I’d like to give everyone the chance to tell me how they’d like their money managed. Here is Mark Carney explaining in banker’s words why he would like people to think about climate change when managing all of our money
“There are three broad channels through which climate change can affect financial stability: Physical risks: the impact today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events…
Liability risks: the impact that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible… the hardest;
Transition risks: the financial risks that could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.
In November, our country signed up to an agreement in Paris that means that managing climate change is now at the heart of what we are doing, it’s becoming part of our DNA and to ignore it – especially when investing for events in the distant future – like old age – seems crazy,
But there are still many people who think that Environmental, Social and Governance (ESG) is for cranky greens opting out of society.
For me ESG is about opting in not out which is why I am disappointed that of the 17 reports into the Governance of our Workplace Pensions, I have read in the past four weeks, only one mentioned ESG at all!
I am like Mark Carney, I want someone keeping an eye out for the risks he talks about.
But it’s more than just the risk I want to know about. I’m keen that the money I’ve saved over the years is invested with a clear philosophy and with a social purpose. I’d like to think I have values that are in line with the long-term interests not just of the planet, but of my fellow human beings. I don’t want my money propping up Governments that torture and kill, I don’t want to invest in projects that flood people’s villages and I want to stay clear of companies that pay no heed to the interests of staff and shareholders.
It’s not just that I’d like a kinder fairer cleaner society, it’s that I cannot believe that thieves prosper and that there is a long-term future for tyrannical regimes or reckless environmental policy. Investing in companies that grease the palms of management while risking the shareholder’s dividend and underfunding staff’s pay packets and pensions is not for me.
But sadly, I cannot report on one workplace pension default that I have found that has a clearly implemented ESG strategy. I’ve only looked so far at the insurance companies and I was pleased to read Paul Todd of NEST saying
“Increasingly there will be more clients like us who have 20 to 50-year investment horizons and need to manage risks that are likely to materialise over these kinds of time spans.”
NEST actually has an ESG strategy which it publishes here But NEST can only manage the managers of your money, it does not have the opportunity to directly exercise voting rights but has to try and influence the policies of the asset managers it employs.
Infact this is a problem for almost all of the master trusts since they do not have sufficient assets to invest directly into the market. The exception is NOW, but even now can exercise little control over the companies into which it invests as it does not buys shares directly but invests in “equity futures” that carry no voting rights. For a serious but brief study of the responses, have a look at the Manifest blog on the subject.
These are some of the reasons for the really poor scores of all the workplace pension providers in Share Action’s recent survey . Others include a failure to properly complete the paperwork (Royal London)! For a serious but very funny study of the responses, have a look at the Manifest blog on the subject.
Reasons to be cheerful?
When you ask the workplace pension providers in private, what they are doing about ESB, they look at you like you were a hippy. They are so busy keeping up to date with the flood of applications that this stuff is Championship if not Division 1/2 stuff.
But this is changing. Organisations like Manifest and Share Action are raising awareness and the investment arms of Standard Life, Aviva and L&G are making all the right noises. If is surely only a matter of time between now and a point where the IGCs of these insurers swing into action and ensure that good words are translated into good actions.
The cost of good governance in this area is not so great that it cannot be incorporated into existing default strategies.
In a recent report on ESG, Clear Path Analysis ask whether passive strategies can properly address ESG. Huib-Jan de Ruijter, A Dutch investor points out that an indexed approach can become an ESG strategy without fundamental change to the underlying assets
The interesting developments that I see in this space are the emergence of low carbon indices which could play a role … We see some people using an overlay strategy which isn’t so much to do with climate risk but more on the impact side. They are using overlay strategies to assess whether to buy into green bonds or forestry which has a huge impact in terms of climate change .
“After all, this is still a topic that is in its early stages of consideration for most pension funds and it is an area that will evolve. ”
I don’t think we have a minute to waste. If we are ever to get young people to invest long-term, then they need to relate their investments to how they’d want their money managed.
For those under 30 in particular, the social issues within ESG are really important. Organisations that show they are serious about the kind of issues that Mark Carney talks of as well as the more established issues around executive pay , that could make a difference.
In case anyone in marketing doesn’t think these things get read, here is LGIM’s latest quarterly video and report