When it comes to investing pension assets responsibly, knowing the “right thing” to do isn’t easy.

Back in 2000, the California State Teachers’ Retirement System (CalSTRS) divested some US$238 million worth of tobacco stocks it held because of the huge litigation risks faced by that industry. Since then, the value of tobacco stocks has climbed significantly, and the second-largest pension fund in the United States lost out on as much as US$1 billion in returns. Now the board of CalSTRS is considering whether it should begin investing in tobacco companies again.

Meanwhile, British Columbia Investment Management Corp. and the Canada Pension Plan Investment Board have recently incurred the wrath of environmentalists because of the stake that both funds have in a massive electricity project planned for the Patagonian region of southern Chile. This criticism comes despite the fact that both are signatories of the United Nations Principles for Responsible Investment and are among the leaders in Canada for incorporating environmental, social and governance (ESG) considerations into their investment practices.

These examples demonstrate how difficult it is for pension funds to do the “right thing” or even know what the “right thing” is.

First and foremost, pension plan managers have a fiduciary obligation to act in the best interests of their beneficiaries. At the same time, pension managers can’t ignore beneficiaries’ concerns about what consequences those interests may have for the environment or for human rights. And, of course, plan sponsors need to balance the short-term gains realized by investing in certain sectors and companies with any long-term financial risks associated with poor governance or HR practices, looming government regulations and possible litigation.

In our special Report on Responsible Investing, associate editor Brooke Smith profiles some of the plans that are wrestling with these issues. As well, Jordan Berger, of Mercer, looks at the various ways that pension funds can incorporate ESG considerations into their investing practices.

Balancing the financial interests of beneficiaries with what’s socially responsible will continue to be a challenge for pension funds. When those interests align, it’s a no-brainer. But when they conflict, it’s a recipe for insomnia.

Don Bisch is the editor of BENEFITS CANADA. don.bisch@rci.rogers.com

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the July 2008 edition of BENEFITS CANADA magazine.