INSIGHT by Nikolaj Pedersen, senior researcher in PRI’s sustainable markets department
| Many jurisdictions currently work on ESG-related standards aiming at leadership in the field. What impact do you expect from the competing standards, and what will it mean for asset owners in terms of ESG investing efficiency?
The proliferation of new ESG-related standards is a consequence of policymakers attempting to address market failures and ensure that the norms and practices of the investment industry are not carried out to the detriment of policy objectives in relation to social and environmental challenges. Understandably institutional investors operating in global capital markets have an interest in promoting consistency and alignment across jurisdictions. At the PRI, we aim to support this priority through engagement with investors and policymakers.
We seek legitimacy, to the extent possible, in standards that have been internationally agreed, such as the Paris Agreement, the UN Guiding Principles on Business and Human Rights and the Sustainable Development Goals. We encourage policymakers and market practitioners to align their activities and approaches with these standards to ensure clarity, minimise cost associated with for investment institution and allow consistency and comparability for international firms.
| PRI released the report In Search of Sustainability: Private Retirement Systems in Australia, the United Kingdom, and the United States recently. Could you please elaborate on the key-findings and current developments?
Structural characteristics are a very strong determinant on the extent to which plan boards and managers are able to be responsible investors, active stewards, and allocators of capital to economic activities with desirable social and environmental outcomes. In a time where policymakers in most major jurisdictions are adapting financial sector policy and regulation to facilitate the transition to a low carbon economy – for example through sustainable finance initiatives – our research highlights that market structure aspects needs to be simultaneously addressed to be successful.
For the most part, the weight of capital and influence of actors in private retirement systems has shifted away from institutional asset owners that undertake investment strategy, asset allocation and manager selection on behalf of beneficiaries. It has gravitated towards financial service providers, who have assigned responsibility to individuals to determine their own investment strategies. The strong growth in personal pension assets, relative to other segments of the retirement systems assessed – Australia, the UK and the US – illustrate this point.
Adding on top lack of concentration of assets – in particular in the UK and US – the result is national retirement systems where savers and plans lack the resources, knowledge and influence to demand that external service providers – who are not the key agents in the investment chain – deliver products and services that integrate sustainability in an affordable way.
| The report discusses structural challenges like asset managers and consultants lacking initiatives to deviate from the ‘norm’ despite having extensive resources and knowledge and often being better placed than retirement plans to drive responsible investment and stewardship. What is the role of asset owners in tackling this challenge and how can PRI support them?
Asset owners, in theory, have the ability to influence the extent to which sustainability is considered in financial markets through their product demands and mandate design. The challenge arise when the retirement plans and pension funds which, in practice, have the necessary resources, knowledge and influence to shape financial service delivery represent only a minority of overall retirement assets.
In such a structural landscape where the relative share of influential retirement plans is diminished, asset managers and other service providers will have fewer incentives to address systemic sustainability issues. This will impact the sustainability of the financial system overall. Smaller retirement plans and retail investors – including personal pension savers – with limited resources and bargaining power will be particularly disadvantaged.
That being said, asset owners including retirement plans are at the top of the investment chain and play a key role. Particularly organisations with a universal ownership outlook – organisations who own the externalities of their portfolio companies as they hold a cross-section of the economy through diversified, global and long-term portfolios – are critical. They will have an interest in reducing the economic risk presented by sustainability challenges to the market to improve financial performance overall and therefore need to consider sustainability issues and long-term investment horizons.
Nikolaj Pedersen is a senior researcher in PRI’s sustainable markets department. His research focus on the functioning of retirement systems and to what extent policy and structure enable responsible investment activities. Nikolaj previously held roles in the Signatory Relations team servicing institutional investors in Europe, North America and the Middle East. He has a master’s degree in International Studies from Aarhus University and holds IMC and CAIA qualifications.