Tomorrow we will have an announcement from one of our leading DC pension plans that it is switching its default option into a fund that focusses on sustainable investments.
To mark this, we will have a special pension playpen lunch at the Counting House to be chaired by the amiably brilliant Mark Scantlebury which will ask some important questions.
What do we mean by “sustainable”?
Is the fund’s move about helping members to better outcomes or a cynical publicity stunt?
Is “sustainable investment” fine as a concept but lacking as a long-term investment strategy?
I asked these questions to my not so politically right on colleagues at First Actuarial and those who responded , responded with scorn and derision.
What do you think?
If you are in London tomorrow (Monday 7th November) get yourself to the Partners Room at the back of the Counting House pub at 50 Cornhill (2o0 yards west of bank). The Pension PlayPen lunch will kick off at 12.30 sharp and finish at 1.45pm (with some networking after).
It’s PAYE (pay as you eat) and the bill is divied up – typically it costs £15- we like to pay in cash but if you are planning to put this on expenses – you can have an individual receipt.
Let’s have a bumper turn out for this important debate.
I share your colleagues’ concerns, Henry.
A sustainable investment may be one which offers an attractive yield and reasonable prospects of growth along with capital protection, but I suspect this is not at all what the leading DC plan has in mind.
I’m unable to come up to London tomorrow, but if I had been able to join you I could have expanded on what sustainability in terms of maintaining yield at a certain rate or level means when future market prices may be flat, declining or increasing.
I would assert for starters that a 3% yield without growth is quite insufficient to maintain/sustain my purchasing power. This would seem to rule out investing all, or even many, of my nest eggs in a fixed income or even an inflation-linked security at current prices.
I really need something which may yield 3% now but which has reasonable prospects of growing that yield over time, let’s say for simple illustration at a rate of 2% per annum. What this means is that if it takes 5 years to achieve, then I would expect by year 5 to have around £3.25 of annual income for every £100, rather than just year 1’s £3.00. And if market yield levels were unchanged (which I accept is an unlikely assumption) then each of my £100s would now be worth £108.33.
If the value of the asset declines, and the unchanged coupon (which may be interest or rent or even a dividend) rises to 4% yield (ie my original 100 becomes 75), don’t be fooled by the 4%, as I am still only getting £3 of income for every £100 I originally invested, so this is not only quite insufficient in income terms, but also the prospect of a 25 capital loss is really quite, no, very, alarming.
If, on the other hand, the value of the asset increases, and the yield becomes 2% (ie 100s become 150s), I may wish to realise some of the 50s gained; indeed I may wish to reinvest some or all of the 150s into something yielding more than 2%, and attempt the same all over again (eg if £150 yields 3% initially, so I get £4.50 of annual income compared to £3.00 previously, and when the yield rises to 2% each £150 becomes £225).
But since when did leading DC (or DB) plans ever think of sustainable investment in these terms?
So instead they re-define “sustainability” in terms of some wishy-washy idea of an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.
No doubt that makes the investment managers and CEOs/CIOs feel better about themselves in the short-term, but what does it do for their clients’ capital and income requirements in the medium- to long-term? The idea of “competitive” used here suggests being/doing no worse than the next investment manager, or the next, when what clients really, really want is a satisfactory and sustainable return on their capital.
George I completely agree with you in terms of your thoughts on the interaction between yield and capital, quite a challenge in the short term.
However on the issue of ethical/sustainable investment, I guess that depends on where you believe future profits will be generated
With many current investment or passive funds, maintaining significant holdings in oil and tobacco companies will this still provide sustainable profits in the future.
Perhaps there is an element of managing future risks that you highlight after all
On corporate governance, I believe there has been sufficient high profile cases that highlight the dangers of business’s ignoring these issues.
Social impact can mean many things, some of which may not be for profit, in this case these could be ignored and left for the philanthropists.
Andy H