Pension funds are increasingly being asked by politicians, non-governmental organizations, campaigners, and pressure groups to mobilize their financial clout more actively and to take their responsibilities as corporate owners more seriously. The chances are it could change from being “asked” to being “required.”
At the vanguard of the movement is UK Treasury minister Lord Myners who recently berated pension funds for their appalling voting records and accused them of behaving like old-style “absentee landlords.” Their short-termism, passivity, and habit of voting with managements even on self-destructive deals such as RBS’s purchase of ABN AMRO, is seen as having exacerbated, and perhaps even triggered, the banking and financial crisis.
Myners wants to pressure pension funds and other institutional investors to raise their game and emulate the behavior of the $460bn Norwegian Government Pension Fund and California’s public sector scheme Calpers by engaging more actively with management teams to ensure they behave responsibly, ethically, and sustainably.
Earlier this week Mercer Consulting, the Carbon Trust, and the IFC, a subsidiary of the World Bank, launched a project that is expected to make it easier for pension funds to oblige—especially where climate change is concerned.
The research project should ensure investors are not flying blind where climate change is concerned. It aims to identify the investment opportunities, as well as the investment risks, that global warming can be expected to pose. The study will examine a range of global warming scenarios and map out the risks and opportunities each will have on a range of asset classes and geographies until 2050.
Mercer will make its findings public in October 2010 while participating pension funds will also benefit from a confidential, tailored report assessing the impact of these scenarios on their own asset allocation portfolios. The findings will also be fed into policymakers and industry bodies.
Participants in the project include the Norwegian Government Pension Fund, Calpers, Calstrs, Sweden’s AP1, AustralianSuper, British Columbia Investment Management Corporation, the Environment Agency Pension Scheme, the Maryland State Retirement & Pension System, Ontario Municipal Employees Retirement System, PGGM, and VicSuper. The research is being led by the Grantham Research Institute and Vivid Economics.
“The importance of private sector capital cannot be understated in the fight against climate change,” said Greg Radford, director for environment and social development at the IFC. “Yet, mobilizing those funds requires clear understanding of the climate risks and opportunities to help pension funds allocate capital appropriately.”
Sigbjorn Johnsen, the Norwegian finance minister, added: “The climate scenario study is an important element in our effort to gain a deeper understanding of the robustness and sustainability of our long-term investment strategy.”
Bruce Duguid, head of investor engagement at the Carbon Trust: “This focus on asset classes, combined with previous work on sector impacts, should enable investors to reward opportunities that will thrive in a low-carbon economy and help avoid fuelling further high carbon growth.”
The Norwegian government scheme, probably the world’s most responsible sovereign wealth fund, recently switched from negative screening to what it calls an engagement approach. Whereas it previously believed disposing of its stake in miscreant companies was the best way to get them to shape up (this was the method it has used with tobacco companies and London-listed mining company Vedanta Resources), it now prefers to put companies under observation and pursue an engaged investors approach.
I await the results of the Mercer study with interest.
Further reading for pension fund investments
- Viewpoint: Ernst Ligteringen, No More Room for “Business as Usual”
- Best Practice in Investment Governance for Pension Funds, by Roger Urwin
- Ethical Funds and Socially Responsible Investment: An Overview, by Chendi Zhang
- CSR: More than PR, Pursuing Competitive Advantage in the Long Run, by John Surdyk
- How to boost investment returns: Invest responsibly, by Ian Fraser [blog post]
Tags: environmental and social governance , fund management , Mercer , pension funds , socially responsible investment , stocks and shares