One of the things that has always struck me as odd about the institutional investment industry is how far removed it is from knowing and understanding the end beneficiaries of pension funds. There are so many agents busy taking their slice from pension fund members’ future retirement income, with barely a thought given to who these people are and what their values and preferences might be in preparing for retirement. Having a pocket full of money is one thing, but what sort of world do they want to retire into? And what about their children, and grandchildren? If pension fund members understood that the way their retirement savings was invested could produce a solid investment return in a way that also had a positive impact on the world in which they live, how would they react? What would they want? Research by behavioural economists shows that people do place a high value on environmental issues, human rights, health and labour standards, and good governance to minimize the risk of corruption, bribery and bad corporate decision making (see Professor Alan Lewis’ book Morals, Markets and Money). So why don’t we, as part of industry best practice, ask members about these issues in designing a suitable pension fund investment strategy? The good news is that the pension fund members – the sleeping giants of the industry – are waking up. Groups such as 350.org, the Vital Few initiative, Share Action to name a few, have reached out to the wider population to engage with them on a variety of issues. Climate change is a topic that has gained particular attention, with various petitions, letters and campaigns requesting a response from asset owners. In Australia for example, a number of funds have come under pressure to reduce their exposure to fossil fuel companies (link). In response, as ri.com recently reported, Unisuper announced that its socially responsible investment option would screen out companies involved in fossil fuel exploration and production. This awakening of beneficiaries regarding their views about wider issues that will impact on their retirement future is one of the most exciting developments in the responsible investment industry for some time. If we respond to this in a positive way it could open the floodgates for change right along the investment chain. It could be the ‘push’ factor that trustees of pension funds need to take these issues to the next level in terms of priorities and action. Member engagement also goes to the core of our evolving interpretation of fiduciary duty. As with all law, interpretation evolves to reflect changing social norms and preferences.The RI specialists inside pension funds should not be afraid of this call to action from their members. Instead they should see it as an opportunity for speeding up change internally, and help in breaking down the barriers that keep their efforts sidelined. We might dress up what we have achieved inside institutions to sound bigger than it is, but I think we all know the constraints that exist and how hard it is for RI specialists to break through. That is why having the voice of the members of your fund behind you is an opportunity to be grabbed with both hands.
I propose a call to action for RI insiders of pension funds around the world to embrace the waking giant:
- Whether you are a DC or DB fund, there is a strong need to get closer to your members and understand what they think about wider issues that relate to their retirement future. One-way information flow is not sufficient; we need dialogue.
- A collaborative approach would be the most cost effective way to develop a best practice industry response.
- Collaborating with each other, for example, to design a member survey that could be used as a basis for funds to evaluate member values and preferences. Industry collaboration could also guide the industry’s best way to respond. Is it divestment through a specialist fund, more engagement with companies, new index construction and benchmarks, new investment products, a change in asset managers, a change in a fund’s asset allocation? Perhaps it is a combination of all of these activities?
- Collaborating with activist groups would also be beneficial. Some might think they are the enemy since they have stimulated pressure from members, but in fact they have skills that we need. These groups have demonstrated that they are able to reach members, gauge the public mood on these issues, and generate action. As RI professionals, our interests are aligned with them in many ways. We are all concerned about the way the market functions and would like more people to get behind the need for change.
The wall of resistance to RI remains high inside investment institutions. Rising dissent amongst pension fund members could finally help catapult us over the top to where we need to be.
Danyelle Guyatt is Founder and Director at Collaborare Advisory