Trillions of pounds of global pension assets are traded and monitored every minute of every day. In 2018 global pension assets surged to $41.3tn making pensions an increasingly important part of the economic landscape. We invest in pension products to safeguard our future, but to what extent are these investments at the forefront of responsible investment, helping to drive long-term sustainable change?
The pensions disconnect
Pensions enable us to plan for our futures however, the short-termism in the current financial system means that pensions – alongside other investment types – often fail to be invested into companies which support positive outcomes in the long-term. This short-termism means that long-term benefits gained from investing in innovation, workforce skills, or the efficient use of natural resources are not prioritised, and the societal and environmental impacts of issues – including carbon emissions and air pollution – fail to be addressed. Over time this can actually lead to weaker companies and lower profits.
This all leads to a pension disconnect: the investments that are there to safeguard our future are actually undermining its long-term sustainability.
The investments that are there to safeguard our future are actually undermining its long-term sustainability.
This disconnect is felt particularly by cause-led organisations such as NGOs and religious institutions who look to lead on social responsibility yet can find their investments can be at odd with the aims of their organisations.
The Church of England was invested in the now defunct payday lender Wonga whom it accused in 2014 of predatory lending practices. It was recently revealed that the Church has significant investments in the online retailer Amazon – a company it has criticised for “leeching off the taxpayer”. The National Trust invested £30 million in fossil fuels indirectly via a portfolio fund despite the conservation charity pledging to cut down its own use of fossil fuels and warning about the impact of climate change. A 2017 report by Friends of the Earth found that UK council pension funds invest over £16 billion in climate-wrecking fossil fuels.
An emerging lever for change
In light of this disconnect it’s encouraging to see how pension funds and corporates alike have started to leverage pensions as a tool to drive sustainable business practices over the long term.
Growth of sustainable pensions: Bloomberg analysis suggests that increasing demands of pension funds for integration of long-term investment issues (as well as asset managers’ hopes of capturing dollars from millennial and female investors) are driving sustainable-investing growth. Recently BlackRock launched a new ESG-focused strategic growth fund in response to “growing appetite” among UK pension schemes for long-term growth strategies that offer more sustainable investment options.
Holding hedge funds to account: Pension asset owners are increasingly using their influence by asking hedge funds to document policies and approaches to responsible investment issues – particularly as public pension funds face new government requirements on sustainability, such as avoiding coal, or needing to quantify the carbon emissions of their portfolios. The likelihood is that hedge fund managers may start to see more responsible investing questionnaires in their inboxes, as the number of investors who have signed onto the PRI grows (including about 345 asset owners around the world such as Dutch pension fund ABP and U.S. pension fund CalPERS).
Aligning interests: Organisations are starting to align their retirements funds with their sustainability goals (and those of their employees). In 2017 Bloomberg became the first US-domiciled corporate retirement plan sponsor to join the UN’s Principles for Responsible Investment (PRI). It said one of the main reasons for joining the organisation was “to enable its employees to proactively integrate ESG-themed funds into their own retirement investment strategies”.
Organisations are starting to align their retirements funds with their sustainability goals (and those of their employees).
In early 2018 the World Business Council for Sustainable Development (WBCSD) announced an aspirational goal to move 1 percent of $1 trillion ($10 billion) in retirement assets under management of its member companies to environmental, social and governance-themed retirement benefit accounts by 2020.
The Church of England Pensions Board has embarked on more active engagement with companies, especially the extractive industry to ensure the protection of the environment, communities and economies of those impacted by mining. The Pensions Board and Anglo American recently shared how they worked together to incorporate ESG elements into the company’s corporate reporting and track financial trends in the mining industry, achieving both financial and ethical returns. The pension provider is also leading a group of investors challenging 55 multinationals to review their association with lobbying groups whose “positions are inconsistent with the goals of the Paris Agreement”. It has also led the establishment of the Transition Pathway Initiative (TPI) are supporting pensions and other asset owners to assess investee companies’ preparedness for the transition to a low-carbon economy and engage to support efforts to address climate change.
Divestment: A new government directive in the UK has given managers of the £1.5tn invested in Britain’s workplace pension schemes new powers to get rid of shares in oil, gas and coal companies in favour of long-term investment in green and “social impact” opportunities. Until now many pension trustees have been restricted by fiduciary duties that they feel requires them to seek the best returns irrespective of the threat of climate change.
Challenges, and the Opportunity
However, whilst many pension funds and corporates are publicizing their approaches to sustainable investing, progress on integrating ESG isn’t all smooth sailing.
The world’s largest pension fund – the Japan’s Government Pension Investment Fund (GPIF) – has nearly $1.5 trillion in assets and sees itself as a “super-long-term investor” with the goal of a century or more of sustainable investment.GPIF’s experience suggests that although external asset managers entrusted with passive investment (that hold investees’ stocks as long as they are included in indices) tend to recognize material ESG issues, external asset managers entrusted with active investment (with primary holding periods of approximately several months to a few years) only tend to recognize Governance issues as material. The GPIF also said that while external asset managers “have taken measures to address ESG issues, in many cases such measures have not been included in actual engagement activities.”
However, what is undeniable is the transformative potential of pensions – it is an asset class with the potential to unleash trillions of pounds in sustainable investments.
The reality of ESG investing is that this is still developing in practice. However, what is undeniable is the transformative potential of pensions – it is an asset class with the potential to unleash trillions of pounds in sustainable investments. “It’s low-hanging fruit for companies to extend ESG into retirement planning,” said Andrew Behar, CEO of As You Sow. “Seventy-four percent of Fortune 1000 company employees want to invest in a future they can live in.” For some, it may be fossil fuel-free, for others it could be gender equity and for others, a weapons-free fund. Whatever it is, our pensions represent a critical tool to be leveraged to advocate for long term future we want.