Paul Cox

Approaching the research from the perspective of a long–term investor such as a large pension fund, Paul Cox concludes that RI works, but there are major questions concerning when, and by how much.

New research into responsible investment highlights future challenges for National Employment Savings Trust (NEST)

In new research into Responsible Investment (RI), commissioned as part of his advisory role at the Personal Accounts Delivery Authority (PADA), Paul Cox from the Business School analyses the current efficacy of RI through interviews with 25 fund management firms.

Approaching the research from the perspective of a long–term investor such as a large pension fund, Paul Cox concludes that RI works, but there are major questions concerning when, and by how much.

The report makes recommendations in four key areas, urging potential buyers of RI to closely question and examine fund managers in these subjects.

Firstly, given that the objective of RI is to investigate risks and opportunities not covered by conventional financial analysis, Dr Cox suggests that clients should seek to understand what aspects are being researched, what major research intentions there are for the period ahead, together with an explanation of why these have been selected. It is important to understand what this research is doing because the types of risk that contributed to the major world stock market declines and banking industry crisis were not once mentioned by any of the 25 fund management firms interviewed in 2007.

Looking at the fund manager’s organogram to identify where the RI responsibility sits is a good way to find out the type of RI being pursued. It’s also key to understand how embedded or independent the RI team and its key personnel are from investment committees and trading within fund management firms.

Attempts to influence the approach that public listed companies take in regard of their own corporate responsibility was more effective when the RI team within the fund management firm had independence from the regular internal investment committees who were likely to be more concerned with short term performance and the next performance league table. Improvements in this area might see fund management firms ring fencing certain of their RI activity whilst allowing information and intelligence gained from this to pass across to investment decision makers. The measurement of outcomes that make the benefits from RI feel real to clients was also often poorly performed.

Finally, there was also a lack of clarity around engagement, or dialogue, with companies. On the surface, it was not at all clear what the engagement process between fund managers and companies was seeking, doing or achieving. Buyers of RI, regulators and standard setters should all be mindful of claims that the existence of a particular level of engagement provides any evidence at all that fund management groups exercise their responsibilities as owners in the spirit that the Combined Code on Corporate Governance intends.

Commenting on his findings Dr Paul Cox said ‘A key requirement of investors, such as pension funds, is to make steady returns over a long period, often this is measured in decades. Many of these investors’ core holdings are bought with little or no known intention of selling in the short or medium term. This means that the exact price and day that marks the start and end point of each investment is often not nearly as important as what happens to the investment during the period of ownership. By explicitly focusing on ownership and responsibility, RI has a key role to play in helping corporations and markets deliver the value that many clients of fund management firms rely on.

Date: 23 February 2010

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