Pension funds advised to collaborate on stranded assets – Rotman/Generation workshop

Conclusions drawn from high-level event last month

Institutional investors should seek out effective collaborations with like-minded organizations to manage the risk of ‘stranded assets’, according to participants at a recent high-level workshop organised by Canada’s Rotman International Centre for Pension Management and Al Gore’s Generation Foundation.

The rationale is that climate change is a “global problem requiring global action” and multiple perspectives. “Effective collective action will require multiple players (e.g., legislators, regulators, NGOs, investors),” it was stressed. Individual institutions are advised to undertake in-house projects to raise the understanding of the stranded asset risks issue at both board and management levels.

This was the output from a session on stranded assets led by Bob Litterman, the former Goldman Sachs partner and co-developer of the Black-Litterman asset allocation model, and Mark Fulton, the former head of research at DB Climate Change Advisors at Deutsche Bank. The pair focused on the potential impact of climate change on asset pricing in public markets. Their presentations are available here and here.

“So the workshop participants’ recommendation to consciously choose to raise the level of own-organizational awareness and understanding of the issue as a first step is right on the mark,” said the event’s moderators, Rotman Director Keith Ambachtsheer and Maastricht University Professor Rob Bauer, in their report of the event. They called the session a “challenging, difficult discussion”.

“Also, logically, for any pension organization to collaborate effectively with others on climate change issues, it must develop and adopt a clear organization stance for itself first.”

The event – Sustainable Capitalism – took place on June 4-5 and debated Gore and his Generation Investment Management partner David Blood’s 2012 Sustainable Capitalism white paper which proposed five action steps for asset owners, asset managers, and companies.Another session on ‘promoting constructive investor behaviour’ was kicked off by Jane Ambachtsheer, Global Head of Responsible Investment at consultants Mercer and Sir George Buckley, the former 3M chief who chairs Ownership Capital, the new boutique set up by former PGGM Responsible Equity head Alex van der Velden.

This session looked at Gore and Blood’s suggestion that companies could issue some form of ‘loyalty reward’ such as extra voting rights or dividends to long horizon shareholders. The session found that research suggests this was “likely to be problematic” in fostering long-term investing. The session instead suggested that investors apply “concentrated, long horizon investment mandates”. The idea is that: “ Our own longer term thinking will support longer term thinking in our investee corporations.” It was agreed that this would “constitute a major step towards the sustainable form of capitalism” envisioned by Gore and Blood.

On the collaborative level, it was suggested that a ‘model investment mandate’ could be developed through an organization like the Rotman Centre, although there was no mention of the existing “model mandate” work by the International Corporate Governance Network.

The event also featured sessions on integrated reporting (George Serafeim and Anita McGahan), quarterly earnings guidance (Judith Samuelson and Eric Wetlaufer) and executive pay (Roger Martin and Stephen Brown).

Rotman’s Ambachtsheer and Bauer said one attendee observed that “the ‘real world’ and ‘responsible’ investor crowds usually live in parallel universes, attending separate events often designed to re-enforce their own strong pre-conceptions”.

They concluded that pension organizations “must walk the talk themselves if they are to be credible collective action mediums”.