CFA Institute Journal Review August 2015 Volume 45 Issue 8
Should Pension Funds’ Fiduciary Duty Be Extended to Include Social, Ethical and Environmental Concerns? A Study of Beneficiaries’ Preferences (Digest Summary)
Journal of Sustainable Finance & Investment
Exploring the preferences of future beneficiaries of the Swedish pension system regarding socially responsible investing, the authors analyze the results of a survey with 1,119 respondents and find support for a model that includes both financial motives and values-based motives. The findings provide insight into the priorities of pension beneficiaries and open a discussion on how these preferences should be incorporated into pension plan investments.
The authors use a bottom-up approach to understand how beneficiaries define their own best interests and what they believe the managers of their pension funds should consider in their investment decisions. They provide background on the debate about fiduciary duty as well as an overview of previous research on investors who practice socially responsible investing (SRI). The authors present hypotheses and then review the results of a survey designed to provide insight into these six hypotheses (four with financial-based motives and two with values-based motives). They conclude with a discussion of the results of the survey and the implications for the debate about fiduciary duty and SRI.
How Is This Research Useful to Practitioners?
The authors take a fiduciary perspective but also include general information on what motivates investors to practice SRI. The findings refute the proposition of mainstream financial theory that people are exclusively concerned with risk-adjusted returns. In reality, both financial- and values-based motives are important and there is no indication that the financial motives dominate.
In response to a survey conducted by the authors, 49% of respondents indicated that fund managers should consider social, environmental, and ethical (SEE) aspects of investments even if it does not increase returns, with an additional 11.5% indicating that managers should consider SEE factors even if it leads to lower returns. In another question, only 18.3% of beneficiaries indicated that fund managers should focus only on maximizing financial returns. The authors included three hypothetical companies in the survey and respondents showed a very strong preference (80%–90%) for having plan managers avoid companies engaged in unethical behavior.
The authors find a strong correlation between how investors prioritize self-transcendent values over self-enhancement values and their preference for SRI. They also find that SEE preferences correlate with broader responsible behavior, such as the purchase of organic and fair-trade food, donations to charity, and membership in an environmental organization. Years to retirement and financial confidence are positively correlated with risk attitude. But contrary to the authors’ expectations, risk attitude negatively influences preferences for SRI.
From a fiduciary perspective, there is strong debate on whether to incorporate SRI criteria. Proponents argue that fiduciaries also have a responsibility to consider the ethical views of beneficiaries. Detractors argue that SRI concerns are too personal and that fiduciaries should make investment decisions based solely on traditional financial metrics.
This research will be relevant to plan fiduciaries, pension plan regulators, and others interested in the topic of fiduciary duty. It will also be of interest to practitioners, academics, and members of the public seeking to gain additional insight into investors’ preferences for SRI.
How Did the Authors Conduct This Research?
The authors sent a survey to a random sample of 3,500 Swedish residents who were of working age (18–64). The authors received 1,119 usable responses, which is a response rate of 33.2%. Compared with the Swedish population, the survey respondents were older (average age of 52.1 years versus 41.3 years for the population) and more educated (41% had a university degree versus 34% for the population), but their income distribution was not statistically different from that of the population.
The questionnaire covered 11 topics, including attitude regarding risk and return and preferences for SEE concerns. To measure beliefs about financial returns, risk, and SEE priorities, participants rated their agreement to statements using a five-point Likert-type scale. Preferences for SRI in pension funds are obtained from responses to two direct questions and three scenarios.
Indexes are obtained by averaging across the responses. The model hypotheses are tested with path analysis conducted with SPSS Amos statistical software from IBM. The authors first test the model with financial motives, then with values-based motives, and finally test whether the goodness-of-fit of the model with financial motives improves by adding values-based motives.
The study has some limitations, which are acknowledged by the authors. First, it involves only Swedish beneficiaries, and it is difficult to say whether the results generalize to other countries. In addition, the authors elicit SRI preferences in a fictitious context without showing that the results correspond to actual fund choices.
This research is a good contribution to the growing body of academic literature focused on SRI. Given the growth in interest for SRI, it is logical to consider whether SEE considerations should be incorporated into the management of pension plans. Fiduciary objections have included the personal nature of SRI as well as a concern that plan trustees may be inserting their personal views and interests. The authors focus on the desires of beneficiaries regarding incorporating SRI principles and, from their sample, illustrate that a strong preference exists. As this debate continues, it would be helpful to see whether similar beneficiary preferences are observed across larger samples and in other countries.