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Some Kodak moments

At the recent IPE Conference and Awards event, the audience voted on many questions but two really were extraordinary moments worth capturing.

In response to Prof Amin Rajan’s survey of EU pension funds, only 29% thought pension funds’ business models were more resilient in handling future crises. And 83% thought they were badly or very badly prepared for the losses that are possible as a result of runaway climate change, which is the path we are now on.

This authenticity from a large group of mainstream European investment professionals is really encouraging. The big question is ‘why?’; the bigger question is ‘what else can we do?’.

The first is relatively easy to answer. New thinking takes time to be internalised. And until new approaches are tested by events, we can’t be certain about them. But the fact that people already think new approaches won’t deal with ‘new’ systemic risks is noteworthy.

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My sense is that investment professionals intuit that the sector is approaching its own type of ‘Kodak moment’. Very successful organisations that are overly wedded to the status quo and unwilling to risk and innovate, can – like old photos – just fade away.

Looking at Rajan’s report (The Alpha Behind Alpha, 2014) with an independent mind, you sense an industry trying – earnestly – to solve problems by using the same kind of thinking used when we created them.

There is much (good) re-arranging of chairs on the deck of the Titanic but the really fundamental questions are still not on the agenda.

For example, if macropolitical and macroeconomic threats are the cause of much of the uncertainty, and that is so with climate risk, why don’t funds come together to tell politicians to do a better job? Given their presence in all countries that matter and given also their diversification – funds hold about 10% in fossil fuel companies that will be harmed should there be a disruptive change to a low-carbon development model but they also hold about 70% in non-fossil fuel companies that will be harmed by a business-as-usual approach – large investors have a fiduciary case for forceful engagement.

And to be clear, forceful engagement does not mean making anodyne statements that haven’t changed much since 2009 and a press release plus some low-key meetings. Think instead how institutional investors mobilised against the European financial transaction tax.  

The good news: we know what we should be doing. At the IPE Conference two years ago, 70% of the audience voted in favour of engaging in lobbying, and half of those were in favour of more assertive lobbying than was happening then. At this year’s event, I asked “Do you think investors have a responsibility to act vis-à-vis corporate political influence on climate policy 21% said “Yes – but only to ask for disclosure”; 60% said “Yes – and also on substantive issues” and only 17% said “No”.

The bad news is that decision-makers are still clinging to the past.  The excuses roll quickly off the tongue. We aren’t political organisations; our job is to find good investment strategies. We support organisations like CDP/IIGCC/PRI. 

But this knowing/doing gap can be closed. Step one is, as PGGM has done, to recognise that the purpose of pensions is not just to post a cheque into the retirement account of members. As PGGM puts it: “The benefits we pay are worth more in a world worth living in. We also can’t produce returns in a system that doesn’t work, so the sustainability of the financial system is a core part of what we look at as a long-term investor.”

Step two is to accept that the key to change on the scale that’s needed, and in the time that’s available, is to focus on assertive stewardship. We can’t stock pick or even asset allocate our way out of climate catastrophe.  

Step three is to resource this project appropriately – senior staff with the lobbying experience – and to ask them to develop a strategy that is fit for purpose.

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