NSFM opinion: About forests and trees

Sean Kidney writes: Fiduciary duty for a pension trustee is about protecting the financial interests of fund members in the long term. Or, in the language of the pensions world, “maximizing risk-adjusted returns over the long term, consistent with the interests of participants”. Why then do pension funds spend more time looking at the trees rather than at the forest?

What do I mean by that? Current practice of fiduciary duty is too focused on assets - individual trees, while neglecting systemic risks - the forest. Pension funds invest large amounts of effort in asset management, to address risks and assess opportunities. Yet they invest virtually nothing in identifying and taking steps to manage systemic risks, despite the fact that a large proportion of their returns and risks are driven by systemic changes. Value destruction in recent years is clear evidence of that.

There is another emerging systemic risk: climate change. In some form or other, many pension funds now factor in climate change and related risks into their asset management, such as the possible impacts of a carbon price. But while doing so pension funds again fail to consider the systemic risks.

Governments have to take decisive action against climate change within a very short time frame (5-10 years) to have a reasonable chance of avoiding the more extreme scenarios of catastrophic climate change. Successful, coordinated global action on climate change would involve significant investment opportunity as vast energy infrastructure redevelopment is undertaken.

Should pension funds be sitting around and wait for governments to act? Or should they do as major corporations have done for years: waging education campaigns aimed at decision-makers to get them to take necessary steps?

There is an ocean of potential for governments to use their planning and regulatory powers to structure the necessary investments as opportunities suitable to the investment criteria of pension funds. What it needs are discussions between the Governments and pension funds of what would be required to make funds available to finance mitigation projects. Yet there have been precious few of those.

Even with constrained budgets, there is much room to act on systemic risks through collaboration with other pension funds. There have been a few tentative efforts, such as joint letters to government, or commissioning of reports. Yet these are only baby steps, utilising tiny budgets – and with minimal impact.

The need to refocus is there; political marketers, educators, advertising agencies are ready and waiting. All that’s needed is an appreciation among pension funds that attention needs to be paid to the forest as well as to individual trees.

Sean Kidney is Chair of the Climate Bonds Initiative, a project of NSFM. He is also Europe Manager for Climate Risk Ltd, providing consultancy services assessing climates risks and opportunities and advising governments, corporates and NGOs on how to achieve social change.

This article is part of our NSFM opinion series, in which participants propose specific steps towards real and sustainable market reform. Contributors write in a personal capacity. NSFM participants are invited to contribute to the series. Please contact Ebba Schmidt or Frank Jan de Graaf for further information.