Small adjustments are not enough: we need to reimagine our approach

“To know and not to do, is not to know” – Johann Wolfgang von Goethe

If we grapple with the truth in various climate and ecological projections, the risks to the future of our younger members become clear. While our industry is starting to manage ESG risks in portfolios, it is failing to grapple with the risks to young cohorts that exist outside of any portfolio mitigations. As fiduciaries, we need to reimagine our role and do things differently.

Let us review where we are and where we are going:

● There has been a 68% decrease in animal populations since 1970, with a 94% drop of biodiversity in America’s tropical regions, according to the WWF 2020 Living Planet Report;

● 1.2bn people are at risk of forced migration or displacement by 2050, according to the Ecological Threat Register for the Institute for Economics & Peace. These people live in 43 countries that are unlikely to be able to withstand the impact of the ecological threats they face; 

● Insurers tell us a world with 4°C global heating is uninsurable. An uninsurable asset is an unbankable asset – and a world without insurance and banking lacks capital and thus capitalism. Schroders’s climate dashboard predicts a 3.9°C rise by the end of the century – capitalism’s collapse in other words.

By 2050 members now in their thirties will be looking to retire. An unmitigated projection of the trends outlined above is likely to severely compromise the ability to pay good pensions. Addressing the risks involved requires radical changes in existing corporate practices, as well as investments in solutions.

A fiduciary should treat all members equally. But does the ability to pay pensions due in 2050 take equal preference to those that are being paid now? To be balanced and equitable, fiduciaries need to reimagine their role as long-term investors and rebalance their duty towards all members, not just those who are next in line. 

Reimagination 1: invest in a vaccine
Managing ESG investment risks is a fiduciary duty. It can reduce risks from companies (or issuers) exposed to transition risk and boost investment in a more sustainable economy with lower carbon, biodiversity, and which is societally supportive.

An analogy to this is wearing a mask. But while wearing a mask offers protection, it is neither a vaccine nor a cure. Younger members need their fiduciaries to invest in a cure.

Fortunately, there are many sustainable transition opportunities, cures in other words, offering good investment returns. In the future, fiduciaries might have to balance prospective returns with investing in a cure – but not today. So equitable fiduciary duty means not only ‘wearing a mask’ but also ‘investing in a cure’. 

But this is not enough on its own. It tackles neither existing practices nor the $2.5trn (€2.1trn) annual scale of investments required to meet the UN Sustainable Development Goals by 2030. This requires collective effort. We need to reimagine our fiduciary efforts to include building collaborations with other investors.

Reimagination 2: building communities
Many active investor groups are helpful in aggregating influence and resources. The work these organisations do is excellent. But larger groups lack consensus on the scale of change required, while their smaller counterparts lack the influence to achieve all their demands. 

To succeed, that dynamic has to change. We must focus on building communities that are fully engaged to the extent required. With scale, we can demand radical change and science-based targets in every corporation, as we are able to stop loans and insurance for those that do not. 

We need to engage with and nurture our peers to create a vision in others equal to that in ourselves. Not just individual but collective effort; not just wearing a mask but an urgent investment in a cure. We must each reflect on how we can leverage our own influence. We need to go beyond our direct sphere and build communities. I am seeking to do this with actuaries and I think this approach has broader applicability. 

Engagement for all
Advisers can act as an industry community catalyst, although in practice their caution is further constraint. Too many expectations are peer-relative rather than focusing on what is required. I am trying to change this. I chair the Institute and Faculty of Actuaries’ (IFoA) Sustainability Board. The board is explicit in being a change agent with a mission to “create meaningful engagement by all actuaries in understanding, and addressing, the uncertainties… arising from climate change and other sustainability issues”. 

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Nick Spencer

The board, alongside the IFoA’s governing body, has developed an action plan on integration of climate-related risks into actuarial work. In simple terms, to have climate change as part of the actuarial DNA, broader sustainability will then follow. This will help address sustainability risks within both pension funds and insurance companies. 

I am hopeful it will assist advisers to become the community catalysts they should be. 

If actuaries can, we all can
The peer-to-peer nature that is required to develop a profession can also be used to build a peer-community across the industry. The IFoA plan’s 38 recommendations can be summarised within the following themes, which apply equally to peer-communities;

Education: knowledge and awareness are first steps; the immediacy and scale of the challenge followed by tools and practical solutions;

Research and thought leadership: addressing technical and practical gaps and reimagining strategies. Importantly for asset owners, how are budgets reimagined away from short-term fund management fees into solving long-term strategic challenges and stewardship?

Regulation: this can be through charters and signatory commitments or through advocacy with regulators and policymakers;

Communities: building peer-to-peer influence.

I will be very happy to share our learnings as they develop. I welcome connections and suggestions. We need to build ever greater communities given the scale of this challenge.

The equitable fiduciary
An equitable fiduciary is as engaged with securing pensions in 30 years as much as those in 30 days. To do so goes beyond managing fund-level ESG risks to embrace investing in ‘cures’. It also requires building peer-communities to create the scale of investment alongside commitment to radical action. 

So if you are engaged, build a community. If you do not yet fully know, seek a community that does. If you can not find a community – ask me or others who are already engaged. 

With commitment and investment scale we can create a sustainable future and deliver on the fiduciary promise to all members. 

Nick Spencer is a sustainable investment adviser at Gordian Advice

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