Legal review could drive billion dollar pensions industry to factor environmental impacts into asset analysis
By Ed King
Tough new recommendations governing the types of industries fund managers and pension trusts invest in could be released by the end of the year.
It means consultants and advisors working for pension funds worth billions may have to consider the long-term environmental and social impacts of their assets.
The study is in response to the 2013 Kay Review into financial markets, which was critical of the ‘short-termism’ displayed by many investors.
It seeks to clarify how far investment consultants should take account of factors such as social, environmental and ethical impacts, and also who should bear fiduciary responsibility for asset management.
George Latham, Managing Partner at WHEB Asset Management says what’s at stake is transparency and accountability. “At the moment fiduciaries focus on short term financial returns. However, this may not be in the best interests of beneficiaries in the kinds of long term timescales that are needed,” he told RTCC.
“If you’re in a pension scheme and retiring in 30 years’ time, are the year by year narrowly defined financial returns the right focus? A pensioner’s wider interest is also in the kind of world into which they will retire.”
Abigail Herron, head of Responsible Investment Engagement at Aviva Investors agrees. “It makes no sense that investment decisions are made in a vacuum,” she said. Current rules over who is responsible for investing are “opaque” she adds. “The lack of clarity with regard to who is subject to fiduciary duties and what they are is an underlying issue.”
Last month UN climate chief Christiana Figueres warned fund managers could be breaking the law if they continued to divert cash into oil, gas and coal companies.
She said: “Investment decisions need to reflect the clear scientific evidence, and fiduciary responsibility needs to grasp the intergenerational reality: namely that unchecked climate change has the potential to impact and eventually devastate the lives, livelihoods and savings of many, now and well into the future.”
The stakes are huge. A survey by analysts Towers Watson revealed US$14 trillion of assets were under management in the world’s largest 300 pension funds at the end of 2012.
How much of that is comprised of fossil fuel stocks is unclear, but a 2013 study by Oxford’s Smith School of Enterprise and Environment could offer a guide. It estimated US$240-$600 billion of the US$12 trillion of assets in public pension funds and university endowments was invested in coal, oil and gas.
Smaller efforts to force Universities and other public bodies to ‘divest’ their fossil fuel holdings have gained high levels of publicity but not made a significant dent into oil major finances. The Smith School study revealed campaigns by leading climate pressure groups like 350.org are making fossil free funds more common, but had little discernible short-term impact.
A recent trend from leading development banks to cut funding to fossil fuel power plants may have a more potent effect. In the past year the European Investment Bank, European Bank for Reconstruction and Development have released plans to cut or curb backing for projects linked with high carbon emissions.
Last month World Bank chief Jim Yong Kim added his voice to those calling for tougher action to cut levels of greenhouse gas levels through divestment: “Through policy reforms, we can divest and tax that which we don’t want, the carbon that threatens development gains over the last 20 years,” he told an audience at the annual World Economic Forum meeting in Davos.
Latham and Herron believe a strong message from the UK Law Commission will have knock-on effects around the world. London’s FTSE has a high proportion of fossil fuel companies that could find themselves directly affected by moves to incorporate long term risk analysis into decisions. “You’re bound to see ripple effects in other financial markets,” Herron says.
A change in UK law is currently unlikely says Latham, stressing that what he wants to see is a recommendation that “encourages” investment advisors in the right direction rather than new regulations. But he adds that simply forcing fund managers to look beyond short-term gain will not on its own be enough.
“This review is really important and a good opportunity. A good outcome has the potential to have a really significant impact, but the point the Law Commission made to us a month or so ago was that Fiduciary is not the be-all and end-all. It won’t solve everything but it’s a really important part of it.”