The responsible investment community has done something very important. It has raised awareness that institutional investors who define their job as beating the peer group benchmark are being irresponsible – stewardship responsibilities for the long term are now on the agenda. But the current trading-oriented model of investment is impossible to align with these responsibilities.

PRI has pushed ESG along, but further improvements are falling foul of the ‘80/20’ rule. Instead, PRI can – and should – use the opportunities that come with a new leadership team to encourage the invention of ‘ESG 2.0’ models that are purpose built for long-term stewardship.

Sharan Burrow is a major voice in the trade unions. She issued a call in October for new investment models to PRI In Person in Cape Town. Who will lead the industry in answering this call?

New investment models don’t regularly ripple through the pension industry. But it does happen.

The time was 1972. The place was Cambridge, Massachusetts USA. The man was Jim Bailey, who would go on to found Cambridge Associates.

That year, the rules of fiduciary prudence were changed via the Uniform Management of Institutional Funds Act. The primary change is as relevant now as it was then – as the knowledge of investing evolves, so too should the standards of prudence. The new knowledge then was diversification and it allowed fiduciaries to add securities trading to their strategy.

At that time, the Harvard Endowment, had no experience of securities trading. It commissioned Bailey, fresh out of Harvard Law School, to investigate. In a privately published Q&A, he was asked whether he encountered early resistance to such radical ideas.

Indeed, he said, there were. “It was not particularly easy to get these asset classes adopted in those early days because there was not a lot of historical data that neatly illustrated the correlations, expected returns, and risk levels,” he answered. “In addition, the law was changing, in terms of whether it was permitted. Finally, people were sceptical because there was no precedent or good model for the success of this strategy in the endowment arena.

Bailey outlined three perceived major risks: legal risk; embarrassment risk (if the approach ‘blows up’); and implementation risk (can managers effectively run this?).

Harvard and other institutions learnt to manage these risks. The challenge for ESG 2.0 is to learn to manage the modern risks that are linked to long-horizon stewardship investing.

The good news is that this work is under way. Legal risk is being managed by scholars like Keith Johnson (US) and Ed Waitzer (Canada) with campaigning groups like ShareAction taking up the call, and governments are responding (eg the UK Law Commission Review of Fiduciary Duty).

The embarrassment risk is being managed by thought leaders, including Sharan Burrow, insiders like John Kay and Paul Woolley (UK), Keith Ambachtsheer (Canada), Jon Lukomnik (US), and think-tanks like the Network for Sustainable Financial Markets, Long Finance, Finance Innovation Lab and Capital Institute.

What’s urgently needed is progress on implementation risk. We need to create safe places to try new things and learn from experience.

PRI is ideally suited to this role. Its new programme of work – overcoming barriers to long-term investing – should be expanded to become an industry-supported learning centre, where ideas that merit attention are objectively studied, and learning disseminated through white papers, handbooks and training.

The institutional industry is not known for having a robust learning culture, so PRI will need to break the mould. This is why PRI was created. The window of opportunity is now.


Raj Thamotheram is an independent strategic adviser, co-founder of and president of the Network for Sustainable Financial Markets, and Tim MacDonald is a senior fellow of the Capital Institute