The impact of popular slogans seems to be waning

Janette Weir reported on work commissioned by the DC Investors Forum on the impact of Covid on members of workplace pensions. You can read LIVING WITH COVID: TRACKING MEMBERS’ VIEWS ON RESPONSIBLE INVESTMENT  here

 

Given what we now know about members’ general attitudes and behaviours, it is perhaps not surprising the concept of responsible investment aligns well with how they would want their pension money to be invested, with seven in ten members (68%) still saying that responsible investment is of interest to them, up from to 61% in 2018. Despite the economic turmoil of the last year, It is heartening to see that interest has not waned.

That said, the number of interested members does appear
to have peaked, suggesting there could be a core of
around 30% of members who will never be particularly
interested in having their money invested in this way.

Looking at member interest in responsible investment
in more detail, we find that in 2021:
• Men are still more interested than women
• Interest increases once pot size reaches £20k
• No significant changes to last year, except the
number of men and the number of 55-64-year-olds
who are not interested at all has nearly doubled,
albeit from small baselines (4% to 8% and 7% to 14%
respectively

I feel very differently about these charts . Given that there is now almost universal acceptance that this country is going to have to give up its cars, gas boilers and meat eating to meet its climate change targets, it is very surprising that people are not more interested in “responsible investment” and that there has been no significant increase in the past three years.

These numbers suggest to me that Joe and Joanne public are  unimpressed with the idea that they can make their money matter despite being prepared to pay a greenium for almost everything on their shopping lists if there is clear evidence the extra money is a worthily spent.

People need to see clear evidence of what they are paying as a “greenium” and what they are getting as the “impact” of that payment”. Until people can see what they are giving up and what they are gaining from ESG, it remains just a “good idea”.

Can pension schemes make a difference?

My answer is that pension schemes can’t change the world, but they can navigate a changing world to best advantage.

To quote a friend of mine who does not work for an asset manager but does work for a pension scheme

“pension schemes can’t report an impact, they can only really report the impact of the firms in whom they invest”.

The agents of change are not the pension schemes (who own the assets) but the asset managers – or more particularly the executives downwards who actually do the work.

Infact, pretty well all that is left for pension schemes to do is to report on progress. They can be praised or reviled for picking investments which are or aren’t progressive but the only proper measure for “impact” – is the measure of improvement in the behaviors of the investments.

Even then the pension schemes are only a little influential unless they are the majority owners of the investments. This latter point was made me by a private markets sales person last week, Private Equity takes majority positions in companies so can be more influential (he says). I’m not sure I believe all the claims of private markets but I can see that majority ownership brings opportunities.

This skepticism from people on the inside of the argument is mirrored by skepticism by people on the outside. I spend a lot of the time in the City of London and as night draw in closer , I see how little energy saving is going on in these fund management and banking houses.  During lockdown, the exterior lighting of BNY Mellon, which is outside my house, remained on 24/7. There was no-one who fixed this for over half a year. On the inside, BNY Mellon talks a good story but talk to locals to QV62 and you get a different story about their “outside”.

You might consider this a cheap shot  (it is) . But people are cheap as chips when it comes to being chippy and they are right to be. The evidence of their own eyes counts for something,

Now consider these rather more sophisticated arguments made to me last week by people who think hard about these things

 how you can measure “how much good your pension is doing”. How you would measure actual impact, which is reducing Green House Gasses for climate change?

• Lowering the cost of capital for some greener investments by buying more and raising the cost of capital for redder investments – I think it should be possible to measure the marginal impact of a scheme buying more equity belonging to a firm, or buying more bond issuance. But I think it will be extremely complicated and sensitive to the size of the investment.  So feasible, but as I say, hard.
• Making an investment go ahead which would not have otherwise done so [or stopping an investment from going ahead by not buying it] – I think we’ve sometimes kidded ourselves that a scheme buying into this or that infrastructure project or buying this or that bond is having an impact as they are making an investment which would otherwise not have happened….There’s “additionality”.
• But on reflection my tentative view is that this can’t be right. It’s only you buying the investment that has stopped someone else making it. You have no way of knowing whether someone else might have bought it at the same price. I think it’s risky to ever assume true additionality in the financial markets. Again, you might have bought it at a lower rate of return than someone else – and therefore lowered their cost of capital – but that’s the first category again.
• Engaging with firms to get them to change course – Kolbel et al show that there’s quite a strong correlation or presumed causation between engagement/voting and change. But I think if you were trying to measure that or attribute it to a particular asset manager or pension scheme you wouldn’t be able to do it. Success has many mothers, as the saying goes! So you can identify success, but I don’t think you can measure it or say “that fund or scheme was impactful there.”
• Engaging with Government to get it to change course – same as engaging with companies.

So measures of “how much good am I doing?” are either too incalculable (changing the cost of capital), unknowable (additionality) or knowable but unattributable (stewardship).

If you can’t measure it…..

If you believe that there is no performance measure on how you are doing on making an impact, then it doesn’t exist.

Of course we can and do measure the performance of assets and can do so relative to benchmarks. But how much of a fund’s performance is attributable to managing the risks of climate change, social change and of poor governance is harder to measure.

I’m coming to the conclusion that the only proper measurement is the rate of progress achieved by a pension fund in holding investments that do good things. This we can do by using backward looking measures such as TCFD and watching trends. If we want a benchmark it is either the scheme’s specific target in reducing its carbon footprint (for instance).

Put another way, if a successful investment strategy is to buy low and sell high, shouldn’t we be looking to buy into stocks which offer growth or are under-valued and shouldn’t a pension fund be providing the capital to achieve progress, rather than compete to buy stocks which are already “clean and green”?

So, for a scheme adopting a “buy and hold” strategy, success could be measured by the improved impact of the asset for  its E, S and G. While a scheme that just swaps assets with low ESG for those with high ESG may struggle to achieve additional value, having bought into the dream at outset. The greenium for purchasing a carbon neutral stock today may not provide value for money.

Backward measures are limited in telling us what is happening in the future, but where a pension fund is sustaining its investment in productive capital, they do at least monitor the direction of travel. Accountability does breed responsibility.

What can a pension scheme realistically do?

Schemes that opt to become carbon neutral today are setting the bar pretty high. Several progressive schemes are taking such an approach.

The issue for such schemes is that the greenium they are paying today may impact on member outcomes which matter to a skeptical public. By buying into a de-risked portfolio, are you limiting your potential for growth.

In marketing terms,do such schemes risk being labelled “niche players ” in a market where a “niche may be a tomb”?

Coming back to my erudite correspondent’s comment.

measures of “how much good am I doing?” are either too incalculable (changing the cost of capital), unknowable (additionality) or knowable but unattributable (stewardship).

Will the public give credit for the effort that certain schemes are putting into adopting ESG friendly strategies? More fundamentally, are these strategies doing any good or are they just changing the cost of capital, competing for assets others would have bought or kidding themselves that they are being listened to.

I would be very interested to hear more from key thinkers about where pension schemes can contribute “added value” and how this is done. Until I am convinced, I will remain an enthusiastic skeptic, which is where I suspect Jo and Joanne public are today.