Accounting: the expanded

Economically Targeted Investments and Fiduciary Responsibility

In Canada, the assets of trusteed pension plans amount to over $650 billion, representing the deferred wages of about 4.5 million Canadians (Statistics Canada, 2004). There is a growing interest by workers in learning about the nature and impact of these investments (Quarter et. al., 2003). Indeed, the Canadian trade union movement, represented primarily by the Canadian Labour Congress, has called for an approach to pension fund investing that combines good returns with targeted social, economic and environmental objectives (CLC, 2004). This is precisely the intent of economically targeted investments (ETIs), which “seek to obtain risk-adjusted market grade returns while achieving collateral benefits for plan members and their communities” (SHARE, n.d.). Some examples of collateral benefits include job creation or protection, community economic development, affordable housing, development of infrastructure, public works and social services. Also considered is the limiting of “collateral damage,” for instance job losses, company closures, significant negative impacts on pension plan members, and environmental damage (Wortsman, 2002).¹⁶

Pension fund administrators and trustees in Canada have been reluctant to consider factors other than the maximization of financial returns when making investment


¹⁶ Some examples of collateral benefits include job creation or protection, community economic development, affordable housing or development of infrastructure, public works and social services. Also considered is “collateral damage,” for instance job losses, company closures, significant negative impacts on pension plan members, and environmental damage (Wortsman, 2002).
decisions. One issue of concern is whether or not socially responsible investing is congruent with their fiduciary responsibilities (Carmichael, 2000, 2003b; Yaron, 2001, 2004). In the Canadian institutional context, there are two legal principles that pension fund trustees have to satisfy in carrying out their duties responsibly:

1. 
   The principle of prudence, which includes:
   

1. 
   the duty to obtain a reasonable rate of return on investment;
   

2. 
   the duty to invest the trust property;
   

3. 
   the duty to maintain an adequate diversity of investments; and
   

4. 
   the duty to obtain proper investment advice where necessary.
   

2. 
   The principle of loyalty, which includes:
   

1. 
   the duty to act honestly and in good faith and in the best interests of the beneficiaries treating all beneficiaries with an even hand;
   
2. 
   the duty to exercise discretion and not delegate ultimate responsibility; and
   
3. 
   the duty not to allow one’s personal interests to conflict with those of the beneficiaries. (Yaron, 2001, p. 5)
   

In an extensive analysis of Canadian legislation, common law and academic literature, Yaron (2001, p. 2) argues that the best interest of beneficiaries are not solely their financial interests and that “there is significant legal and empirical support for viewing socially responsible investment practices as a requisite element of prudent and loyal trusteeship.” Yaron concludes that pension trustees “may apply non-financial criteria in selecting investments as long as such investments provide a reasonable rate of return comparable to other investment options with similar levels of risk.” And he adds:
The prudence of investment decisions is based on a process-focused, long-term, portfolio-wide assessment in keeping with modern portfolio theory, not the performance of individual investments. … In all instances, pension trustees should act in accordance with the plan’s investment policy, seek independent expert advice where necessary, and document the basis for all decisions made. (Yaron 2001, pp. 53-4)
This was confirmed through an analysis of fiduciary responsibility in terms of pension fund investing undertaken by one of the world’s largest law firms (Watchman et al., 2005). In their report, A legal framework for the integration of environment, social and governance issues into institutional investment, prepared for the UNEP Finance Initiative, legal experts set out to determine if environmental, social and governance (ESG) issues in investment policy of public and private pensions funds were voluntarily permitted, legally required or hampered by law and regulation. These issues can be characterized by having one or more of the following features (Enhanced Analytics Initiative 2006, p. 1):

• 
  they tend to be qualitative and not readily quantifiable in monetary terms (e.g. corporate governance, intellectual capital)
  
• 
  they relate to externalities not well captured by market mechanisms (e.g. environmental pollution)
  
• 
  they relate to wider elements of the supply chain (e.g. suppliers, products and services)
  
• 
  they are the focus of public concern (e.g. genetically modified organisms)
  

• 
  they have a medium to long-term horizon (e.g. global warming)
  
• 
  the policy and regulatory framework is tightening (e.g. greenhouse gas emissions).
  

This analysis looked at legal frameworks in nine countries as they concerned pension investment policy, covering both the Anglo-American common law system (the US, the UK, Australia and Canada), and the Roman-French civil law system (Spain, France, Italy, Germany, and Japan). After careful consideration, it was concluded that ESG factors can be considered, and arguably are required as part of fiduciary responsibility. The specific wording of the report is as follows:
The links between ESG factors and financial performance are increasingly being recognized. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions. It is also arguable that ESG considerations must be integrated into an investment decision where a consensus (express or in certain circumstances implied) amongst the beneficiaries mandates a particular investment strategy and may be integrated into an investment decision where a decision-maker is required to decide between a number of value-neutral alternatives. (Watchman et al., 2005, p. 13)
The enormous size of pension funds gives investors a powerful opportunity to influence corporations to influence sustainability issues (Brown, 2003; Minns, 2003, Sparkes & Cowton, 2004). In order to do this, accounting tools are needed to help investment decision-makers choose investments that take into consideration economic, social and environmental impacts. The Expanded Value Added Statement (EVAS), a social accounting statement, was developed as one of these tools. The EVAS is not
intended to replace existing financial statements, but to supplement them. By synthesizing traditional financial data with social and environmental data, the EVAS provides additional valuable information for understanding the dynamics of an organization and one that shows great potential by focusing attention on value creation and use. By focusing attention on an organization’s economic, social and environmental impact, the EVAS is another tool that can be used to tell an organization’s performance story, and perhaps change the way the world appears by making visible things that affect the long-term interests of pension shareholders and society in general.