G20 summit backs new OECD long-term investment principles

Recommendations include supervisory changes and long-term ESG oversight by investors.

G20 leaders this weekend endorsed a series of OECD principles on long-term investment, which aim to channel institutional assets towards infrastructure and renewable energy projects to replace traditional bank funding. At the St Petersburg Global Leaders summit, the G20 chiefs backed the new report containing eight new principles aimed at the assets tied up in the US$80 trillion institutional market of pension funds, insurers, mutual funds and sovereign wealth funds. In the report, the OECD says pension funds managed over $20 trillion in assets at the end of 2012, with a net annual inflow of savings of over $1 trillion. But, it notes that only 1% of those assets were invested in infrastructure projects, with an even smaller fraction in clean energy projects. OECD Secretary-General Angel Gurría said: “The fall-out from financial crisis has exposed the limitations of relying on traditional sources of long-term investment finance such as banks. Governments are looking for other sources of funds to support the long-term projects that are essential to sustaining a dynamic economy.” The OECD says more institutional long-term financing is essential for the development of small and medium-sized enterprises and low-carbon technologies. Investors, it says, could benefit by taking advantage of long-term risk premia for exposure to less liquid assets. Such an approach, it adds, could also reduce investment turnover within portfolios, leading to fewer costs. However, it noted that the governance requirements of long-term investments could be more complex than those of traditional investments. To promote long-term investment, the new OECD principles include a series of policy incentives.Governments, it said should review their legal systems to ensure tax neutrality across different forms of finance and promote long-term pooled investment vehicles and collective retirement plans.They should also work on creating opportunities for private sector participation in long-term projects such as infrastructure via public procurement and public-private partnerships. Increased issuance of appropriate long-term debt for investment in such projects, it says, could also support asset-liability management by institutional investors and complement long-term investment portfolios. At the regulatory level, it said governments and supervisory authorities should intervene where necessary to tweak corporate governance, agency relationships, remuneration, and risk management mechanisms towards underpinning long-term investment. Solvency, accounting and funding requirements for institutional investors, it says, should avoid creating incentives for procyclical investment strategies.
Importantly, the reports says investors should calculate the performance-based elements and contract clauses of fund managers’ and senior executives’ remuneration on long-term, risk-return criteria. The report says institutions should also be able to properly identify, measure, monitor, and manage the risks associated with long-term assets as well as any long-term risks – including environmental, social and governance risks – that may affect their portfolios.
Link to OECD Principles report
Link to RI interview with Juan Yermo, Head of the OECD’s private pensions unit

Additional reporting by Nicolas Pullman