The latest in RI’s market overview series.
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In December this year (2nd-13th), Chile will host the 25th session of the Conference of the Parties (COP25) to the UNFCCC. The event has already prompted high-level political response. Felipe Larrain Bascuñán, Chile’s Finance Minister, is co-heading with Finnish Finance Minister, Petteri Orpo, a new initiative dedicated to developing best practises for finance ministries globally on sustainable finance, with some 15 countries represented. The action accompanies a number of initiatives that have been bubbling away for a few years, which when viewed together create a picture of a market developing as one of Latin America’s biggest potential movers on responsible investment.
In February this year, AFP Cuprum became the first Chilean pension fund to sign the PRI. Its owner is Principal Financial, the US pensions and investments group, a Fortune 500 stock and parent of US$412.7bn fund manager, Principal Global Investors, also a PRI signatory.
The sign-up has been a responsible investment boon; previously Chilean pension funds were doing little to nothing on ESG.
Chile’s pension fund system is part of the liberal economics experiment of the early 1980s when the previous public pay-as-you-go (PAYG) system was switched to a huge defined contribution (DC) system of individual accounts run by private pension funds. Today, there are 6 major pension fund players; five owned by US financial services companies, the other by Gruposura from Colombia. Pension funds can invest 20% of their assets directly and 80% must be outsourced to fund managers. To date, just two asset managers in Chile have signed up to the PRI. Moneda Asset Management, the $9.4bn Chilean funds house, was the first in September 2018, followed in December that year by LarrainVial Asset Management, the $6bn fund manager.
Recent law changes have enabled Chilean institutional investors to allocate to alternative assets such as private equity, commodities and real estate.
However, in the last few years the system has come under fire because poor returns are not providing sound retirement levels, while pension charges rates for the providers and managers have been high. There have been demonstrations demanding re-nationalisation of the system and the suggested creation of a state-owned pension fund as a low cost provider.
What’s not in doubt is the heft of the pensions market: it represents some 70%+ of Chilean GDP at circa $200bn.
Under former President, Michelle Bachelet, the left wing leader from March 2014 – March 2018; and herself previously President from 2006 – 2010 (Chilean Presidents are not allowed consecutive terms) the country’s pension fund regulatory body was looking closely at ESG issues and thinking about asking pension funds to demonstrate their approach to sustainability issues in investment research. RI reported at the time that the Financial Committee of Chile’s Ministry of Finance was analysing responsible investment best practice for its two sovereign wealth funds: the Pensions Reserve Fund and the Social Stabilization Fund, worth $9bn and $14bn respectively.
That seemed to cool following the December 2017 election of Sebastián Piñera on the political right, another former President from 2010 – 2014, who took the helm again in March 2018. Piñera was elected on a ticket of cutting corporate taxes with the aim of doubling economic growth and reducing poverty. Piñera has, however, committed to accelerating the decarbonization of the Chilean economy. Last year, the Chilean energy sector pledged not to extract any more coal as the fuel for electricity.
A major cross-political sustainability success story has been the growth of renewables, which has reached
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