What do Pfizer, Eli Lilly and Astrazeneca, Altria, Japan Tobacco and Rothmans, Inc., Imperial Oil, Nexen and Shell Oil, Halliburton, and Coca-Cola have in common?
All are companies in which Queen’s was an investor as of March 31, 2007.
Last March Queen’s responded to calls by the group Students Taking Action Now: Darfur to divest from PetroChina and China Petroleum, companies connected to the Sudanese government in Khartoum.
That month, the University of Toronto announced it was divesting from tobacco companies. Queen’s said it has no plans to do the same.
The divestments sparked questions about the University’s investments, and University plans to create a coherent policy on ethical investing.
But that’s not as easy as it sounds, said Vice-Principal (Operations and Finance) Andrew Simpson. Queen’s relies on the money its investments make, so getting the maximum return is the first priority.
Queen’s istration doesn’t choose the companies in which it invests, he said. It employs investment managers who decide where best to put the University’s money.
“People come in and say, ‘Why do you invest where you invest?’ Well, we don’t. That’s the fund manager’s job.”
Queen’s has investment managers for its three investment funds—pension, endowment and pooled investment. These fund managers are responsible for choosing which companies to invest in based on mandates the University gives them.
The investment committee overseeing each fund manager’s performance on an ongoing basis. Each fund has a per cent return rate it’s expected to earn.
The pension fund provides income for retirees and acts as a savings for current employees. The endowment fund impacts money going to departments, scholarships and positions such as department chairs.
Simpson said that, more and more, investors and their fund managers are looking to social issues in making investment decisions.
“There’s an increasing acknowledgment and recognition that the long-term performance of a company will be damaged if they’re doing damaging practices,” he said. “We’re cognizant of [socially responsible investing]-type issues. … It’s not fair to say [Queen’s fund managers are] completely oblivious.”
Simpson said the University has to weigh its desire to invest in socially responsible companies against its responsibility to obtain a high rate of return on its investment funds.
“If there’s an issue raised like the Sudan [divestment] issue, what do you do? It’s very difficult, particularly because you have fiduciary responsibility to ensure those returns are being maximized,” he said. “The employees and the students who receive, effectively, income from those sources … you don’t want to do anything to harm those returns.”
Simpson said because the University’s fund managers were “fairly confident” divesting from those companies wouldn’t harm the University’s financial interests, they chose to divest.
“The answer with the Sudan question was pretty straightforward,” he said. “We had conversations with the fund managers on how they felt. They were not relying on those investments.”
But decisions like this have to be made on a case-by-case basis, depending on the effect divesting from particular companies will have on a fund’s rate of return.
“That’s why it’s a difficult subject to build a policy around,” he said. “[It’s] difficult to talk about a divestiture policy format because it’s so hard to determine.”
At any given time, Queen’s is invested in upwards of 1,000 companies.
“It’s very difficult for a staff of three people to keep their eye on those companies,” Simpson said.
The University’s looking into ways of articulating a stance on ethical investing, and plans to bring a plan to the Board of Trustees May meeting. Simpson said they’re looking into a strategy that has been used at McGill University to allow campus groups to come forward with their concerns on a case-by-case basis.
“There needs to be a way of defining what is a significant issue to the university community as a whole and what’s an issue that’s not. If one individual or a number of individuals are concerned but it’s not really shared more broadly,” it may not warrant changing investment policy, Simpson said.
Queen’s is also interested in Yale University’s concept of “social injury,” which measures a company’s negative effect on consumers, employees or others, including activities that break domestic and international laws “intended to protect individuals against deprivation of health, safety or basic freedoms.”
Queen’s may use this in its own ethical investing policy.
Stakeholder activism is an alternative to divestment for investors wishing to speak up about company practices they disagree with, Simpson said. It’s attractive to Queen’s because it means the University can act on companies’ unethical practices without taking financial risks.
“Ultimately, on a topic like divestiture, that’s where it comes back to the point that this fiduciary responsibility is such an important issue,” he said. “The of the committee … have to assure themselves they can continue to meet their fiduciary responsibility if they were to divest from certain companies.
“I think that’s why a lot of funds are moving towards shareholder activism rather than required screening and divestiture.”
Kevin Ranney is a managing partner and director of research for Jantzi Research, a Toronto-based investment research firm. Jantzi advises investors and assesses their portfolios to see what the environmental, social and governance issues are with the companies in which they’ve invested.
“We try to identify which companies are implementing best practices, who are the leaders, who are the laggers and who are the ones in between,” he said. “We would sit down and say, ‘What are the issues of concern to [this investor]?’”
Ranney said different investors have different parameters under which they balance ethical investing decisions with their mandate to make money.
“There has been a lot of debate over the years about … within a fiduciary framework, what flexibility is there to assess the social, the environmental, social and governance performance of a company?
“As opposed to an individual like you or me who might say, ‘I’m only going to invest in clean technology companies because I don’t believe in any of the rest—and of course we can do that—a university can’t do that because of this fiduciary duty, you know: to only invest in clean technology companies entails a tremendous amount of risk and an institutional investor with fiduciary responsibility can’t take a great deal of risk.”
Ranney said there are two main reasons investors take environmental, social and governance factors into when making investment decisions. One is values-based. The other is good business sense. Companies with bad business practices can make for risky investments.
“For example, if a mining company doesn’t manage its relationships with First Nations communities well, it may run into controversy, it may face opposition and that opposition may limit its ability to move forward with projects or it may tarnish the company’s reputation,” he said. “A company will have less fines if it operates in compliance with environmental permits, it will reduce its costs if it implements energy-efficiency initiatives.”
In addition to complete divestment from problematic companies, shareholder activism—in which investors use their vote as shareholders to pressure a company to change its practices—has proven effective in making companies clean up their act, Ranney said.
“There’s no question, we have seen companies improve performance significantly as a result of these types of initiatives,” he said.
Last year, Ranney said, shareholders convinced Apple to reduce the electronic waste its products create.
Ranney said it will be interesting to see how universities act on the growing trend towards ethical investment.
“There’s a risk-based argument for doing that, but there’s also clearly ethical considerations [that] are being taken into consideration, and just like with U of T’s decision or Queen’s decision around Sudan, the decision is not purely rooted in analyses of investment risk but is also based on broader ethical considerations,” he said. “It will be interesting to see how universities navigate this new terrain in which they’re facing increasing pressure from stakeholders to look at these things.”
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