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Monday 29 October - SRI and Savings Plans in Asia
Summary
by Dr. George Curuby, Chair
Barbara Krumsiek, President, CEO and Co-Chairperson, Calvert Group Ltd
Ms. Krumsiek discussed the emergence of the 401K revolution in the US and its
impact on the SRI market. The Calvert Group, of which she is President, is the
largest family of SRI mutual funds in the US, offering 27 funds with a full
range of investment strategies-from domestic, international, equity, bond, and
even a money market portfolio.
Japan, with half the population of the US, has pension savings totaling only
about 15% of those in the US. While defined benefit (DB) plans in the US were
originally the primary form of pension plan following the introduction of the
ERISA legislation, defined contribution (DC) plans grew five-fold from 1985
to 2002, and they have recently surpassed DB plans in terms of assets. In the
US, retirement assets totaled $10.9 trillion at the end of 2001 (including pension
assets, assets earmarked for retirement savings, including IRAs), and annuities.
In the past year, 75% of net new dollars to US mutual funds came from individual
retirement plans. At the end of 2000, there were 42 million participants, and
this number was still growing-but assets were declining slightly due to a decline
in market prices.
In the US, 44% of retirement savings is in the form of 401K assets, and only
6% comes from social security savings. In a recent survey of 401K plan members,
the three main reasons they gave for possibly increasing their contributions
to their plan were: (1) increase in corporate matching, (2) getting a salary
increase, and (3) being provided with a broader selection of plan investment
options.
Ms. Krumsiek perceived the following weaknesses in 401K plans: (1) plan members
are able to borrow money using their 401K assets as collateral, and they often
spend the money; (2) employers often offer employees company stock as one option
for their plans-which concentrates risk in their retirement portfolio. Ms. Krumsiek
would like to mandate diversification and loosen restraints on the sale of stock
held by employees in their 401K plans.
Six years ago in order to overcome plan sponsor to the introduction of SRI
funds (due to concerns about fiduciary responsibility), Ms. Krumsiek asked the
Department of Labor for an opinion letter about whether or not SRI funds were
acceptable from the perspective of their fiduciary responsibility. The letter
that the DOL provided paved the way for Calvert to expand its plan sponsor relationships
from 75 to 650, and to increase the number of plan administer relationships
from one to 10. She commented that "talking to trustees on a company-by-company
basis doesn't lead to results." This suggests the need for a similar approach
in newer markets, such as those in Asia.
Paul Klug, Managing Director & COO, Morgan Stanley Asset & Investment
Trust Management
Mr. Klug started his presentation by showing how, according to recent research
about corporate performance, those companies that have high scores for corporate
governance also tend to demonstrate financial and stock market performance that
is greater than companies with low scores for corporate governance.
In Japan, there is still an obstacle with regard to a definition of SRI. What
are the criteria? Mr. Klug mentioned that there is still a need to incorporate
culturally driven criteria and include Japanese values. In Japan, what are important
values? Integrity is certainly one of them. It is also important for these criteria
to be measurable. With criteria, it is possible to establish a track record
and benchmarks-which are critically important for: (1) pension plan sponsors
for reasons of fiduciary responsibility, and (2) fund managers for reasons of
portfolio construction.
From Mr. Klug's perspective, the key drivers for SRI are: (1) evaluation standards,
(2) benchmarks, and (3) investor education. He also said that it is important
that corporations embrace SRI principles and that they have transparency of
financial statements. From a regulatory perspective, he observed that we are
moving towards a greater independence of corporate boards of directors and towards
global accounting standards.
Tatsuo Mizutori, Executive Vice President, Mercers Human Resource Consulting,
Ltd.
Mr. Mizutori started by saying that his presentation would focus on the question
of how SRI will develop in Japan and the related problem areas.
In the US in 2001, Mercers was asked by its pension sponsor clients to engage
in 37 SRI searches, which accounted for 34% of all of Mercers' searches for
that year. These 37 mandates spanned most asset classes and investment styles
(domestic, international, equities, balanced, bonds, large-cap, small-cap, etc.).
The key issue about SRI for plan sponsors is: (1) fiduciary responsibility,
(2) a clear definition of SRI-related risk, (3) a clear policy statement for
SRI, and (4) shareholder advocacy. Whether the plan sponsor was a DB or DC plan,
from Mr. Mizutori's perspective, a key issue is fiduciary responsibility.
Mr. Mizutori had a conversation recently with a key Japanese pension industry
opinion leader, and he was surprised to be told that SRI is not in compliance
with ERISA. Mr. Mizutori said that he felt that it is critical that Japan's
opinion leaders be educated so that they have the proper knowledge based about
SRI. He said also that he had personal questions about whether negative screening
might lead to a breach of fiduciary responsibility; while he feels that there
is no problem with positive screening. He also mentioned that sector risk might
result from SRI screening because of the exclusion or underweighting of certain
sectors. On the whole, Mr. Mizutori's impression is that most SRI funds have
a growth tilt. He recommended that SRI funds be able to make a clear statement
about securities selection and portfolio construction in order to differentiate
themselves from other mainstream growth funds.
In Japan as of September 2002 there were only 174 corporations with DC plans,
of which 33% had less than 99 employees. So, DC is off to a slow start since
October 2001 when DC plans were introduced.
Questions and Answers
Question: How do you manage risk in a SRI portfolio?
Answer: We measure and manage risk exactly the same way we would mainstream
portfolios in terms of volatility, tracking error, beta, and other CFA-type
analyses. We are evaluated on a level playing field with other fund managers
and we are required by the SEC to disclose the benchmarks against which we measure
our performance.
Question: How should plan sponsors develop a SRI policy?
Answer: It is important that plan sponsors develop a SRI policy for
their assets at a plan level and for selecting funds to be added to the range
of products they offer their plan sponsors. The development of a SRI market
in Japan will be both top-down and bottom-up. Right now, we are developing products
for a nascent market-which is a bottom-up approach. The top-down development
will take longer because it will require the formulation of local guidelines
and investment criteria that incorporate local values and philosophy.
Question: Are SRI funds more risky?
Answer: According to quantitative analysis, the academics have not found
that SRI funds are either more nor less risky. We would like to think that the
various screens of a SRI fund would make it less prone to risk associated litigation
(i.e., employment or environmental), catastrophes (also environmental), or corporate
fraud (financial reporting and disclosure).
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