Time to align invested interests over the long-term – overcoming the current disconnect in the corporate / pension fund value chain
February 22, 2018
Responses to some of the greatest sustainability challenges of the 21st century will require integrated thinking across the board from companies. Martina Macpherson explores a blind spot due to the current lack of alignment between workplace pensions schemes and sustainability strategies.
Public pension funds, particularly in Europe, are increasingly signing up to a sustainable investment approach, taking a variety of forms such as the use of: exclusion criteria, a best-in-class approach, the integration of climate-related, transition or environmental, social and governance (ESG) criteria in active or passive investment management strategies and thematic investments, or, last but not least, via an active shareholder policy and engagement strategy.
Sustainable investments have grown globally to US$ 22.89 trillion (GSIA, 2016[1]) and a lot of this market growth can be attributed to a welcome return to long-term investing (see also Corporate Citizenship’s Long Term Value Project workstream and report, 2016[2]), replacing a period of short-termism brought about by intense volatility post the financial crisis. Sustainable investment strategies, and the associated integration of an ESG lens, tend to show their superior return potential over the long term, as is shown by numerous studies (e.g. by Harvard Business School, 2014 & 2015[3]).
Confusion over legal obligations, a lack of integrated ESG and asset allocation guidance via the investment consultants[4] and the unsatisfactory performance of sustainable investments have often been quoted as the key reasons why most corporate pension funds do not consider sustainability criteria in their investment processes. It is the fiduciary duty of pension fund trustees to maximise returns for the beneficiaries of the fund. In that context, return has been interpreted narrowly with an exclusive focus on short-term share prices and dividends, rather than on long-term sustainable returns and stakeholder value[5].
While government pension funds around the world have started to embrace their role as long-term, universal owners[6], only a few corporate pension funds so far have started to integrate sustainability criteria into their strategic investment decision making, and this stops employees and beneficiaries from investing in funds that reflect their values. Surprisingly, not even the pension funds sponsored by companies which are rated as sustainability leaders, e.g. leaders in the global Dow Jones Sustainability Index, such as Nestlé, Marks and Spencer, Syngenta, follow through on this approach.[7]
The Dow Jones Sustainability Index has already recognized the challenge and now asks companies to provide details if their employee retirement plan offers a sustainability option in its recent annual questionnaire.[8]
Meanwhile, millennial employees are already ahead of the curve: a survey (Natixis, 2016[9]) found that 82% of millennials would like to see investment options in their retirement plans that “reflect their personal values,” and 72% said they would increase their contributions if they knew the investments “were doing social good.” And a recent study (Povaddo, 2017[10]), examining employees at Fortune 1000 companies, found that 74% of all employees working at these companies “want to invest in environmentally and socially responsible funds in their retirement plans”. Yet less than 1% of 401(k) plans include these types of funds. The same study also found that among millennials, nearly 90% said they would be more likely to “recommend their company as a place to work, would stay longer, and would be more productive” if their company offered environmentally and socially responsible retirement funds.
The disconnect between a company’s vision, strategy and (CSR) activities vis-a-vis its investor and pension scheme’s mandate(s) can pose a potential reputational and/or a business risk to the firm as a whole. Here is a key opportunity for companies to mitigate risk, and provide a competitive edge[11], on human capital management practices more generally and in the continuous pursuit of the best talent specifically.
By Martina Macpherson, Partner, Sustineri, Feb. 2018
With the help of a dedicated awareness, education and training initiative, Corporate Citizenship, Sustineri supported by University of Oxford’s Smith School of Enterprise and the Environment aim to explore the rationale for the remaining sustainable investment conundrum in the corporate pension fund industry and other disconnects in the corporate / investment value chain.
In February 2018, we are launching a brief poll followed by further in-depth research and training. We also aim to provide strategic recommendations on how corporations can better align their sustainability efforts – from corporate strategy, CSR, public affairs and investor relations to the finance department and finally within the financial pension fund strategy.
Further collaboration partners within on the corporate and the investment side will be announced very shortly.
[3] See e.g. Khan, Serafeim, Yoon (Harvard Business School), Corporate Sustainability: First Evidence on Materiality, 2015, Link: https://dash.harvard.edu/handle/1/14369106 and Eccles, Ioannou, Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance, Management Science, Volume 60, Issue 11, pp. 2835-2857, February 2014, Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964011;
[4] Investment consultants advise on the investment practices of trillions of dollars worldwide; however, many are failing to consider environmental, social and governance (ESG) issues in investment practice – despite a growing evidence base that demonstrates the financial materiality of ESG issues to portfolio value—concludes a new report from the PRI, Working towards a sustainable financial system: Investment consultant services Review, 2017, Link: https://www.unpri.org/download_report/45165
[5] For more material evidence on the importance of stakeholder value, see e.g. Clark, Feiner, Viehs (Arabesque and University of Oxford School), From the Stockholder to the Stakeholder – How Sustainability Can Drive Financial Performance, 2015, Link: https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf
[6] Universal owners are asset owners who recognize that through their portfolios they own a slice of the whole economy and the market. They focus their actions particularly on active ownership practices and active investment strategies that integrate environmental, social, and governance considerations. See Roger Urwin, Pension Funds as Universal Owners: Opportunity Beckons and Leadership Calls, Rotman International Journal of Pension Management, Vol. 4, No. 1, pp. 26-33, 2011, Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1829271##
[7] Please note that there are of course exceptions such as Novartis, and Unilever, a pioneer sustainability leader that follows a coherent responsible investment approach for its pension funds based on exclusions, engagement with the management of companies and proxy voting.
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