Swiss pension funds are being urged to use their investment muscle to bring more influence to bear on companies' environmental and social policies.
The ethical pension fund, Ethos, has just published guidelines on the exercise of voting rights and a list of codes on best practice in corporate governance.
Ethos came into being four years ago when two pension funds in canton Geneva expressed concerns about companies laying off workers while financial markets were booming.
The Civil Servants' pension fund and the Construction Industry pension fund pooled their resources to try to invest in companies that they regarded as socially and environmentally responsible.
Almost 90 funds from all over Switzerland are now members of Ethos, which invests more than SFr850 million ($510 million) in equities and bonds.
In common with more traditional investment funds, Ethos says its principal test of whether a company is worthy of investment remains financial but other concerns influence the final decision. And certain companies are excluded altogether.
"We'll only invest in companies that are financially sound," says Ethos president, Dr Jacques-André Schneider. "And we won't include arms producers, pornographers, tobacco manufacturers and nuclear energy producers.
"Once the financial portfolio is set up, we investigate company practices with regard to the environmental and social fields and we then weight their position."
Ethos would like to see other pension funds using similar methods to decide on their portfolios. The organisation says this is increasingly important as pension funds become bigger shareholders.
"Historically, pension funds weren't big investors in the equity markets but that's changing and they can't walk away if they're dissatisfied with company policy."
Pension funds now invest around 30 to 40 per cent of their funds in equities but only a minority of them exercise their shareholder voting rights.
Ethos says they should be encouraged to take a stand on corporate policy because their investments are finally dependent on decisions taken at board level.
Over the past four years, Ethos has questioned the policies of some of the biggest names in business. For example, it voted against the appointment of Lukas Mühlemann as President of the Board of the Credit Suisse Group.
The fund argued that Mühlemann was already CEO and that to make him president as well would concentrate too much power in his hands.
It also tried to force Procter and Gamble to accept an employment code which would have condemned discrimination and granted recognition to trade unions.
Although Ethos has failed in most of these battles, it says the fact that its actions force management into a dialogue is important in itself.
Ethos says the trend towards ethical and sustainable development is growing as funds come to realise that financial returns aren't necessarily damaged by a liberal position on other issues.
"Environmental aspects give a very good clue to a company's social well-being," says Schneider. "The social issue is a little more controversial but take the example of Nike. It was producing very cheap shoes but had a very big problem when consumers realised the social cost."
With almost SFr1 billion worth of funds under its belt, Ethos says the trend towards ethical investment is growing. Schneider points to the recent decision of the state pension fund to use its SFr10 billion reserve to invest in companies that are committed to sustainable development.
"I think that as institutional investors if we don't look out for the world we want to live in, then in the future people will regard us as reckless," says Schneider.
"They'll see it as a great failure that we weren't able to combine classical financial aims with social and environmental needs."
by Michael Hollingdale