
* *
259.332 9.544 0.002
* *
0.074
3 Intercept 21.478/0.307/0.000
European fund 1.345/0.478/0.005
* *
254.324 8.004 0.005
* *
0.069
4 Intercept 21.792/0.342/0.000
European fund 1.793/0.500/0.000
* *
249.503 13.462 0.000
* *
0.120
5 Intercept 21.216/0.285/0.000
European fund 1.216/0.463/0.009
* *
258.423 6.975 0.008
* *
0.056
6 Intercept 22.803/0.515/0.000
European fund 1.956/0.651/0.003
* *
233.658 9.961 0.002
* *
0.129
Panel C
1 Intercept 0.167/0.290/0.564
N.American fund 20.637/0.406/0.117 267.751 2.487 0.115 0.018
2 Intercept 20.423/0.295/0.152
N.American fund 20.480/0.425/0.259 263.462 1.284 0.257 0.010
3 Intercept 20.693/0.306/0.024
N.American fund 20.623/0.457/0.173 257.384 1.884 0.170 0.016
4 Intercept 20.601/0.302/0.047
N.American fund 21.104/0.489/0.024
*
253.520 5.419 0.020
*
0.048
5 Intercept 20.601/0.302/0.047
N.American fund 20.398/0.435/0.360 261.489 0.842 0.020
*
0.048
6 Intercept 21.335/0.355/0.000
N.American fund 21.458/0.693/0.035
*
236.033 5.211 0.022
*
0.067
Notes: Statistical signi?cance at the
*
5 and
* *
1 percent levels, respectively; this table presents the logit
regression results estimated in this study. Panel A reports the logit regressions with the binary criteria
(i.e. 0 or 1) of Criterion 1-6 as the dependent variable and the log of the amount of FUMas the independent
variable. Panel B reports the logit regressions with the binary criteria (i.e. 0 or 1) of Criterion 1-6 as the
dependent variable and the criteria of 1 for European funds and 0 for non-European funds as the
independent variable. Panel Creports the logit regressions with the binary criteria (i.e. 0 or 1) of Criterion
1-6 as the dependent variable and the criteria of 1 for North American funds and 0 for non-North
American funds as the independent variable. SEs are based on Huber/White robust covariances
Table V.
Logit regressions
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of operational responses by these ?duciaries of long-term savings is clear. This raises
the spectre of information asymmetry from Akerlof (1970), Spence (1973) and Stiglitz
(2000) whereby the transactions between pension funds and their members may be
sti?ed if these contracting parties do not exhibit homogenous expectations in terms of
RI. A commitment by the asset owners to improve the transparency of their fund’s RI
practices through public disclosure can minimise the potential for market failure.
Second, this study reveals that the observed practices of the largest pension funds
con?rm a heterogeneous set of responses to RI issues. Within the sample of 97 pension
funds, the spectrumof outcomes is dramatic especially between the European funds and
others. Whilst dominated by asset owners that appear to make no formal mention of RI
considerations on their web sites, around one in four of these pension funds (27 percent)
have a rating of four or higher on the survey scale (Figure 1). This group is skewed
toward larger funds representing 43 percent or $3.6 trillion of total assets.
This raises some immediate questions for future research. What are the barriers (real
or perceived) to ?duciaries of the world’s largest pension funds in more fully disclosing
their RI practices to the general public? Whilst it is encouraging that, by total assets,
funds engaged in the public disclosure of RI practices (de?ned as pension funds with a
rating of four or above on the scale) account for a slightly greater proportion of capital
than those not engaged (43 percent or $3.6 trillion versus 38 percent or $3.2 trillion),
a substantial pool of retirement savings are, according to web site sources, yet to engage
in the RI debate publicly. The observations drawn from this research suggest
the emergence of two main cohorts within the largest pension funds, that is, around four
out of ten engaged in the RI debate; with four out of ten funds having no public
engagement; and the remaining two funds out of ten engaging only partially.
A limitation of this study is the dominant proportion of North American pension funds
who seemless engaged in the public disclosure of RI than pension funds located in other
geographical areas.
The geographic region of Europe (incorporating funds mainly from Denmark, the
Netherlands, Norway and Sweden) have demonstrated leadership in the public
disclosure of RI practices in this sample. It has been noted that the funds with the
highest RI disclosure seem to belong to an area which could loosely be described
as “Northern Europe”. [Had it not been for the presence of a Dutch fund in the group,
“Scandinavia” would have been a better descriptor for this set of funds.] This real
Figure 1.
Fragmentation of RI
practices
60
50
40
30
20
10
0
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0 = No engagement; 6 = Exemplar funds
5 6
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commitment to RI disclosure amongst certain northern European countries could be
explained ina number of ways: northern Europeans’ strong social democratic systems of
government, a common set of norms, or a social consensus supporting good causes. In
any case, why northern European funds ?gure so prominently amongst this study’s
exemplary funds merits further investigation. In terms of FUM size, the evidence from
this study remains mixed. Whilst the multinomial estimation demonstrates that a fund’s
assets under management may explain the overall scores in public RI disclosure,
contradictory results were found with equality tests. When individual scores were
regressed against the size of FUM, the logit regression estimates provided both
signi?cant and insigni?cant ?ndings. A limitation of this study is the fact that the top
97 funds are examined and these results may re?ect this type of “large pension ?rmbias”
in the results rather than re?ecting the ?ndings of the overall pension fund industry. It is
clear that the issue of FUM size in the RI debate remains an area for future research.
Concluding comments
While not the focus of this study, a point that cannot be emphasised enough in ?duciary
discussions regarding RI disclosure is the outcomes for pension fund investors (i.e. the
bene?ciaries) and the impact that RI policies may have had on their ?nal accumulated
balance[8]. Members’ interests are inherently long term, and the current dislocation
between those funds “engaged” and “not engaged” in the RI debate requires immediate
consideration. It appears timely that the investment merits of the RI debate are fully
tested to allow pension funds to ful?l their economic obligation of ef?ciently and
effectively transforming retirement savings into retirement income. The ?rst step is the
elementary disclosure of their RI activities. Only through the completion of this task can
?duciaries ultimately ful?l their obligation to their bene?ciaries.
Perhaps due to the fact that the goals of RI and its disclosure are aspiration driven,
the debate to date has tended to generate much heat, but little light. Current practices
by the largest pension funds suggest that a dichotomy of views exists in different
geographical locations around the world. Perhaps one way to progress the debate is not
to contextualise the ?ndings of this survey as pension funds being “right” or “wrong”,
but a difference of philosophical views based on the belief in the investment merits of
RI practices and disclosure. However, the global shift towards the RI paradigm is
becoming so strong, that equally compelling evidence needs to be produced by pension
funds not engaged in RI practices to inform their policy stance.
Notes
1. “Asset owners” is used herein to describe the organisations that have the ultimate ?duciary
responsibility to investors. This differentiates between pension funds, which are asset
owners, and asset management ?rms and other ?nancial ?rms, which are usually agents of
asset owners.
2. For example, ?rms that are signatories to the UNPRI are effectively permitted two years of
“non-compliance” before their genuine commitment to RI is evaluated. The UN has recently
commenced the review process of addressing PRI signatories who are committed as
signatories but do not demonstrate the PRI through visible corporate policies, activities and
actions.
3. The impact of fund size (as measured by FUM) on the investment performance of mutual,
pension and hedge funds has a long tradition. For an excellent review, see Chen et al. (2004).
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In a related strand of literature, Artiach et al. (2010) ?nd evidence that corporate
sustainability performance is positively related to ?rm size.
4. In the experience of the authors, the terms “responsible investment”, “ethical investment”,
“socially RI”, “sustainable investment” and investment approaches incorporating “ESG”
criteria tend to be used loosely and interchangeably in the ?nance industry. Whilst there are
subtle differences between the ?ve, we follow the convention and use these terms
interchangeably.
5. Ali (2007) explains the emergence of “green” hedge funds who invest client funds in
sustainable-based investments.
6. The six UNPRI are available at: www.unpri.org
7. The pension fund database and details of the survey are available from Watson Wyatt
Investment consulting at: www.watsonwyatt.com
8. This idea is explored in Drew (2009) particularly relating to the perils of short-termism in the
design of pension fund mandates.
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About the authors
Robert J. Bianchi is a Senior Lecturer at the Department of Accounting, Finance and Economics
at the Grif?th Business School, Grif?th University, Queensland, Australia. Robert J. Bianchi is
the corresponding author and can be contacted at: r.bianchi@grif?th.edu.au
Michael E. Drew is a Professor at the Department of Accounting, Finance and Economics,
Grif?th Business School, Grif?th University, Queensland, Australia.
Adam N. Walk is a PhD candidate at the Department of Accounting, Finance and Economics,
Grif?th Business School, Grif?th University, Queensland, Australia.
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
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