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Giant pension funds to snub unsustainable asset managers

The California State Teachers’ Retirement System, Japan’s Government Pension Investment Fund (GPIF) and UK’s USS Investment Management have all said they are not able to ignore “potentially catastrophic systemic risks” which arise from the focus on short-term returns.

Climate change could potentially destroy $69trn (€61trn) in global economic wealth through 2100, the trio of pension funds said in a letter published online, citing Moody’s Analytics.

The pension funds wrote that they prefer “to build and maintain relationships with asset managers” that demonstrate long-term value creation in line with their interests.

This includes integrating environmental, social and governance (ESG) factors throughout their entire investment process, voting according to their pledged mandate, and being transparent about their level of corporate engagement.

The funds pledged to work with their partners “to hold them accountable and ensure they deliver on the commitments they have made”.

Meanwhile, asset managers that are focused on the short term, ignore longer-term sustainability-related risks and opportunities, “are not attractive partners for us”, the letter stated.

In particular, the funds urged their partners and companies “to rethink their strategy and enhance their disclosures, using frameworks such as the Task Force on Climate-related Disclosures, regarding their interactions with stakeholders, society and the environment”.

Purpose of the corporation

The wider stakeholder approach is also gaining traction at companies in the US.

In August 2019, the Business Roundtable, an association of chief executives of leading US companies, redefined the purpose of corporations, saying it is to benefit all stakeholders – customers, employees, suppliers, communities and shareholders.

Alex Gorsky, chairman of the board and chief executive of Johnson & Johnson and chair of the Business Roundtable corporate governance committee, said: “[The statement] affirms the essential role corporations can play in improving our society when chief executives are truly committed to meeting the needs of all stakeholders.”

“By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers,” said Bill McNabb, former chief executive of Vanguard.

Leadership

Commenting on the letter from the pension funds, Fiona Reynolds, chief executive of the Principles for Responsible Investment, told Expert Investor: “Asset owners must step up the pressure by ensuring that the investment managers to whom they give mandates are committed to long-term, sustainable investment strategies.

“Managers that don’t make this commitment will increasingly find that they are not the partners of choice for pension funds.”

As an example, Reynolds pointed to the Net-Zero Asset Owner Alliance, an international group of institutional investors representing over $4.5trn in assets under management and convened by the United Nations.

The alliance has committed to transition their portfolios to net-zero greenhouse gas emissions by 2050.

“The more that asset owners demand this same level of accountability from their managers, the more the financial sector as a whole will benefit,” she added.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.