The purpose of responsible investment – is the ambition level rising?

There are intriguing signs that pension funds are becoming more ambitious and more holistic in their thinking about responsible investment (RI).

A few weeks ago the two of us ran a masterclass session on responsible investment for trustees at the British Columbia Pension Forum – the annual event that SHARE has been organizing now for 13 years. We focused on governance – i.e. how best to set up and oversee an RI programme.

Knowing what your objectives are is always central to good governance – and RI is no exception.  We therefore devoted a lot of attention to trustees’ investment beliefs – the high-level statements about markets, how they work, how to invest in them, and a fund’s own capabilities and resources that are now widely recognized as crucial for good pension fund governance. Investment beliefs are not themselves statements of objectives – but they are good underpinning for them.

Of course a pension fund’s investment beliefs by definition cannot be imposed from outside. They have to arise organically from within, through thorough discussion on the fund board and between the board and staff (sometimes with support from advisors). Nonetheless, we thought it would be interesting to ask participants to look at four existing investment belief statements on RI and sustainability, from around the world. We asked people to vote according to which statement most closely matched their own views – whether they already had formal investment belief statements or not.

Here are the examples we used:

A sustainable, viable world is necessary in order to generate sufficient returns over the long term. …Making sustainability an integral part of the investment policy therefore contributes to returns over the long term. (PFZW, Netherlands).

LGS is long term in nature, and the long term prosperity of the economy and the wellbeing of members depends on a healthy environment, social cohesion and good governance of LGS and the companies in which it invests. (Local Government Super, Australia)

Good governance is good business and contributes to sustainable values. We continually consider all risks in our investment process, including those relating to environmental, social and corporate governance factors. (Ontario Teachers’ Pension Plan)

Being a responsible owner and investor can both protect and create value. (AP2, Sweden).

The winner in our informal poll, by a considerable margin, was ….. Local Government Super. We find this truly intriguing. Believing that long-term economic prosperity and the wellbeing of your members depend on a healthy environment, social cohesion and good governance of your fund and its investee companies is very different from just believing that environmental, social and governance (ESG) issues can be relevant to individual companies. Firstly, it raises ‘ESG thinking’ to the level of your whole portfolio. And secondly, it extends the boundaries of your concerns as an investor beyond just financial returns to the health of the environment and the society into which they will retire.

A portfolio-level approach to sustainability has been emerging slowly but surely over the last few years, in particular in response to the mounting evidence of the implications of climate change. A steady stream of research has highlighted the economy-wide – and therefore in all probability portfolio-wide – impacts of temperature rises in excess of 20C.  Attention is also increasingly focused on the systemic implications of issues such as water scarcity, food security, inequality and biodiversity loss (e.g. threats to pollinators).

In his Keynote address at SHARE’s Pension Forum, Hugh O’Reilly, CEO of OPTrust, one of Canada’s largest pension plans, called for responsible investment to be a fundamental part of pension management, not a frill or an add-on.

Acknowledgement that pension beneficiaries’ interests embrace not just financial security but also environmental and social quality and that these are legitimate concerns for pension funds too is also growing. The leading fiduciary duty specialists Ed Waitzer and Douglas Sarro argue that ‘the duty of loyalty requires fiduciaries to take proactive steps to invest (and encourage investment) for the long term, in a way that serves the best interests of their beneficiaries. This means charting a course for investment that takes account of important social and economic challenges, including effective corporate governance, human rights, and sustainable development.’ The CEO of the UK pension fund-owned Hermes Investment Management, Saker Nusseibeh, contends that the purpose of investment is not ‘dry nominal returns’ but also ‘future wellbeing’ – including environmental and social issues.

Asset owners continue to differ widely in their approaches to responsible investment (just as they differ widely in many other respects). Levels of attention and ambition range from high to low. But the ranks of those putting sustainability at the forefront of what they do, exploring the portfolio-level implications of ESG issues and thinking beyond the conventional boundaries about their responsibilities towards their beneficiaries are growing.

Rob Lake, Independent Responsible Investment Advisor
Shannon Rohan, Director of Responsible Investment, SHARE


Edward J. Waitzer and Douglas Sarro – Fiduciary Society Unleashed: The Road Ahead for the Financial Sector

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