Martin Skancke, the former senior official at the Norwegian Ministry of Finance who had an instrumental role setting up the Government Pension Fund, was appointed Chair of the Advisory Council of the Principles for Responsible Investment (PRI), the body which oversees the initiative, in March.
Now, in his first media interview since the appointment – and ahead of the annual PRI in Person event this week – he opens up to RI about his vision of responsible investment, the challenge of remaining relevant to signatories, the departed Danish pension funds … and even gives his take on the ‘stranded assets’ debate.
Skancke, who took over as PRI chair from former Munich Re executive Wolfgang Engshuber, was formerly Director General and Head of the Asset Management department at the Norwegian Ministry of Finance. He chaired the World Economic Forum’s Public & Institutional Investors Industry Agenda Council from 2010-2011 and was Norwegian representative in the drafting of the Santiago Principles for sovereign wealth funds in 2008. On top of that he’s a director of development institution Norfund and chair of the Norwegian government’s Expert Panel on Coal Investment.
Skancke also sits on the board at Norway’s local government funding agency Kommunalbanken and chairs Fronteer Solutions, an Oslo-based start-up. With such a body of experience there can be few people better placed to plot out the future of the 1,276-signatory body. So what is his vision of responsible investment? “Responsible investment,” he says, ”has to do with overcoming some of the shortcomings of financial markets. To make sure we address principal-agent problems in a good and cost efficient way. To make sure financial markets are useful, to make sure they direct resource where they should be directed and that they promote long-termism and stability, that they promote growth. And that financial institutions are good vehicles for managing other peoples money in a sensible way over long time horizons.
“So the role of the PRI I think is gradually shifting. In the early days of the PRI, the main focus was building awareness. I think now in the new strategy that we will be presenting next year … the focus will gradually shift from awareness to implementation, to make sure we are providing good tools to investors to address these issues.”He speaks of the “toolkit” the PRI provides to signatories, such as guidance around implementation, the Clearinghouse online engagement platform, regional networks, academic research and policy papers. “We need to make sure they are truly value adding for the signatories and helpful for signatories to implement good RI strategy. And then I think we have to acknowledge a lot of diversity in the investment community and that while some fund managers and asset owners have come very far over the last few years, others are just at the start of the journey.
“I think the challenge for us is to remain relevant to all our signatories, even as the diversity among signatories is increasing.” Given this diversity among the signatory base, Skancke uses the analogy of a personal trainer at the gym: “Joining the PRI is like getting a personal trainer for RI activities. Even world champions have a coach.”
Skancke is keen on making the most of the Clearinghouse – one of the first achievements of the PRI after the Principles were launched at the New York Stock Exchange in 2006. Skancke says it “is really about reducing the transaction cost of engagement and making sure it becomes more worthwhile because if the transaction cost is lowered then the hurdle becomes lower and I think that brings benefits to all investors”.
“We will not survive unless we provide demonstrable value to signatories. It’s not so much about adding new types of activity, rather we have to look systematically at the engagement platform, which could probably be utilized even more – and look at the barriers that signatories perceive in using that platform.”
The Clearinghouse is “something that no-one else offers, at least not as well as we do.” Skancke sees it as a key part of the toolkit the PRI offers to address principal-agent problems in the financial system to “make sure that the ‘balance of power’ between the owners and managers of companies is better than it is”.
“There is a weakness in our financial system where corporate governance in many cases is too weak and there aren’t enough checks and balances and the voice of the owners is too weak in relation to the power of the managers. This is important to get right – you can’t have owners micromanaging companies, that’s not their role. If you don’t get that right it’s very difficult to make any progress on responsible investing in general.”
Part of the rethink could also involve a different approach to its networks activity, not just based on geography but perhaps by different types of signatory across geography.
What of the PRI’s relationship with the United Nations? The initiative in recent years has morphed from being the UN PRI to the UN-supported PRI. “We are not at all disassociating ourselves from the UN – but there was a need to establish a separate governance structure. The truth is the PRI outgrew its initial home at the UN. We’ve moved away from home but we’re still very close to our parents.” Skancke says the PRI is engaging with the UN on its governance review “and they will still be part of the governance structure of the PRI”. There was a “very productive” meeting with Ban ki-moon and the other UN agencies in July to help thrash out the Sustainable Development Goals (SDGs), the successor to the Millennium Development Goals. Skancke says: “I think there was a lot of understating that there is a lot of complementarity between what the UN does and what the PRI does. One of the challenges going forward is to maximize the synergies that come from that complementarity.”
As for the SDGs themselves, Skancke observes: “This is clearly something that a lot of our signatories are engaged in and we see that there’s a lot of demand for guidance on post-2015 initiatives. So obviously there’s a role for us. The PRI is about providing the toolkit – not being proscriptive in terms of policy so much a providing a toolkit.” He stressed the PRI’s role as a facilitator, such as in the recent climate statement – but “it doesn’t mean that every signatory has to sign up to the statement”.
Perhaps the defining issue for the PRI recently, though, has been the departure of 11 Danish pension funds upset over the PRI’s own governance. Skancke says he has not met with them personally, although MD Fiona Reynolds has, as has Carnstone, the consulting firm that is assisting the PRI to revise its governance.
“I think the most useful thing at this point is to show them I can deliver something and my focus has really been on delivering on governance reform. The Danish funds have been very open about their criticisms and the issues that they have. I’ve read very carefully the submissions that they’ve made over the past year so I think I know their positions very well. The most useful thing I can do in this context is to make sure we are actively changing the governance of the PRI.”The PRI is not only revisiting its governance, but also formulating its strategy for the next few years (which will be unveiled next spring). Skancke says: “This would be a process where it would have been good to have the Danish signatories inside the PRI helping us develop the strategy and they are very welcome to come back. I don’t think there’s anything I can say that can bring them back, the important thing is what I do.” While not in any way downplaying ‘dissent’, he also sees signatory growth is “part of the picture”.
Of course, the PRI is not the only institutional investor grouping. There are peer groups such as the International Corporate Governance Network (ICGN), the Long-Term Investors Club and others. Skancke says: “Those organizations/clubs that provide value to their members will survive. I think that’s good that there’s a competition of ideas. I think it’s important for the PRI not to duplicate what others are doing but to try to find our comparative advantage and where we can add value.” Part of the strategy discussion will be to help determine the PRI’s role “in this whole ecosystem of responsible investment.”
“It’s about looking at each activity that we have and demonstrating how it adds value rather than having a very ambitious agenda in terms of expanding into new types of activity on a large scale. It’s better for us to do the things that we do well and provide real value than overreaching and doing lots of things of an average quality.”
Another aspect Skancke would like to promote is a closer relationship between academic researchers and RI practitioners. The PRI Academic Network Conference is already linked with PRI in Person in Montreal and he is looking to integrate it even more, to foster more cross-fertilization between academia and practitioners.
Given his role with the Norwegian review of coal and fossil fuel investment, Skancke’s views around the current ‘stranded assets’ debate are worth listening to. “It’s a real issue, but it’s not a new issue. You can frame it very simply in terms of simply supply and demand curves. There are two ways an asset can become stranded, one is demand falls and the second is substitution along the supply curve (that’s to say, new technology).
“The issue is, whether it is a useful guide for portfolio construction. And it’s important to realize that in equilibrium, every asset is owned by someone. In reality, not all investors can divest from fossil fuels because the assets will be there and someone has to hold them.
“So maybe a more interesting question is from a societal point of view, which investors are the best investors to hold these assets?“Have we incentivized oil company managers in the right way? If we reward them for how well they keep up their stock of reserves then maybe we’re putting too much emphasis on volume over value – and maybe that is not value creating for investors. It is an issue of engagement more than divestment.”