Abstract
The potential of Responsible Investment has to be seen in relation to its mission: to act in ‘the best long term interest’ of savers and investors, to preserve their capital over the long term and in a way that ‘aligns with the broader objectives of society’, as stated in the Preamble of The UN Principles of Responsible Investment (UNPRI).1 This body places environmental and social issues at the center of the commitments its signatories pledge to uphold. Thus, it is fair to ask: have the pension funds and asset managers who have signed onto the UNPRI performed any better than other investors as regards upholding the best long term interests of their beneficiaries? In this chapter I want to compare the reality – how the RI community has actually behaved – relative to how it should have in the current crisis, and in the context of ‘the broader objectives of society’. My aim is to propose a number of measures that would help bring the reality of RI closer to its potential. I start with a quick summary of what the crisis is about, in particular to underline how it has negatively affected the interests of savers as regards their income, employment, and preservation of their savings. And to remark how little RI has done to prevent this.
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Notes
- 1.
In early 2005, the United Nations Secretary-General invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI). Individuals representing 20 institutional investors from 12 countries agreed to participate in the Investor Group. The Group accepted ownership of the Principles, and had the freedom to develop them as they saw fit. http://www.unpri.org/about/ The author of this paper was Co-Chair of the Expert Group that drafted the PRI.
- 2.
Jobs loss in the US in this recession exceeds job losses of all post WW2 recessions. See Calculated Risk 2010. Worldwide unemployment reached 212 million people in 2009, the highest ever and an increase of 34 million unemployed people over 2007 (ILO 2010).
- 3.
Vs. the record $17.5 trillion plunge in US household net worth since the recession started at the end of 2007 through first quarter of 2009, and the loss by US pension funds of about 1/3 of their assets. ‘Though the pensions’ assets [of the 100 largest US pension funds] gained an average of 9.12% over the last 12 months, their funded status fell by a total of $68 billion and their funded ratio dropped from 93.8 to 75.0%.’ (Milliman 2009).
- 4.
Government services have been devastated in 2009 and beyond, along with taxes: ‘The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections. The Great Recession hit virtually every single source of tax revenue.’ (Rockefeller Institute 2010)
- 5.
This paper was written at the end of 2009, with some additions in early 2010. 2009 saw the worse recession in the UK in 88 years. I subscribe to Joseph Stiglitz’ and Paul Krugman’s view that the inventory boost now taking place in Q1 2010 will be a passing blip in this sad story.
- 6.
In the most recent past, the very highest earners did very well indeed, capturing almost three-quarters of total income growth in the economic expansion of 2002 to 2006, while the remaining 99% of the U.S. population split among themselves the final 25% of the increase. (White House 2009). During expansions, most of the income growth is captured in the US by the top 1%, whereas in countries like France income is distributed more fairly. Thus, while average real incomes in the US grew by 30% from 1975 to 2005, whereas in France by 19%, if the top 1% is excluded, average US real incomes grew only by 16.5% during the period while average French real incomes grew by 19.7%. In other words, the ‘better’ macro economic performance of the US was appropriated by the top 1% of the population with the remaining 99% of US families receiving less than the French (Atkinson et al. 2009).
- 7.
The Group was supported by a 70-person multi-stakeholder group of experts from the investment industry, intergovernmental and governmental organizations, civil society and academia. The process, conducted between April 2005 and January 2006 involved a total of five days of face-to-face deliberations by the investors and four days by the experts, with hundreds of hours of followup activity. The Principles for Responsible Investment emerged as a result of these meetings. As a fund manager, in 1989 I launched Scandinavia’s first environment fund, MiljøInvest, investing in pollution control tech stocks; in 1996, I launched one of the first global sustainable development Best in Class funds, Storebrand Scudder Environmental Value Fund; in 1994 co-founded the UNEP Finance Initiative and its Asset Management Working Group; in 2006 Co-chaired drafting the PRI; in 2009 helped launch the Natixis Impact Climate Change fund and now chair its Scientific Advisory Committee.
- 8.
The UN Secretary-General pays homage to the UN PRI (see www.unpri.org) but neither the EC, the OECD, or the SEC have made moves to establish RI performance standards beyond the UK’s and other country’s measures requiring pension funds to declare whether they have an environmental, social or governance investment policy and if so to describe it.
- 9.
Tracking error measures the dispersion of a portfolio’s active return, which is the difference between the portfolio and bench-mark returns.
- 10.
Since December 1999, a typical 60/40 — equity/bond portfolio in the US would have recorded the lowest average annual returns since the 1940s at about 1.4%. Adjusted for inflation, it was the worst decade since the 1970s. Wall Street’s S&P500 index is set to record its first negative decade — down 24.6% since 1999. It remains in the red to the tune of 9.8% even when dividends are reinvested. And if you happened to be an unhedged investor from overseas, you suffered a double whammy. The dollar lost some 23% against a basket of the most traded world currencies. (Dolan 2009)
- 11.
As an asset manager and investor, the efficient markets hypothesis never made sense to me, as it explains nothing about how prices are actually set in the stock market. Kristian Falnes (2010) of Skagen Fonds, probably the best performing active asset manager in Scandinavia, simply says: ‘The market is always wrong’. Soros has a similar view, based on his theory of a dynamic reflexivity between perceptions and reality. The CEO of the Norwegian Government Pension Fund, Yngve Slyngstad, is also quite skeptical of passive investing.
- 12.
Despite being saved by the government, the bailed out banks have since then consistently lobbied against banking regulation aimed at avoiding repeated crises, such as the Consumer Financial Protection Agency and the proposed tax on the super profits of bailed out banks.
- 13.
Nouriel Roubini was the most vocal, but at least a dozen other top economists gave strong and timely warnings, such as Kenneth Rogoff, Raghu Rajan, Nassim Taleb, Hyun Shin, William White, Gillian Tett, and Paul Krugman. Roubini references them in RGE Monitor, 1 May 2009.
- 14.
Slavoj Zizek: ‘...our everyday dealing is controlled by what in psychoanalysis we call the mechanism of fetishist disavowal. ‘Je sais bien, mais quand même...’ ‘I know very well, but...’ You know, we can know very well the possible catastrophic consequences, but somehow you trust the market, you think things will somehow work out, and so on and so on. It’s absolutely crucial to analyze this, not only in economy, but generally.’ (Zizek 2009)
- 15.
The investment process and its results can be accessed at http://www.am.natixis.com/climatechange/eng/index.htm
- 16.
The actual text: ‘All that can be required of a trustee to invest is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.’
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Joly, C. (2012). Reality and Potential of Responsible Investment. In: Vandekerckhove, W., Leys, J., Alm, K., Scholtens, B., Signori, S., Schäfer, H. (eds) Responsible Investment in Times of Turmoil. Issues in Business Ethics, vol 31. Springer, Dordrecht. https://doi.org/10.1007/978-90-481-9319-6_12
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