VALBY, Denmark -- A major Danish pension fund puts its money where its mouth is: shunning emerging-markets stocks with poor social policies.
While many pension funds apply social criteria to their investments, few, if any, use such restrictions on an emerging markets mandate.
The 50 billion Danish kroner ($7.75 billion) Kommunernes Pensionsforsikring A/S, which is run by KP Invest, Valby, is applying its set of four social criteria to all of its stock selections. The criteria require portfolio companies to: follow sound environmental policies; not use child labor; not discriminate on the basis of religion, color, race or sex, primarily in hiring and employment practices; and permit workers to join legal labor unions.
Above and beyond
Social investment policies, of course, are not new to pension funds. U.S. pension funds divested stocks of companies that did business in South Africa during the late stages of the apartheid era. Some funds -- notably those run by churches -- avoid the so-called "sin" stocks of alcohol, tobacco and gambling companies. Still others have promoted fair employment policies in Northern Ireland and pushed for sound environmental practices.
But only a few funds have sought to apply Western standards of fair play to emerging markets stocks, and none to the extent of the KP fund, which invests Danish municipal pension assets.
Experts say it's tough -- if not impossible -- to apply social investment criteria to emerging markets stocks.
For one thing, it's often hard to get reliable information on practices of Third World countries. "There are many thousands of stocks out there in emerging markets, on which very little is known," said John Gillies, a senior consultant with Frank Russell Co., London.
Added one emerging-markets money manager, who asked to be unidentified: "If someone has a factory using child labor in the foothills of Afghanistan, we would not know."
Another problem is how rigorously standards are applied. "It depends on how ethical you want to be, doesn't it?" said Allan Conway, head of emerging markets for West LB Asset. If the political regime and human rights policies enter into the equation, funds can be forced to make value judgments, he said.
Applying Western ideas
And sometimes applying Western standards to emerging countries might be inappropriate, some experts maintain. If a fund won't invest in a company using child labor, is that fair if education is unavailable, one manager queried.
What's more, the potential investment universe can be whittled down substantially, potentially hurting returns or raising the risk of the portfolio, several experts noted.
Michael Bek, portfolio manager for KP, said fund officials believe they have addressed these issues. The fund created a $45 million emerging markets portfolio advised by Dresdner RCM Global Investors, London, in December 1997, followed by a second equally sized one with Nicholas-Applegate Capital Management, San Diego, last July.
Mr. Bek said the fund has asked all companies in which it invests to sign a form saying they follow the fund's policies. Also, its managers track negative news through press reports, annual reports, analysts and company visits.
After initially agreeing to discuss the portfolio, Paul Cox, portfolio manager at Dresdner RCM, did not return phone calls. Nicholas-Applegate officials said they cannot discuss their screens because they are proprietary.
Under Danish law, the money managers act as advisers. Thus, any decisions on excluding companies from the portfolios ultimately are made by the board.
Fund officials exert a degree of flexibility. While they might shun a known polluter, they might invest in a company that is buying new pollution-control equipment, said Tage Fabrin-Brasted, managing director of Danish Portfolio Administration A/S, Copenhagen, which serves as named fiduciary of the funds.
Mr. Fabrin-Brasted said about half of the companies from the Morgan Stanley Capital International Emerging Markets Free index are knocked out, leaving at least 800 others. Weapons manufacturers and heavy chemical firms are excluded, as are some textile firms, he said Á particularly those in India that employ child labor.
