Some of us are still clinging to the hope that the destruction the pandemic has wrought on lives and livelihoods will be offset by a kinder, simpler, more equitable aftermath for society.
In particular, there’s an opportunity to address the climate crisis more directly than ever. And for investment firms, the time has arrived when the moral imperative to stop funding environmentally damaging companies and industries should finally outweigh any lingering concern about sacrificing returns to do good.
In an ostensibly positive step on that journey, the UK’s biggest private pension provider said earlier this week that it won’t invest in companies that make more than 25% of their revenue from thermal coal mining. It’s also shunning tobacco makers and some kinds of arms companies. USS Investment Management, which oversees more than 68 billion pounds ($85 billion) as the guardian of the UK university system’s pension pot, said part of the move is simply codifying existing policy — it already doesn’t have any investments in cluster munitions makers, for example.
But its stated motivation for the exclusions caught my attention. USS explained in a press release that it will shun industries it deems “financially unsuitable”:
The traditional financial models used by the market as a whole to predict the future performance in these sectors had not taken specific risks into account. These included changing political and regulatory attitudes and increased regulation.
So the primary aim of its policy is to safeguard future returns. There’s no mention of the need to protect the environment or any reference to USS wielding its financial firepower to make a better world. In the current environment, that strikes me as rather a limited view of the pension fund’s role as custodian of the future economic well-being of its members. Generating a few basis points of extra alpha here and there pales in comparison with the need to ease the worsening climate emergency.
The pension fund’s defence is that it can “only take non-financial factors into account where they do not pose a risk of significant financial detriment on an investment.” Moreover, it said in an emailed response to questions that it has “good reason to believe” that its more than 400 000 members “share each other’s views on that non-financial factor.”
Surely that glosses over a fundamental point: Viewed through the lens of the climate crisis and the shift in attitudes around social and governance issues, everything is effectively a financial factor, be it gender pay imbalances, carbon emissions or the risk of companies being left with so-called stranded assets that become too politically toxic to exploit.
USS isn’t always this timid. In March, it allied itself with the California State Teachers’ Retirement System and Japan’s Government Pension Investment Fund in welcoming efforts to incorporate environmental, social and governance issues in portfolio construction. “Skeptics that continue to question the growing role of sustainability within the global investment community should realise that they are quickly becoming the minority,” the trio said.
That statement is a better reflection of the prevailing backdrop. For example, the January announcement by BlackRock Inc., the world’s biggest fund manager with $6.5 trillion of assets, that it “plans to place sustainability at the centre of our investment approach” is starting to have real-world repercussions. BlackRock is currently challenging Korea Electric Power Corp.’s planned investments in new coal-fired power plants in Indonesia and Vietnam. The second-biggest private investor in the South Korean utility, according to data compiled by Bloomberg, BlackRock said it may “escalate our actions through votes in the future.”
Not everyone agrees that pension funds and asset managers should be broadening their remit. Christopher Burnham, president of the US Institute for Pension Integrity, recently wrote in Barron’s that pension plans shouldn’t be making social and political decisions for millions of members. Such actions risk “opening the door for politicians to play politics with public pensions rather than adhere to a strict fiduciary standard of the highest returns at a reasonable risk,” he argued.
That view strikes me as outdated, and out of tune with the prevailing zeitgeist that acknowledges fiduciary duties stretch beyond factors easily represented in an Excel spreadsheet, but which nevertheless play a significant role in how investments will perform in future.
The European Union, for one, has made clear that it expects fund managers, as well as other financial institutions, to be proactive in preventing their capital from being employed in activities that harm the planet. At the end of last month, the bloc’s top banking regulator said the region’s banks must incorporate climate considerations in their credit policies, and assess whether borrowers are contributing to global warming. This will curtail lending to potentially lucrative but environmentally damaging projects. New regulations governing the responsibilities of asset managers are scheduled to come into force next year.
By taking what seems to me to be a very narrow view of its responsibilities to its members, the University system’s pension fund has missed an opportunity to use its bully pulpit to set an example for other asset managers. Now is the time to advance the argument that capitalism can justify doing good for goodness’s sake — with less emphasis on the potential financial costs of going green, and more weight given to the ancillary benefits that accrue to society as a whole.