Ethical Investment Policy.

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A decision made (14/06/2007) regarding: Ethical Investment Policy.

Subject:	Ethical Investment Policy
Decision Reference:	MD-TR-2007-0067	Exempt clause(s):		NA
Type of Report: (oral or written)	Written	Person Giving Report (if oral):		George Butler – Strategic Investments Manager
Telephone or e-mail Meeting?	NA	Report File ref:		GB/12/07/06/07
Written Report – Title	Ethical Investment Policy	Written report - author		George Butler – Strategic Investments Manager
Decision(s): The Minster agreed to: 1) Adopt the Institutional Shareholders’ Committee’s Statement of Principals (ISCSP) for all investments under the Minister’s control; 2) Incorporate statements of understanding, Appendix B to the report, in respect of ethical investment into the mandates of investment managers for which the Minister is responsible; and 3) Consult with the Minister for Social Security regarding the adoption of the policy for the Social Security Reserve Fund.
Reason(s) for decision: The Minister for Treasury and Resources is mindful of ethical issues and recognises the importance of acting in an ethically responsible manner when investing monies on behalf of the States of Jersey.
Actions required: 1) States to be informed of the policy. 2) Statements of Understanding in respect of ethical investment to be incorporated into the mandates of investment managers for which the Minister is responsible. 3) Minister to consult with the Minister for Social Security regarding the adoption of the policy for the Social Security Reserve Fund.
Signature: (Minister/ Assistant Minister)			Date of Decision: 14th June 2007

Ethical Investment Policy.

TREASURY AND RESOURCES MINISTER

ethical investment policy

1. Purpose of Report

1.1. To consider, a paper prepared by the States Investment Advisers in respect of the formulation and implementation of an ethical investment strategy (Appendix A).

1.2. To agree the proposed ethical investments policy decisions outlined in this paper and present them to the States.

2. Background

2.1. The States of Jersey invests the assets of several Funds on behalf of the tax payers of Jersey and certain individuals and groups. This places the States in a quasi-trustee capacity (see Appendix A for explanation and possible investment implications).

2.2. The attached report, Appendix A, prepared by the States Investment Advisers sets out the advice received by the Treasury department in respect of the formulation and implementation of an Ethical Investment Policy for the States.

2.3. This paper examines the advice received in respect of Ethical and Environmental investment policy and sets out a proposed policy for the approval of the Minister for Treasury and Resources.

3. Definition of Ethical Investment

3.1. The use of socially responsible or ethical criteria for selecting investments generally means that conventional investment policies are modified so that investment is sought in those companies that improve social or environmental conditions and/or which exclude those companies which do not qualify as suitable investments on other ethical or environmental grounds. For the purposes of this report the term ‘ethical investment’ is therefore inclusive of environmental or green issues.

3.2. Another important aspect of ethical investments policy, and by far the most widely used by institutional investors, is the ethical use of shareholders voting rights and shareholder engagement with management.

3.3. There is no clear or universally accepted definition of what is an ethical or socially or environmentally suitable investment and hence it is necessary to define in detail these conditions. The definitions can follow from a consideration of the issues which are of greatest concern.

3.4. The six headings listed below can be used to categorise ethical issues:

1) Political issues – companies that trade with oppressive regimes.

2) Industry related – companies involved in for example the arms trade or the nuclear power industry.

3) Lifestyle – a broad category covering for example companies that sell alcohol or tobacco or derive profits through gambling or pornography.

4) Animal cruelty – this can cover animal experimentation for cosmetic or pharmaceutical purposes, the fur trade and even the exploitation of animals in factory farming.

5) Green aspects – this covers companies harming the environment (for example timber extraction) as well as positive decisions to invest in companies that cover environmental protection, pollution control, waste disposal and health care.

6) Social issues – these cover issues such as good employee and customer relations, high standards of health and safety and offensive advertising.

4. Application of Ethical Investment Policy

4.1. When giving consideration to the application of the proposed policy the governance structures for the management of the States various Investments must be adhered to. The States has several large funds / reserves / pools of assets the management of which are the responsibility of different bodies and individuals. This policy will apply to the investment of assets for which the Minister for Treasury and Resources has sole responsibility.

4.2. The investment policy will, therefore, on approval, be implemented in respect of the Strategic Reserve Fund, the States Pooled Cash Balance and the States Special Funds.

4.3. The Minister for Treasury and Resources also has responsibility for the investment of the Social Security Reserve Fund (the States ‘state pension fund’), the investment of which is managed in consultation with the Social Security Minister. It is therefore anticipated the policy will apply to the investment of that Fund, once the Minister has consulted with the Minister for Social Security.

4.4. The Minister for Treasury and Resources is not responsible for the investment management of the States two other major pension funds the Public Employees Contributory Retirement Scheme and the School Teachers’ Pension Fund. It is for the Committees of Management of those funds to determine appropriate investment strategies.

5. Considerations in respect of the adoption of a Ethical Investment Policy

5.1. Definition and implementation problems - It is usually extremely difficult to reach agreement on the detailed implementation of ethical investment policies that exclude or encourage the ownership of specific investments. Although it may be easy to gain agreement to exclude some shares, for example Japanese companies engaged in whaling, which only have a minimal effect on the available universe of companies, some ethical policies could remove more than half the available companies for investment. The implementation of such a policy requires every single investment to be considered on the basis of its ethical appropriateness.

5.2. The States as a quasi trustee on behalf of the people of Jersey. The States as holder of investments on behalf of the people of Jersey, the beneficiaries, should act in the best interests of those beneficiaries. This places the States in a quasi trustee position. Examination of trust and pension legislation in the UK, Channel Island and Ireland and pension scheme rules indicates that in most instances the ‘best interests’ means the best financial interests of those beneficiaries. This means that it would usually be improper for trustees to pursue investment policies which had or were likely to have an adverse financial impact on beneficiaries merely because such trustees believed that particular constraints on investments were appropriate. Trustees of UK based pension schemes have faced litigation for attempting to introduce investment restrictions based on non financial criteria.

5.3. Government options for the promotion of ethical policies. Legislation is by far the furthest reaching method by which a government can promote ethical policies. Industry regulation, backed by legislation, is a widely adopted approach e.g. alcohol and tobacco industries. Political lobbying at an international and local level is another avenue that can be used. This may result in sanctions trade or other against regimes deemed to be acting unethically or conversely the granting of international aid to regimes improving ethical behaviour. Purchasing policy can also be used to implement ethical policies.

5.4. Ethical investment policy, as indicated in section 3 above, can be implemented in two ways the most commonly thought of (yet least applied by institutional investors) is the specific exclusion or inclusion of certain companies from a portfolio of investments. The second and most commonly used method of applying ethical policy to investment decisions is through the active use of shareholder rights and votes. This is sometimes described as ethical application of shareholder corporate governance.

5.5. It is argued that greatest influence can be achieved by exercising ownership rights in a responsible manner rather than by choosing not to own companies. The theory being that given the scale of global markets even ‘unethical’ companies are easily able to quickly find replacement sources of finance. When institutional investors provide their managers with mandates to vote and engage with the management of companies for the promotion of ethical issues company management has to act.

5.6. The UK Government has supported this initiative and an Institutional Shareholders Committee (ISC) was established to develop a Statement of Principles. The Statement of Principles is aimed at furthering the application of best practice to the relationship between institutional investors and the companies in which they invest, with the object of securing value for beneficiaries over the longer term. The September 2005 ISC Principles have met with considerable support from institutions and pension funds, and are now widely adopted. The Principles are set out in the appendix to the attached report.

5.7. At present, the Treasury deals with corporate governance by delegating responsibility for voting and interaction with companies to its fund managers, receiving details of fund managers voting activity on a regular basis, and relying on the manager to address specific issues with the Department. Whilst the States fund managers do vote actively on a regular basis there is no standing guidance on the application of votes in an ethical manner.

5.8. The States investment adviser recommends that the Treasury adopt the ISC Statement of Principles and require its fund managers to vote at all UK company meetings. In order to ensure that the fund managers vote and engage with company management in a manner consistent with the States ethical views a Statement of Understanding on Ethical Investment, Appendix B, has been prepared for incorporation in each of the fund managers mandates.

5.9. The Statement of Understanding has been drawn up following examination of a wide selection of publicly available ethical statements and investment policies. It sets out the types of activity that are considered to make ethically positive contributions and those activities that may be considered to be ethically negative in accordance with the States of Jersey’s laws and policies.

6. Investment Policy Recommendations

6.1. The Minister is recommended to pursue the implementation of ethical investment policy through corporate governance measures rather than the adoption of prescriptive investment rules that specifically exclude certain investments. Such rules limit access to investment mangers, have unknown implications on the level and volatility of returns and given the States relatively small amount of investments when compared to global markets are unlikely to impact upon ability of excluded companies to raise funds.

The Minister is recommended to:

(1) adopt the Institutional Shareholders’ Committee’s Statement of Principals (ISCSP) for all investments under the Minister’s control;

(2) agree the statement of understanding, Appendix B, in respect of ethical investment and require the Statement to be incorporated into the mandates of investment managers for which the Minister is responsible. Managers will be required to discharge the States voting rights and when appropriate engage with company management in accordance with the principles set out in the statement of understanding; and

(3) propose the adoption of recommendations (1) and (2) to the Minister for Social Security and reach agreement that they be implemented in respect of the Social Security Reserve Fund;

States Treasury Corporate Finance

20 June, 2007 for Decision Meeting 14/06/2007

Statement of Understanding on Ethical Investment

The Minister for Treasury and Resources is mindful of ethical issues and recognises the importance of acting in an ethically responsible manner when managing investments on behalf of the States of Jersey.

Fund Managers’ Investment Decisions

When making investment decisions fund managers, for which the Minister is responsible, are required to give consideration to ethical risks in their assessment of a company’s value, having regard to the information that is readily available at the time of the decision. The Minister intends for this to encourage investment in companies with good governance and responsible management.

Corporate Governance

Fund managers are required to follow the Institutional Shareholders’ Committee’s Statement of Principles (ISCSP) in respect of the corporate governance of companies in which shares are owned. In particular fund managers are required to:

(i) discharge the States voting rights and

(ii) when appropriate, engage with company management

whilst having reasonable regard, where relevant to the ethically positive and negative contributions as set out below.

In seeking to identify companies that make a positive ethical contribution, the Minister pays particular attention to their record in the following areas:

 Conservation of energy or natural resources

 Environmental improvements and pollution control

 Providing high quality products and services that are of long term use

 Strong community involvement

 Good employee practices and equal opportunities record

 Training and education

 Good relations with customers and suppliers

 Openness about company activities

In seeking to identify companies that may have an ethically negative impact the Minister pays particular attention to activities that are counter to the States laws and policies such as:

 Environmental damage and pollution

 Unnecessary exploitation of animals

 Trade with or operations in oppressive regimes

 Exploitation of third world counties

 Sale and distribution of weapons to terrorists or oppressive regimes

 Offensive or misleading advertising