EC O LO GIC A L E CO N O M ICS 5 9 ( 2 00 6 ) 4 4 0 –4 50

a v a i l a b l e a t w w w. s c i e n c e d i r e c t . c o m

w w w. e l s e v i e r. c o m / l o c a t e / e c o l e c o n

ANALYSIS

Pension funds, corporate responsibility and sustainability

Franck Amalric⁎
CCRS Centre for Corporate Responsibility and Sustainability at the University of Zurich, Künstlergasse 15a, 8001 Zurich, Switzerland

AR TIC LE I N FO ABS TR ACT

Article history: The paper introduces two approaches to identify corporate behaviours that should attract
Received 1 December 2004 the attention of pension funds in the context of debates over sustainability, while remaining
Received in revised form within a narrow interpretation of their fiduciary duty. The approaches are based on two
30 October 2005 simple models of how different societal spheres interact with one another and influence
Accepted 2 November 2005 long-term economic performance. These models allow exploring the idea that corporations
Available online 26 January 2006 can influence trajectories of societal change—keeping in mind that pension funds care
about these trajectories because they care about the long-term performance of the
Keywords: economies in which they invest. The model underlying the internalising investor
Sustainability approach assumes that corporations are the only actors in society. In this model, pension
Pension funds funds will maximise their expected ability to meet their liabilities if companies internalise
Corporate responsibility negative externalities and spill-over effects in order to reduce the cost of market failures for
Governance the economy as a whole. The model underlying the civic investor approach comprises
companies and various actors (the state, NGOs, corporate stakeholders) engaged in shaping
the governance structure that mediates the interaction between the social, environmental
and economic spheres. In this model, pension funds will want companies to facilitate
effective responses to societal problems. These approaches allow us to identify a number of
corporate behaviours that should be of concern to pension funds.
© 2005 Elsevier B.V. All rights reserved.

1. Introduction private actors–including pension funds–will have to assume

Over the past few years, pension fund members, experts and
policy-makers have expressed the view that pension funds
have a special role to play in facilitating shifts towards
sustainable societies, given their specific investment objec-
tives and their nominal capacity to influence corporate
conducts. These expectations have arisen out of the conver-
gence of two societal trends. First, pension funds have become
major shareholders in most major corporations—what
Drucker (1976) called the “unseen revolution”. Second, the
emergence of concerns over sustainability in the 1990s,
combined with the perception that states are incapable of
meeting the challenge alone, supports the proposition that
new responsibilities. And these expectations have been
sufficiently strong to pave the way to the introduction of
new legislation in various OECD countries.1
With some rare exceptions, pension fund trustees have
generally been sceptical that they can indeed, or should, play
this special role. In their view, to do so would violate their
fiduciary responsibilities to their members, that is, the
principle that their investment and ownership decisions
should solely aim to enhance their members' financial
interests. Trustees' scepticism thus hinges on the perception
that the enhancement of pension fund members' financial
interests conflicts with an engagement of pension funds in the
pursuit of sustainability.

⁎ 22, rue d'Alboni, 75 016, Paris, France. Tel.: +33 1 53985494; fax: +33 1 53985489.
E-mail address: franck_amalric@yahoo.fr.

0921-8009/$ - see front matter © 2005 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2005.11.009
 EC O L O G IC A L E C O N O M IC S 5 9 ( 2 0 06 ) 44 0 –4 50
The main purpose of this paper is to show that, in some
noteworthy circumstances, there is no such conflict and that,
in the opposite, the fulfillment of pension funds' fiduciary
responsibilities call upon them to exercise their influence on
corporations and society in ways that promote sustainability.
The thrust of the argument is the following: (1) pension funds'
ability to meet their future liabilities is linked to the trajectory
of societal change; (2) pension funds influence that trajectory
through their investment decisions; (3) pension funds should
aim to influence the economy and to promote those trajecto-
ries of societal change that will maximise their expected
ability to meet their liabilities.
Following the logic of this argument, this paper identifies
corporate behaviours that pension funds should be concerned
about in the perspective of sustainability. We consider
pension funds whose investment objective is to finance
long-term liabilities (20 years or more) and we assume that
they invest in a broadly diversified portfolio.
The paper introduces two complementary approaches that
pension funds can follow to monitor corporate behaviours.
These approaches are based on simple models of how
different societal spheres interact with one another and
which allow exploring the idea that corporations can influ-
ence trajectories of societal change.
Section 2 presents the internalising investor approach. The
model underlying this approach assumes that corporations
are the only actors in society. They influence the long-term
return on capital through their impact on the social and
environmental spheres (with social and environmental
changes bearing back on the economy) and through the
economy in the context of market failures. In this model,
pension funds will maximise their expected ability to meet
their liabilities if companies internalise negative externalities
and spill-over effects in order to reduce the cost of market
failures for the economy as a whole.
Section 3 introduces the civic investor approach. The
implicit model underlying this approach comprises compa-
nies and various actors (the state, NGOs, corporate stake-
holders) engaged in shaping the governance structure that
mediates the interaction between the social, environmental
1
Evidence of these expectations is numerous. Among policy-
makers, see Annan (2003) in relation to global warming, and Short
(2000) in relation to international development. Evidence of
pension fund member expectations: Canadian Democracy and
Corporate Accountability Commission (2002) found that, among
the 2006 persons interviewed, 51% want their pension plans to
invest in companies with a good record of social responsibility.
For academic discussions, see among others: Kasemir et al. (2001),
Monks (2001) and Kasemir and Süess (2002). Regarding legislation,
the UK government has led the way with the passing in 2000 of an
amendment to the pension act requiring pension fund trustees to
disclose whether or not they take into account ethical, social and
environmental criteria in their investment decisions. Similar
legislation was subsequently passed in Germany (2001) and
Australia (2001), and is being discussed in Austria, Belgium,
Canada, Denmark, Italy and Spain. In its white paper on corporate
responsibility, the European Commission (2002) invited occupa-
tional schemes to adopt similar practices. For a general review of
the role of public policy in promoting CSR, see Aaronson and
Reeves (2002).
441
and economic spheres. We assume that companies can
influence the other actors and that society can reach various
equilibriums that are determined by the capacity of society to
respond effectively to new societal problems by putting in
place the right governance structures. In this model, pension
funds will maximise their expected ability to meet their
liabilities if companies do not hinder or actively facilitate
effective responses to societal problems.
Section 4 concludes with some remarks on methodologies
to assess the contribution of companies to sustainability.
2. The internalising investor
2.1. Structure of the approach
Large institutional investors with a long-term investment
horizon, such as pension funds, aim to maximise their
expected ability to meet their liabilities. Given this objective,
they are concerned about the long-term return on capital and,
for this reason, about long-term economic growth. It follows
that, assuming no changes in the institutional setting,
investors may wish companies to internalise externalities
and spill-over effects in order to enhance the performance of
the economy as a whole. This is what we call the internalizing
investors' approach.
In this section, we identify corporate responsibility issues
of potential concern to investors according to this approach.
To do this, we take long-term economic growth as a proxy for
the long-term value of a widely diversified portfolio, consider
a list of the main determinants of long-term growth estab-
lished by gathering the results of the many studies carried out
on this topic (see, for instance, Sala-I-Martin, 1997), and look
for evidence showing that corporate behaviours bear on these
determinants, starting with a comprehensive list of corporate
responsibility issues provided by the Global Reporting Initia-
tive (2002).
We distinguish between two categories of determinants of
growth. First, we focus on determinants that lie in the social
and environmental spheres: human capital, social capital,
natural capital and political capital. The idea is that compa-
nies may have an impact on the long-term return on capital by
fostering social and environmental changes, which, in return,
affect the economy through interdependencies between the
different societal spheres.
Second, we consider economic determinants of growth–
physical capital, labour and total factor productivity–in
relation to situations of market failure. Under conditions of
perfect competition, full information and complete markets,
corporate behaviours would not affect the long-term return on
capital as the opportunities and resources not seized by one
company would be picked up by other companies. Thus,
companies may have an impact on the long-term return on
capital by wasting capital, underutilizing labour and/or under-
mining total factor productivity, when there exist intra-
economy market failures.
Our analysis yields a short list of corporate responsibility
issues of potential concern for investors. In a second step not
carried out here, the impact on the long-term return of capital
of each issue on the list should be assessed carefully.
442 EC O LO GIC A L E CO N O M ICS 5 9 ( 2 00 6 ) 4 4 0 –4 50

Corporate opera- Non-economic determinants of Economic growth/

tions and strate- growth: long-term return on
- Human capital capital
gies
- Social capital
- Natural capital
- Political capital

Fig. 1 – From corporate behaviours to long-term economic performance through non-economic spheres.

2.2. Corporate impacts on social and environmental
determinants of long-term economic performance
Fig. 1 presents the basic connections between corporate
behaviours and the social and environmental determinants
of long-term economic performance. Table 1 summarises the
evidence. The following paragraphs review this evidence in
more detail.
2.2.1. Human capital
In the early 1960s, Schultz (1961) and Becker (1962) introduced
the concept of human capital to underline the importance of
the quality of the workforce, in contradistinction to its size, as a
key determinant of long-term economic performance.
Recent empirical analyses, e.g. Barro (1991) or Mankiw et al.
(1992), have confirmed the importance of human capital in
explaining past growth. Furthermore, the accumulation of
human capital increases the long-term return on physical
capital, which, according to Lucas (1990), may explain why
returns on investment remain high within developed
countries despite high levels of capital stock. Most of these
studies take the level of schooling as a proxy for human
capital, although more recent ones, e.g. Bloom et al. (2001),
have also given attention to health and shown the significance
of this factor in explaining economic growth.
Yet, most of the corporate responsibility issues that may
affect individual welfare and capabilities, such as labour
standards and corporate impacts on human rights, are not
unambiguously linked to determinants of long-term economic
performance. In fact, the only corporate responsibility issue
that relates to human capital and for which (1) the responsi-
bility of companies is clearly established and (2) evidence of
the impact on long-term economic performance sufficiently
solid, is that of on-the-job training.
2.2.2. Social capital
Social capital refers to the network of formal and informal
institutions that facilitate social interaction and nurture
individuals' trust in the legal and economic system. Banuri
et al. (1994) use the following image to illustrate the
importance of social capital in sustaining the economy.
Consider the various elements that are required to build an
effective road transport system: one prerequisite is a network
of good roads (physical capital); another is the development of
people's driving ability (human capital); yet a third is a set of
formal and informal rules and norms to regulate drivers'
behaviour on the road. This third element is social capital.
Some political scientists and economists, e.g. Putnam
(1993), Fukuyama (1995), Knack and Keefer (1997), Porta et al.
(1997) and Harrison and Huntington (2000), have recently

Table 1 – From corporate behaviours to long-term economic performance through non-economic spheres
CR issues affecting Determinants of long-term Significance for CR issues of relevance
non-economic spheres economic performance, long-term economic for pension funds
(main issues taken from GRI) evidence of corporate impacts performance

Respect and promotion of Human capital Strong On-the-job training

human rights
Decent work –On-the-job training –Formal education
Labour rights –Health
Product responsibility –On-the-job training
(e.g. impact on health)
Welfare impact of pollution

Depletion of natural Natural capital Weak and indirect (through

resources, pollution other societal spheres)

Corruption and bribery Social capital (incl. “social Medium (difficulties in

fractionalisation”) “measuring” social capital)
Diversity Usually seen as being formed through
association
Freedom of association Political capital: good governance, Strong Corruption, in particular
rule of law, civil liberties linked to management of
Anecdotal evidence of corporate natural resources
impact on good governance
Little evidence that corporations
hinder or foster civil liberties
 EC O L O G IC A L E C O N O M IC S 5 9 ( 2 0 06 ) 44 0 –4 50
Corporate Market failures:
operations and - Externalities
strategies - Information asymetries
- Transaction costs
Fig. 2 – Impact of corporate behaviours on long-term economic performance in the context of market failures.
drawn attention to the importance of social capital, and
beyond it of culture, in sustaining economic activity and long-
term development processes. A high degree of trust within
society would reduce transaction costs and thus enhance
economic activity; social capital would also facilitate the
creation and operation of public institutions, with positive
long-term effects on economic performance. However, as
noted by Solow (1995), social capital is difficult to measure,
and so likewise its contribution to economic performance.
Even if social capital could be measured, there is a lack of
knowledge about the role that large companies play in
building-up, nurturing or eroding it. Some corporate beha-
viours do seem to have an impact on social capital–e.g.
corruption and bribery, diversity in the workplace, freedom
of association–but these connections have not been thorough-
ly explored by academics.
2.2.3. Natural capital
Nature provides products and services that are often deemed
important in sustaining the long-term performance of an
economy. Products include non-renewable resources such as
oil and minerals, as well as renewable resources such as
fisheries, forests, land and water. Services include climate
regulation, the hydrological cycle, nutrient cycles, the trans-
formation of solar energy into biochemical energy through
photosynthesis and the management of soils, to name just a
few.
Resource economics studies the economic factors that
determine the use of exhaustible and renewable resources,
and the significance of these resources for long-term eco-
nomic performance under various conditions.2 It is the latter
strand of this subdiscipline that interests us here. While
normative approaches to this second issue–i.e. how to use
natural resources to sustain long-term economic perfor-
mance–are plentiful, comparatively few empirical studies
investigate how and when the over-use of natural resources
has led to economic under-performance. Moreover, the main
empirical result that has been established is somewhat
paradoxical. Known as the “curse of natural resources”, it
holds that countries with abundant natural resources tend to
grow slower than resource-poor countries (Sachs and Warner,
2001). Most explanations for the curse have a crowding-out
logic: reliance on natural resources would crowd out one or
more of the key factors that drive growth and thus undermine
it. An important issue, explored by Auty (2001), is how reliance
on natural resources can crowd out good government by
fostering rent-seeking behaviours and corruption. However, in
2
For a broad presentation, see Bretschger (1999).
443
Economic determinants of Economic growth/
growth: long-term return on
- Physical capital capital
- Employment
- Total Factor Productivity
this model, the problem is not so much how changes in the
environmental sphere undermine economic performance, but
rather how the management of natural resources has an effect
in other societal spheres–in this case political capital–which in
turn affect economic performance negatively.
We therefore conclude that there is little evidence to
support the view that companies that destroy natural capital
undermine long-term economic prospects, simply because
the link between natural capital and growth is itself not well
established.
2.2.4. Political capital
Political capital refers here to political stability, respect for the
rule of law, political rights and civil liberties, and good
governance.
Sala-I-Martin (1997) found that these political variables are
among the more solidly established determinants of long-
term economic performance. Political stability, respect for the
rule of law and good governance, i.e. ensuring that the state
acts for society and not in private interests, are obviously key
to ensuring that resources are used efficiently and effectively.
Political rights and civil liberties, on the other hand, are
instrumental in preserving the proper and legitimate func-
tioning of the state.
There is a degree of evidence that an accumulation of
economic power may, in some circumstances, erode political
capital, in particular through bribery and corruption in
countries with relatively weak political systems. As men-
tioned above, this phenomenon is proposed as an explanation
for the “curse of natural resources”. Furthermore, there is
anecdotal evidence that corporations, as holders of significant
economic power, may take part in this erosion of political
capital—and it could be substantiated that they have an
impact on long-term economic performance in this way.
Pension funds should therefore closely monitor corporate
behaviours, such as corruption and bribery that have an
impact on political capital.
2.3. Long-term economic consequences of corporate beha-
viours in the context of market failures
Fig. 2 presents the connections between corporate behaviours,
market failures and economic determinants of long-term
economic performance. Table 2 summarises available evi-
dence. The following paragraphs review this evidence in more
detail.
2.3.1. Externalities across production units
Corporate-generated externalities that have a direct bearing
on other productive activities may lead to a waste of physical
444 EC O LO GIC A L E CO N O M ICS 5 9 ( 2 00 6 ) 4 4 0 –4 50
Table 2 – Impact of corporate behaviours on long-term economic performance in the context of market failures
CR issues Market failures
for long-term economic performance
Pollution (across Negative externalities
productive activities)
R&D Positive externalities
Training
Disclosure of information, Information asymmetries
including product labelling
Corporate governance
Access to work, products Transaction costs and corporate
and services boundaries
M&As
Dividend payments
capital and thereby undermine long-term returns on capital.
This effect may take place either through the ex-ante
appropriation of a production input to which access is not
regulated (“tragedy of the commons” effect), or through the
ex-post emission of pollutants that will affect other produc-
tion processes.
Externalities across production units can also be positive,
however, and new growth theories, such as in Lucas (1988),
have underlined their significance for long-term growth.
These positive external effects are transmitted mainly
through human capital and ideas. By contrast, no study
assesses the level of physical or natural capital that may be
lost owing to negative externalities across production units,
and their further impact on long-term economic
performance.
The role of companies is key in promoting positive
externalities through R&D and on-the-job training. These
issues should therefore be monitored by investors.
2.3.2. Asymmetries of information
Asymmetrical information, notably between providers and
users of capital, can be an important source of market failure.
It can lead to a misuse of capital at company level–the risk
being, as shown formally by Edlin and Stiglitz (1995) and
Shleifer and Vishny (1989), that managers invest in a way that
secures their own position, rather than increasing shareholder
value–as well as to a distortion of market prices, itself leading
to a misallocation of financial resources at the societal level
and hence to a waste of capital and economic under-
performance.
Recent studies, e.g. Greenwood and Jovanovic (1990),
Levine (1997) and World Bank (2001), have underlined the
long-term significance of a society's ability to acquire and
process information on competing investment prospects.
Since many firms and entrepreneurs solicit capital, financial
intermediaries and markets that are better at selecting the
most promising firms and managers will produce a more
efficient allocation of capital and faster growth.
Corporations play an important role in producing informa-
tion about themselves. The recent corporate scandals in the
US and Europe have shown the damage that distorting
information can have, not only for individual companies, but
also for the economy as a whole. Investors should thus want
companies to achieve high standards of corporate reporting
and transparency.
Significance of the market failure CR issues of relevance for
pension funds
No evidence
Strong (ideas, human capital) On-the-job training
R&D
Strong for some issues (i.e. finance) Transparency/reporting
Strong Dividend payments
Mergers
2.3.3. Transaction costs and corporate boundaries
Transaction costs–costs of market search, acquiring informa-
tion, guaranteeing property rights, negotiating terms of
exchange and ensuring that the terms of the exchange will
be respected–can be a major hindrance to the fluidity of
economic activities and an obstacle to economic performance.
North (1990) has argued that a reduction in transaction costs
has historically been one of the most important drivers of
economic growth in Western countries.
Corporations, along with institutions, play an important
role in reducing transaction costs according to Coase (1937).
They do so when they enter into long-term contractual
commitments with their employees, merge with or acquire
other companies, develop consumer management practices
with specific target groups or retain earnings; in short, when
they put in place a control-and-command system to organise
transactions, instead of conducting market transactions.
The main rationale behind these corporate practices is
profit maximisation. Firms will engage in them when control-
and-command proves to be profitable and less costly than
reliance on market transactions that incur (transaction) costs.
For instance, Easterbrook (1984) argued that retained earnings
are superior to the payment of dividends because they avoid
transaction costs penalising investors as well as companies.
However, these practices may be counter-productive for
society when they undermine the good functioning of the
market, in the same way as mergers may undermine
competition. This suggests that the socially optimal boundary
between corporations and the market cannot be set by
corporations motivated by profit. For this reason, investors
should give attention to corporate behaviours that shift this
boundary, such as dividend payments.
2.4. Discussion
Tables 1 and 2 list the (few) issues, which there is evidence on
that corporations affect long-term economic performance in a
static institutional setting. Most of these issues are economic
rather than social or environmental. Moreover, one of these
issues, corruption in the management of natural resources,
would not pass the second test—that of an actual measure-
ment of its significance for pension funds' portfolios. If the
“curse of natural resources” is a well-established result in the
empirics of economic growth, it affects mainly small devel-
oping countries, e.g. Gulf states, Zambia, Liberia, etc. However,
 EC O L O G IC A L E C O N O M IC S 5 9 ( 2 0 06 ) 44 0 –4 50
large pension funds based in OECD countries are very little
exposed to the long-term economic performance of these
countries—thus undermining the rationale for considering
corruption in the management of natural resources an issue of
concern to them.
These overall results can be given two interpretations: (a)
that there are not many corporate responsibility issues that
pension funds should be concerned about in the context of
sustainability; (b) that the internalising investor approach is
too restrictive.
There are some grounds for believing that the approach is
indeed too restrictive. In the absence of some form of general
equilibrium model that would allow to test the relative
importance of social and environmental indicators on future
economic performance, one is limited to an empirical
assessment of the relative importance of such indicators in
explaining past economic performance. Yet studies that do so
may take for granted the existence of certain background
conditions, such as climatic stability, provided by the envi-
ronmental and social spheres. In other words, we cannot be
sure that they have taken into account the full benefits
provided by the stability of the background conditions, in part
because these benefits are so difficult to measure. The
insignificance of these spheres in studies of long-term
economic performance may thus reflect the limitation of the
(neo-classical) economic models, rather than the true state of
things.
Furthermore, the past may not be a very good indication of
what the future holds in store. After all, one of the basic ideas
behind the concept of sustainability is that current trends
cannot continue in the future.
3. Civic investors
Some issues at the core of the debate on sustainability–
environmental crisis, growing inequalities between different
regions of the world, demographic transition in ageing
societies, etc.–will, in all likelihood, have an impact on the
long-term return on capital in society. Clearly, these issues
should be of concern to pension funds.
Most of these issues have not been created by large
corporations. Yet corporations may have unique capacities
to either hinder or contribute to addressing them. One of the
reasons behind the emergence of a corporate responsibility
movement is precisely the realisation that states alone are
unable–or unwilling–to address some of the major societal
problems that the world is currently facing, notably the
challenge of sustainability (e.g. Ruggie, 2003). Should pension
funds support responsible corporate behaviour under the
rationale of addressing societal issues and compensating for
state failures?
This section addresses this question. It explores the
responsibilities of pension funds in the face of threats raised
by major societal trends when the state is incapable, or
unwilling, to intervene. We call this approach the civic
investor approach because it suggests that pension funds
might play a more active role in public policy debates than
they currently do. Throughout the section, we shall use the
issue of climate risk to illustrate the logic at play. This example
445
is pertinent because it is a core issue of sustainability and
because a number of institutional investors have recently
expressed concerns on the matter, through such initiatives as
the Carbon Disclosure Project, launched in May 2002, and the
Investor Network on Climate Risk (2003), created in November
2003.
3.1. Overall structure of the approach
Consider society as stemming from the interaction between
three societal spheres–the economy, the social sphere and
the environment–mediated by a political sphere. We assume
that society can follow different trajectories of societal
change, which lead to different societal outcomes charac-
terised by mutually compatible social, environmental and
economic performances. The reason pension funds should
care to know which future is best for them is that there is no
perfect hedge, i.e. no way of guaranteeing that liabilities will
be financed in all possible future contingencies of the world.
We now set out the three steps of the civic investor
approach.
First, pension funds should assess which of the different
futures they face will maximise their capacity to meet their
financial objectives. This is done by comparing the expected
performance of their investments under different scenarios of
societal transformation.
Second, if a pension fund is better off if the societal issue is
addressed, it will logically want a public response to that end.
Such a response can take different forms: the state may step
in, or when the state fails, some form of civil regulation may
arise. Each case draws attention to specific aspects of
corporate conduct that can support or hinder these public
responses.
Third, it assesses the actual costs and benefits of public-
response enhancing corporate conduct from the perspective
of pension funds. Only those aspects of conduct that generate
higher benefits than costs would qualify as pension funds'
preferences for responsible corporate conduct.
3.2. Monitoring the potential impact of various societal
issues and trends
The construction of scenarios provides an appropriate meth-
odology to paint different possible futures, and then assess the
more desirable course of action from the point of view of
pension funds. These scenarios, as in World Business Council
for Sustainable Development (1997), are intended to replicate
the different paths of societal transformation and equilibria
they lead to in the medium to long run.
Consider the issue of climate risk. The starting point of
the approach is to assess the stake of broadly diversified
investors in climatic change. To simplify the analysis, we
distinguish between two different scenarios: in a business-
as-usual scenario, increases in greenhouse gas emissions
continue unabated and produce widespread climatic
changes that affect some businesses and economic activities
directly; in a public-response scenario, concerns over current
levels of greenhouse gases trigger a public response–either
through state regulation or through various forms of civil
regulation–to curb emissions, with the consequence that
446 EC O LO GIC A L E CO N O M ICS 5 9 ( 2 00 6 ) 4 4 0 –4 50
climatic disruptions are of limited magnitude but with a cost
to businesses exposed to greenhouse gas emissions.
In each of the two scenarios, pension funds will assess the
potential impact on the value of a market portfolio on the
basis of the type of risks that each company faces: risks from
the direct impact of climatic changes in the first scenario or
risks linked to a reduction in greenhouse gas emissions in the
second. The Carbon Disclosure Project 2002 Report (cf.
Innovest, 2002) assesses the relative importance of these two
kinds of risks for large companies. This information can be
used to draw implications for the performance of broadly
diversified portfolios.
On this basis, pension funds can identify which of the two
scenarios is better for them, i.e. under which of the two
scenarios they will have the greatest chance of meeting their
financial objectives. If the business-as-usual scenario is more
favourable, then the assessment of the specific societal issue
will stop there.
3.3. Promoting a public-response scenario
We now assume that pension funds prefer the public-
response scenario over the business-as-usual scenario. The
likelihood of such a public response will depend on the
capacity of societies to organise themselves and undertake
collective action. This is the challenge of governance.
This challenge can be met in a number of ways. Standard
economic and political theory posit that it is the role of the
state to address existing societal problems and prevent the
emergence of new ones. Yet, in practice, the state may not be
able–or willing–to play the role that theorists assign to it.
Cases of state failure are particularly significant in relation to
sustainability, as Speth (2003) points out. One cause is
jurisdictional gaps, i.e. mismatches between the level at
which an issue arises and the existence of state institutions,
coupled with mechanisms of accountability at the appropriate
level (e.g. Kaul et al., 1999). Another cause is a sheer lack of
human, financial or administrative capacity at the service of
state action—an important limitation in many countries of the
South. A third is the diversion of the state from its core
mission of promoting the public goods and its capture by
private interests.
Innovative forms of governance have emerged over the
past few years in response to these failures. Many of them–
multi-stakeholder initiatives, civil regulation, public–private
partnerships–are characterised by the active involvement of
non-state actors, including large corporations and non-
governmental organisations, and thus break away from the
simple model of state regulation according to which the state
sets the rules and companies abide by them.
Large corporations exercise a strong influence on these
various forms of governance, old and new. This influence is a
significant channel through which they have an impact on
societal outcomes and thus an important component of their
overall corporate responsibility.
3.3.1. Facilitating and promoting state intervention
Pension funds can perform a number of tasks to facilitate and
promote state intervention. For instance, they can share their
concerns with their members and, in this way, influence
public debate. Alternatively or in addition, they can express
these concerns directly to the public at large and to the state.
The involvement of national associations of pension funds
and institutional investors seems a logical way to do the
latter.3
Pension funds can also facilitate state intervention by
monitoring the political influence of the corporations in which
they invest. Public policy and the design of institutions is a
controversial area, and corporations have often participated in
the process of policy-making to such an extent that, ever since
Adam Smith's denunciation of the merchants' political
influence in the late 18th century, their political power has
regularly been criticised (e.g. Korten, 1995; Rajan and Zingales,
2003, among many others).
The point is that the interests of managers and owners
often diverge regarding public policy-making. Broadly diver-
sified long-term investors will seek public policies that
enhance the value of their portfolio and, usually, this will be
achieved by policies that support a performing economy.
Corporate executives, by contrast, aim to increase shareholder
value and will promote public policies that favour their
industry or, even better, their own companies.
Pension funds should thus be concerned about the political
influence exercised by companies. Indeed, they may find
themselves in the strange position of being owners of
companies that lobby policy-makers to hinder the state
intervention that they themselves call for.
3.3.2. Supporting the emergence of new forms of governance
State intervention is not the only form of public response
available. In fact, in the context of state failures, new non-
state-centred forms of governance are emerging, in particular
to deal with issues of sustainability. Revealingly, the speech of
Kofi Annan (2003) at the Institutional Investors' Summit on
Climate Risk is a barely concealed call on investors to act in
response to the lack of political will shown by some govern-
ments. There is a wide diversity of these forms and, to focus
our attention, we shall take the example of just one of them
here.
The governance system known as civil regulation relies on
the demand for corporate responsibility expressed by the key
stakeholders of a company—its investors, clients, employees
and the communities wherein it operates (cf. Zadek, 2001).
These stakeholders, in on-going contact with public debate,
form their own opinion as to what constitutes appropriate
corporate conduct. Such opinion coalesces into expectations
3
Consider the National Association of Pension Funds (NAPF) in
the UK. NAPF represents pension funds covering some 10 million
employees, who account for 75% of occupational scheme assets
in the UK and control 20% of the shares of the London Stock
Market. In its own words, “NAPF concentrates the power of its
membership into an influential voice to government, parliament,
regulators and the media. It also provides its members with
valuable information and other services to assist them in the
effective running of their schemes”. Given its mission, it seems
reasonable to expect the NAPF to take a position on key policy
issues, which may have a strong bearing on their members'
capacity to meet their future liabilities, such as climatic change or
international development. Similar organisations exist in other
countries that base their retirement systems on pension funds.
 EC O L O G IC A L E C O N O M IC S 5 9 ( 2 0 06 ) 44 0 –4 50
and ethical demands addressed at companies. From these
then emerge business opportunities as well as reputation and
other risks—thence business decisions reflective of stake-
holders' new ethical preferences. Higher ethical standards and
greater engagement on the part of stakeholders can thus
contribute to aligning corporate operations with the societal
objectives of sustainability.4
Civil regulation thus requires (i) high levels of corporate
alertness and responsiveness to stakeholder expectations
and to the risks and opportunities stemming from issues of
sustainability; and (ii) high levels of stakeholder commit-
ment to reward the more progressive companies and punish
others.
Large companies can derail civil regulation by not fulfilling
the role that other actors expect them to play. Pension funds
should monitor these corporate behaviours when a state-led
response is unlikely to address a particular societal issue.
Assessing corporate conduct in this perspective will involve
assessing the extent to which corporate behaviours (i) are alert
and responsive to stakeholder expectations and (ii) support (or
hinder) the emergence of a counter-corporate power, notably
in the form of enhanced stakeholder engagement.
In the case of climatic risk, the 10-point action plan of the
INCR provides some concrete examples of such counter-
corporate power measures. Point 1 calls upon the SEC “to
enforce corporate disclosure on requirements under regula-
tion S-K on material risks such as climate change (…)”; point
2 calls upon the “SEC to re-interpret or change its proxy
rules”; points 4 and 5 call for companies to be more
transparent about how they may be affected by climate
change itself and the introduction of new regulations (INCR,
2003). Whether companies hinder or facilitate such propo-
sals should be considered a corporate responsibility issue—
and this is one to which pension funds may be particularly
sensitive.
3.3.3. Costs and benefits of public-response enhancing corpo-
rate conduct
We have identified above a number of specific corporate
conducts that may provide benefits to pension funds in the
context of serious societal issues:
▪ Restraint from exercising political influence that may hinder
state intervention in addressing the societal issues.
▪ Raising corporate alertness and responsiveness to stake-
holder expectations, and encouraging stakeholder engage-
ment, in order to facilitate the emergence of civil regulation.
We now assess whether it makes financial sense for
pension funds to want companies to undertake such action,
given that this may have a cost. The costs and benefits
expected from corporate action comprise two elements:
impact on the expected performance of a portfolio within a
specific scenario and impact on the likelihood of occurrence of
4 – raising members' awareness about the issue at hand
For statistics on stakeholders' demands for corporate respon-
sibility, see Environics International (2002). For the business case
based on stakeholder expectations, see Willard (2002), among
others.
447
the three different scenarios—business-as-usual, public re-
sponse through state intervention and public response
through civil regulation. Furthermore, we assume that the
expected long-term return on a pension fund's portfolio, for a
given level of risk, is inferior in the business-as-usual scenario
to what can be earned in the two public-response scenarios
(otherwise pension funds would prefer the business-as-usual
scenario).
In this framework, restraining corporations from carrying
out political lobbying aimed at hindering state intervention
has a doubly positive effect for pension funds. First, it reduces
corporate costs (i.e. the costs of political lobbying) and thus
increases corporate profits and returns for investors. Second,
it increases the probability of state intervention, and thus a
public-response scenario, as preferred by pension funds. We
can therefore conclude that this is indeed a preference that
pension funds should rationally hold.
Things are more complex for other aspects of corporate
conduct. Raising alertness and responsiveness to stakeholder
expectations may carry a hidden cost that will not automat-
ically be covered by increased earnings or reduced costs at the
company level. To reach some preliminary conclusions,
assume that stakeholder engagement will not be strong
enough for the company to recover these costs in the
business-as-usual or the public-response-through-state-in-
tervention scenarios, and that, by contrast, costs will be
recovered in the public-response-through-civil-regulation
scenario, because in this scenario stakeholder engagement is
assumed to be high.
From these simple assumptions, we derive the following
points:
▪ Pension funds, among other stakeholders, will not take the
lead in promoting corporate responsibility to address a
specific societal issue through civil regulation. Indeed, if
the level of stakeholder engagement in a specific societal
issue is low, the cost of corporate engagement will not be
recovered and the increased likelihood of the civil regula-
tion scenario will not be sufficient to compensate for this
loss.
▪ As stakeholder engagement rises, pension funds will want to
raise corporate alertness and responsiveness before man-
agement does. The reason is that they have more to gain, i.e.
the increased likelihood that the societal issue will be
addressed.
3.3.4. Discussion
The civic investor approach defines the responsibilities of
pension funds in the face of threats raised by deep societal
trends in a context of the restricted capacity or willingness of
the state to intervene. Our analysis suggests that pension
funds have a number of tasks to perform:
▪ Monitor how societal changes and emerging societal pro-
blems put their investments at risk
▪ Facilitate and promote state intervention by
– engaging in political lobbying
– monitoring corporations' political influence and lobbying
work
448 EC O LO GIC A L E CO N O M ICS 5 9 ( 2 00 6 ) 4 4 0 –4 50
▪ Support the emergence of new forms of governance by
– raising corporate alertness and responsiveness to stake-
holder expectations
– encouraging stakeholder engagement.
These tasks have a cost and, in many instances, issues of
free-riding will arise (some pension funds may incur the costs
of action from which all pension funds will benefit). These are
valid concerns that require appropriate responses beyond the
scope of this paper—although we did allude that some could
be addressed through associations of pension funds.
The tasks listed above go well beyond the tasks currently
performed by pension funds and, for this reason, may seem
strange. Yet, upon reflection, what should seem strange is that
pension funds do not perform such tasks: individuals invest
huge sums of money for their retirement, and yet there exists
no seriously organised lobbying group to defend these
investments against the encroachment of present policies
and practices. The reason for this gap lies perhaps in people's
confidence in the future. The concept of sustainability was
formulated precisely to challenge this confidence and draw
attention to the distribution of economic and social opportu-
nities across time. Pension funds have still to draw the full
implications of this challenge.
4. Conclusion
Over the past few years, a consensus has emerged that
sustainable development should be seen to have three main
dimensions: economic, social and environmental. Conse-
quently, and following John Elkington's Triple Bottom Line
idea, companies are increasingly evaluated according to their
impact on the economic, environmental and social spheres
(Elkington, 1998). However, this is not sufficient to relate
corporate behaviours to trajectories of societal change and to
the long-term performance of the economy. In addition, it
needs to be specified how the three spheres interact with one
another, since it is this interaction that shapes societal
development.
This paper has proposed two approaches to identify
corporate behaviours that may have a bearing on societal
trajectories and, in particular, on long-term economic perfor-
mance, and for this reason that are of potential concern for
pension funds. The two approaches are complementary: the
first one identifies corporate practices within a given institu-
tional setting and the second one corporate practices that
directly bears on this setting. It should be clear that there is a
certain degree of overlap between the two approaches: indeed,
in some cases, it is by adopting new practices such as in
environmental management that companies will be able to
bear on political processes. The combination of these two
approaches has led us to narrow down substantially the
number of corporate behaviours of relevance to pension funds
(in the sole perspective of fulfilling their fiduciary responsi-
bility) as compared, for instance, to the number of indicators
developed by the Global Reporting Initiative (2002).
Attention to how companies can impact trajectories of
societal change through the interaction between different
societal spheres has other important consequences. One of
them is to draw attention away from the relation between
corporate responsibility and financial performance at the level
of one company, and onto the link between corporate
responsibility and the financial performance of broadly
diversified portfolios.5 When broadly diversified investors
look at a company's behaviour in relation to the other assets
they own–as they should do–they will support the pursuit of
shareholder value maximisation only to the extent that it is
compatible with the maximisation of the performance of their
entire portfolio.6 This paper has provided many examples of
instances in which the two may diverge, such as in the case of
political lobbying. This point, surprisingly rarely made in the
literature apart from Hansen and Lott (1996), challenges
current wisdom that all shareowners would agree with and
promote the corporate objective of maximizing shareholder
value.7
Another consequence stemming from looking at the
impact of companies on societal trajectories is the need to
precise the society under consideration, thereby drawing
attention to the (mathematical) fact that the societal perfor-
mance of companies will generally differ across societal
systems. Since pension funds depend only upon the perfor-
mance of those economies in which they invest, they will be
concerned about corporate conducts that are responsible
towards a specific territory or economy. This is the reason
that, as discussed earlier, OECD pension funds will not be
concerned about the “curse of natural resources” phenome-
non. For pension funds, the concept of a corporate societal
performance without reference to any specific societal system
is of little interest.
Finally, we may note that this spatial dimension raises
more than an aggregation issue. It is also about the kind of
information that is to be aggregated. Consider, for instance,
the amount of water a company uses globally. Corporate
responsibility analysts who use this criterion implicitly
assume that it is meaningful to aggregate the amounts of
water, measured in litres, that a company uses in different
places to assess the sustainability impact of corporations.
However, pension funds concerned about the long-term
performance of specific economies will care about the
opportunity cost of using water, and this cost will widely
5
More than 100 studies have explored the relationship between
corporate social performance and financial performance. For
references, see Forum for the Future (2002). For substantive
critiques of these exercises, see Wood (1991), Rowley and Berman
(2000) and Margolis and Walsh (2001).
6
In general, the set of corporate strategies that maximizes the
value of a portfolio is logically different from the set constituted
by the corporate strategies that maximize the shareholder value
of each company considered in isolation. They will differ
substantially as soon as interdependencies begin to exist across
companies outside of the market and open to the influence of
corporate behaviours.
7
Note that the current consensus on shareholder value max-
imization is rather new. In the 1970s, economists debated
whether shareowners could unanimously agree on a firm's
objectives. Disagreement, rather than agreement, was considered
more likely, owing to differences in shareholders' investment
horizons and risk/return preferences, e.g., Grossman and Stiglitz
(1977).
 EC O L O G IC A L E C O N O M IC S 5 9 ( 2 0 06 ) 44 0 –4 50
differ between different places. In this sense, a litre of water in
water-rich Canada is not the same thing as a litre of water in
water-poor Egypt. Here our analysis underlines the practical
relevance of recent attempts (e.g. Figge and Hahn, 2004) to
measure corporate contributions to sustainability in terms of
opportunity costs.
Acknowledgements
I would like to thank André Burgstaller for his support in
writing this paper, as well as for inputs by Peter Buomberger,
Jason Hauser, Alexander Seidler and two anonymous referees.
Thank you also to Lucas Bretschger, Bettina Furrer and Bernd
Schanzenbächer for useful comments. Financial support by
Ecoscientia Foundation is gratefully acknowledged.
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