PRI Academic conf.: Pensions expert Ambachtsheer’s four-point plan for responsible investment

Responsible investment needs to focus on four areas where it hasn’t done enough yet to move it towards a goal of long-horizon investing if it is to become mainstream, Keith Ambachtsheer, the pensions expert, has told this year’s PRI Academic Conference in Paris. In a keynote address, Ambachtsheer, Director of the Rotman International Centre for Pension Management (ICPM), and an advisor on pensions to governments and institutional investors for almost three decades, said large asset owners were the constituency that would drive long-horizon investing forward. There were four subjects he thought were still missing from the collective endeavour that could lead to structural change in pension fund activities that would better reflect the two clear needs of asset owners: long-term wealth creation allied with short-term payment certainty for retiring members. The first was a common framework for assessing the effectiveness of boards at investee companies. This, he said, would probably be a combination of management guru Peter Drucker’s ‘common sense’ questioning of executive performance allied with more detailed organisation design tests of the like developed by Elliott Jaques, the Canadian organisational psychologist. The second area was a common incentive comparison protocol whereby investors take a more standardised approach to the base and variable pay of executives over a relevant timeframe: “Investors haven’t really collectively got to grips with this so far and so the interventions on say-on-pay haven’t been a good story to date,” he said. A third area was a meaningful and effective principal/agent dialogue between investors and corporations.
Ambachtsheer said he expected to see some major initiatives on this in the next year given that governments were pushing for it. The last area of engagement was research and development on the effectiveness of the existing mechanics and strategies of institutional investment, given the tendency “to do what we’ve always been doing”, which Ambachtsheer was often at odds with what was best for long-term pension beneficiaries.In a separate panel, Bernard Icard, Head of Equity Proprietary Investments at the €270bn Caisse des Dépôts (CDC), the French sovereign wealth investor, said the Caisse often held companies for 7-8 years, and for much longer in French firms (20-30 years), therefore good corporate governance decisions and engagements were vital. He said the Caisse’s portfolio managers had ESG factors as part of their bonus structure and were obliged to put some ESG questions into their engagement discussions with investee companies: “We leverage our contacts at the COO level, the decision-making level, and then follow up with the ESG professionals on topics of interest/concern. It’s particularly important that the dialogue with companies on engagement is a good one because often we want to talk with them informally about non-controversial issues.” Laura Berry, Executive Director of the Interfaith Center on Corporate Responsibility (ICCR), which represents faith assets of $120bn, said that engagement on ESG issues paid off in the long run, even it was often difficult to begin with: “We started out as adversaries with companies but increasingly they’ve come to see us as information sources. I see us being in the business of justice arbitrage and our way of looking at the world often flags up major issues in advance. In 2003 we filed six resolutions at financial services companies to ask them to look at their underwriting policies….and we know how that turned out!”
Tessa Hebb, Director at the Carleton Centre for Community Innovation, said that while engagement was now a preferred strategy of investors, there was need for further academic research on its effectiveness. She added that the investor/corporate ‘principal/agent’ relationship also needed further exploration on questions such as shareholder power and company responses to stakeholder/shareholder pressure. The three-day PRI–CDC Academic Network Conference runs until November 15, including a first day that was dedicated to PHD research on ESG-related topics, followed by subsequent days looking at the intersection between academic research and investment practice.