Fiona Reynolds, managing director at Principles for Responsible Investment, responds to recent ‘Keep politics out of pensions’ article by Daniel Ben-Ami
Returning to London from a few weeks’ holiday on the beach in Australia, I was reflecting on the state of responsible investment globally and feeling that, although there is work to do, there have been some changes in perception and a renewed recognition of the value of taking a long-term view on value creation, sustainability and risk management.
In December, at COP21 in Paris, we witnessed the first concrete global agreement on climate change, with more than 180 country-based climate plans submitted to the UNFCCC. What set these climate talks apart was the significant role investors played throughout the summit and the importance of institutional capital as an integral component to countries implementing the investment inherent in their emissions plans.
And it is not just in the climate sector where change has been occurring. In the US, where the acceptance and implementation of responsible investment has traditionally lagged behind Europe, the Department of Labour last October came out with some clarifying statements that ESG considerations in investment decision making is consistent with fiduciary duty. This decision dovetails with a growing body of research, which demonstrates that a sustainability-focused investment agenda can lead to market outperformance.
Despite this momentum, my post-holiday glow quickly disappeared after reading the IPE article ‘Keep politics out of pensions’ by Daniel Ben-Ami. It seems to suggest the state of retirement incomes in the UK, particularly low balances, is due to the fact pension funds and asset managers spend too much time on ESG issues. At a more fundamental level, Ben-Ami posits that consideration of ESG issues, climate change and other external factors are in some way a drag on economic growth and hence the returns generated for beneficiaries.
First, to suggest the state of UK retirement savings has anything to do with ESG considerations is clearly wrong. For that, you need to look at policy, design and regulation. Over the last decade, we have seen a slow move away from defined benefit to defined contribution (DC) funds, and a move to provide pensions for all employees, not just the luckiest by dint of employment. We need to remember that auto-enrolment for workplace pensions only commenced in the UK in 2012 at a rate of 2%, and the system is still in transition, with an increase to 8% only coming about in 2018. There are no mandated rules for matching additional contributions, and there are no mandated portability rules. Anyone who knows anything about retirement incomes knows the average worker in a DC fund needs to make contributions of 12-15% of salary on average across his working life to be able to retire with a comfortable pension.
In addition, in the UK, we see the problems of investment management fees for retirement products being too high, excessive intermediation, too many funds and too much complexity. However, a national pension system has to start somewhere, and, no doubt, some of these issues will be addressed as it matures. The establishment of NEST was a good starting point.
The wider question, however, needs to be addressed. To suggest a young 25 year old joining a pension fund today doesn’t need her fund to address the long-term material risks arising from issues like climate change, environmental sustainability, resource depletion or supply-change risks is a failure to understand what will drive value creation to 2050 or 2060 when our young worker may be retiring. A quick glance at the corporate philosophy of Unilever may provide a glimpse of how a UK-listed global corporation with a diverse footprint is balancing the risks and opportunities posed by these externalities to help ensure its licence to operate, and that shareholder value remains strong in the decades to come.
There are many studies – most notably from Arabesque Asset Management/Oxford University, Mercer, Harvard University and others – which present hard data to show that consideration of ESG factors actually leads to investment outperformance, which is why investors are taking keen notice. At the end of the day, these are investment issues – they are not political issues except to the extent politicians often fail to address long-term risks in markets simply because they are often focussed on short-term issues that will help their re-election.
Pension funds, however, are here for the long term, investing on behalf of a multi-generational group of stakeholders trying to match liabilities over a rolling lifetime of member horizons. Many pension funds in the UK are leading the way when it comes to responsible investment – to help, not hinder, their returns.
Finally, anyone who doubts the benefits of looking at ESG considerations needs look no further than Volkswagen, a once-respected company that has lost market share, reputation and shareholder value, a stark example that all investors should heed.
Fiona Reynolds is managing director at Principles for Responsible Investment