Thursday, 20 June 2013

Pension funds are thinking seriously about sustainable investment

Sustainable investment, aka Socially Responsible Investing (SRI) or Environmental Social and Governance (ESG) oriented investing to many people has the image of being the domain of fringe do-gooders. That's not so if one is to judge by events like the recent workshop held at U of Toronto's Rotman School (that's a management school, not a sociology or arts school). The workshop (U of T press release here) had a lot of pension industry heavyweights from Canada and around the world like the CPPIB, Ontario Teachers, Caisse de Dépôt, TIAA-CREF, CalPERS discussing what was worth doing and how to do it. U of T has made available the workshop notes here. The notes have links to background papers and to headliner Al Gore's (yes the real Al Gore and he actually took part in at least some of the workshop) paper on Sustainable Capitalism.

There is a lot of emphasis on investing with a long-horizon, an idea that seems to unite pension funds and socially/environmentally focussed people in the five main topics the workshop covered - stranded assets (what happens when climate change or price of oil destroys business models), integrated reporting (going beyond financial-only reporting to include social etc), evils of quarterly earnings guidance (stop being so obsessively short-term!), executive compensation (wrongly structured and excessive) and constructive investor behaviour (i.e. acting more like a long-term investor)

Some notable comments:
  • executive compensation "...the current executive compensation situation constitutes a ‘market failure’ situation in the sense that there is no obvious relationship today between executive performance and the levels and structures of executive compensation. ... the sense in the room that a strong, coherent collective action initiative is needed " If the big pension funds develop an activist stance on compensation and do it the right way, maybe they can break through the incestuous self-reinforcing cycle of upwardly ratcheting executive compensation, a problem I have written about before.
  • constructive investor behaviour "The key concept here is the broad adoption of ‘concentrated long term investment mandates ’ that require investor engagement. This would be a radical departure from the traditional Keynesian ‘beauty contest’ style of active management, and also from the broadly-diversified ‘formula’ style of passive management. A high number of workshop participants judged this to be a potentially high-impact initiative at the individual fund level." In other words, the pension fund people attending think this is worth doing and they see themselves doing it. Unlike joe average investor who can only influence by voting with his/her feet, when a giant pension fund calls, or several do, big-shot CEO and aloof Board are likely to listen. The swipe at passive index-ETF style investing is interesting - most individual investors in such ETFs are probably there because they believe the mantra of investing for the long term yet because of the passivity they can only take what they get, including those companies who operate only with a short-term horizon.


Value Indexer said...

It could be interesting to see big investors having more influence in the way companies are run... on the other hand it could be something to fear.

In the last couple of decades, investors have pushed companies to focus on their next quarter's earnings at the expense of just about everything else and I don't think that has been very good for the market.

If there is a new outside influence on management we can only hope it is one backed by real wisdom and enough attention to know what is relevant to each individual company.

CanadianInvestor said...

VI, you do have a point that pension funds won't necessarily or always exert a beneficial influence. There has to be good governance in place there too, a point made by Keith Ambachtsheer, one of the organizers of this workshop, in his book Pension Revolution.

Anonymous said...

As for me I would not want to see huge investor influencing companies in any ways. Yes, there is a chance that this will be a good impact...but more likely big investors will come with lots of changes which will be convenient for them. Here is a question: do we need such changes?!We need to remember that we are the once to pay the price and honestly I do not want imagine myself searching for place to borrow money in Calgary when I am like 60!

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