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Impact Investing: Pension Funds

Are you ready to put your ideas into action and make an impact? If so, you are ready to join the “Impact Revolution.” In my last post, we discussed how to measure impact and the initiatives leading the way in establishing standardized ways to do so. Today, we will go further, and dive into a discussion about the companies we should invest in for our pension funds.

When you hear the words “pension fund,” what comes to mind? Most of us are completely unaware of how our pensions are invested and the impact our pension fund portfolios are having on the world, yet the actions of our pension fund managers have an outsized impact. The world’s pension funds held $38 trillion in 2016, nearly 20 percent of the world’s total investment assets – and there is no reason why we should not exercise more influence over how the money in our pensions is being invested. For example, if we influence our pension fund managers to optimize risk–return–impact, they could significantly support the achievement of the Social Development Goals (SDGs) .

A significant portion of those with pensions do, in fact, want their managers to align investments with their personal values. A 2017 report by Big Society Capital in the UK found that almost half of all savers want to invest in companies that reflect their values regarding health, social care, environmental projects and housing. Some of us are already turning these desires into action, and pension fund managers around the world are changing their approaches and shaping their portfolios towards ESG investments.

Impact Pension Funds: Leading the Way

Interestingly, European pension fund managers are leading the way. When the UN announced the SDGs in 2015, the Dutch were the first to create a plan of action to advance these goals. A group of pension funds, insurance companies and banks got together and launched the Dutch SDG Investing Agenda in December 2016. The agenda was groundbreaking in its creation of a national consensus to support sustainable investment, and it boasted 18 signatories, who together manage more than $3 trillion of assets, including some of the leading pension funds in the Netherlands.

PGGM, the second largest pension fund in the Netherlands is also one of the world’s leading impact-driven pension funds. It has invested approximately €12 billion ($13.3 billion) along the four SDG themes of climate, food security, water scarcity, and health, and has a mandate to invest at least €20 billion ($22.2 billion) in total.

Similarly, PME, another Dutch pension fund that represents the metal and electrical engineering industry, announced in early 2017 that it would align 10 percent of its €45 billion ($50 billion) portfolio with the SDGs. Their strategy focuses on affordable and sustainable energy, work and economic growth, sustainable innovation and sustainable cities.

The Dutch civil service pension fund, ABP, has stated that it wants to double the assets allocated to “high-sustainability investments,” to €58 billion ($64 billion). Its priorities include reducing its carbon footprint, investing in education, promoting safe working conditions, respecting human rights and eradicating child labor. ABP also announced that it will divest its entire holdings in tobacco and nuclear weapons – worth an estimated €3.3 billion ($3.7 billion) – and several other large Dutch funds have also cut tobacco firms from their portfolios in recent years.

An increasing number of pension funds in other countries, including Norway’s KLP, Sweden’s AP funds, Denmark’s Pension Danmark and the National Employment Savings Trust (NEST) in the UK, are also heading in the same direction. NEST has started to shift its assets into a “climate aware” investment strategy that invests more in renewable energy companies and less in those responsible for high carbon emissions.

In the UK, the pension fund of HSBC bank has made a climate-tilted fund the usual option for its younger investors. About 60 percent of this investor group are under 40 years old, so the fund believes that its focus on climate will appeal to them and cause them to be more engaged with their investment choices.

Because of how most pension funds are designed, employers end up having an enormous amount of influence over their employees’ investing choices. Employers typically choose the financial institution they are going to work with, which narrows down the employees’ choices considerably. Furthermore, as many as 60 percent of retirement savers in countries like the US are enrolled in savings plans automatically, meaning that employers make all the choices about where their employees’ pension money is going, and it has been found that most of them do not choose socially responsible investment options, let alone impact investments.

To redress this situation, the French have come up with a new model that makes impact investing accessible to pension savers. The 90/10 “solidarity funds” allocate 10 percent of their assets to organizations with a special “solidarity label,” and invest the remaining 90 percent in traditional companies that meet socially responsible investing guidelines. Companies with more than 50 employees must offer a 90/10 fund to them as an option.

Expanding Impact Globally

The French approach discussed above could be easily replicated across the world. It is a desirable approach as it enables pension contributors to have 90 percent of their assets in ESG investing, while dipping their toe in impact investing at the same time. For this reason, Big Society Capital (BSC) and other investors in the UK are advocating “social pension funds” that follow the French “solidarity” model.

While the US lags behind Europe in these approaches, some of the biggest and most influential American pension funds are beginning to move in a similar and more positive directions. The California Public Employees’ Retirement System (CalPERS) represents more than 1.9 million members and manages more than $380 billion and is one of the biggest pension funds in the US. The fund uses its power and influence as a major shareholder to push corporations to change their behavior and do the right thing.

For example, CalPERS is a key player in Climate Action100+, a group of institutional investors that is trying to encourage fossil fuel companies to change their policies. So far, the group has won commitments from several major companies: Royal Dutch Shell has committed to specific targets for lowering its emissions; the mining company Glencore has agreed to stop expanding its coal business; and Maersk, a shipping container company, has committed to carbon neutrality by 2050.

CalPERS’ “sister fund,” the California State Teachers’ Retirement System (CalSTRS), manages $283 billion and it too has adopted an ESG approach, taking a list of 21 ESG factors into account when evaluating the risk of an investment. For example, CalSTRS considers it a risk to the long-term returns of an investment if a company discriminates based on race, gender, disability or other factors, or pays “inadequate attention to the impacts of climate change.”

CalSTRS is moving to make an increasing number of investments that are impact-driven. In 2017, it bought its first social bond issued by an arm of the World Bank, which will invest in companies that source products from small holder farms and provide affordable health and education services to low-income populations.

To learn more about the Impact Revolution, order a copy of my new book, IMPACT, here

However, the true star of the scene is Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, which manages $1.5 trillion. The fund’s chief investment officer, Hiro Mizuno, is one of impact’s greatest champions in the world of pension funds.

In 2017, GPIF raised its allocation to environmentally and socially responsible investments from 3 to 10 percent of its stock holdings, an increase from 1 trillion yen ($9.5 billion) to 3.5 trillion yen ($33.3 billion). This was a big boost for ESG investing globally, as well as a potential generator of future ESG investments, if smaller Asian pension funds follow suit.

Now you might be thinking: How can I use all of this information to make an impact? Since pension fund trustees are accountable to their savers, if you are a saver, now is the time to exercise direct influence on how your portfolios are invested—it is your right and it is in your power to do so. To learn more, read IMPACT and become a part of the Impact Revolution.

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