While considering that pension schemes are not philanthropists, Impact Investing Institute chief executive Sarah Gordon believes pension funds should invest in businesses that deliver positive impact, as these are more likely to produce genuinely sustainable profit streams.
“What had been biblical is becoming common place,” said the former Bank of England governor and now the COP26 finance adviser to Prime Minister Boris Johnson.
It is not difficult to agree. We are not just in the grip of a global pandemic, but the evidence of a climate emergency multiply on what feels like a daily basis.
Carbon dioxide in the atmosphere has risen to its highest level in more than 800,000 years. The past five years have been the warmest on record, sea levels have risen by 20 cm over the past decade, with the rate of increase doubling in the past two decades, and entire species and habitats have been wiped out.
There is a growing consensus among investors, financial regulators and policymakers that impact investing — investment that delivers a positive, measurable social or environmental impact alongside a financial return — is a necessary component of that just transition
These are not abstract statistics, they represent the reality we live in, where extreme climate events like hurricanes, flash floodings and wildfires are devastating communities and natural habitats, with social and economic consequences that rival even Covid-19.
At the Impact Investing Institute, we believe that investors can drive solutions to some of these challenges and support a transition to a net-zero carbon world, which considers the consequences of that transition on people and communities.
There is a growing consensus among investors, financial regulators and policymakers that impact investing — investment that delivers a positive, measurable social or environmental impact alongside a financial return — is a necessary component of that just transition.
Yet we continue to hear a range of reasons why investors and advisers think that impact investment is not for them.
Pension schemes are not philanthropists
In my early days as chief executive of the Impact Investing Institute, I spoke to the trustees of, and the adviser to, one of the largest FTSE 100 defined contribution pension schemes.
During the discussion, the adviser raised many of the issues that discourage pension schemes from investing with impact. He ended the conversation by saying: “We are not philanthropists.”
Pension schemes are not philanthropists, and they are neither established nor run to solve social and environmental problems.
But we believe that businesses that deliver positive impact are more likely to deliver genuinely sustainable profit streams, and are building an evidence base that shows that impact investing does not mean sacrificing financial returns.
In our first year at the institute, we have been working across the pensions industry — with pension schemes, investment consultants, asset managers, policymakers, lawyers and industry experts — to debunk the misconception that fiduciary duty, the legal obligation on trustees to act in the best interest of the scheme’s members, prevents pension trustees from investing with impact.
From our conversations across the industry, we know that many pension schemes want to reduce negative impacts and risks like carbon emissions, biodiversity loss, poor governance and inequality that arise from and impact their portfolio.
Even more encouraging, the number of pension funds that are interested in investment opportunities that have positive impact and secure a competitive financial return is growing steadily and quickly.
Together with leading practitioners, we have developed four impact investing principles for pensions, which provide practical guidelines on how pensions can pursue an impact investing strategy. We have also published a legal paper, attested and reviewed by pension lawyers and experts, that explains how fiduciary duty and impact investing are compatible.
The Dutch example
Pensioenfonds voor het Slagersbedrijf, the Dutch butchers’ pension fund with assets under management of about €2.5bn (£2.2bn), 2,400 affiliated employers and 13,450 active members, is one of the many funds that have demonstrated the compatibility of impact investing and fiduciary duty.
By setting impactful objectives, and by appointing a fiduciary manager with impact integrity who has expertise in impact and considers it in all investment decisions, the fund ensured that it had the right advice on how to articulate, implement and monitor its impact on a quarterly and annual basis.
Examples like this not only encourage us in our work at the institute, which focuses on making it easier for pension schemes to integrate impact into their investment strategy, but also show that there is a real market appetite to use capital to help solve social and environmental challenges, while seeking a financial return.
Carney believes that private sector initiatives that address climate change represent “the greatest commercial opportunity of our time”. Seizing that opportunity is one way to confront the grim realities that we face.
Sarah Gordon is chief executive of the Impact Investing Institute
