Socially responsible investment is increasingly infiltrating the DNA of institutional investors, often guided by the United Nation’s Six Principles for Responsible Investment.
Xander den Uyl, Board Member of the PRI and chairman of the Asset Owner Advisory Committee, wants to work on the specific details of the responsible investment discussions which, all too often, remain fairly abstract.
03 Mar 2016
“Engagement should increasingly be translated into policy and investment decisions which suit the target group.”Xander den Uyl
“An important discussion point within the PRI is who has primary authority in the discussion about responsible investment,” commented Den Uyl. “Is that the asset managers or the asset owners? In fact, it should be the asset owners as they are the asset managers’ clients. Consequently, the AOAC wants to strengthen the owners’ position. As a Dutchman, I am, in this context, a proponent of seeking consensus. Far from asset managers and asset owners being one another’s natural enemies, they should work together to achieve the objectives of the PRI. We should never forget that the asset managers have considerable
investment knowledge. While this varies in the case of asset owners, which means they can’t all exert the same degree of influence on the managers. And it will take time to eliminate this disparity.”
In the area of responsible investment, there is a question of different speeds. In both Scandinavia and the Netherlands, the policy is reasonably well organised. For example, the Dutch Pension Act makes it compulsory for pension funds to submit a report accounting for their responsible investment policy. The Dutch Central Bank [DNB] has also made this a focal point in its 2016 Supervisory Schemes. However, the rest of Europe is lagging somewhat behind. “Personally, I am all in favour of a full disclosure obligation for institutional investors without this being legislated for per se. The moral obligation should come from the bottom up; that is from the participants to their pension funds and from pension funds to the asset managers. The government would be better guiding on the basis of transparency rather than all sorts of ‘tick the box’ obligations. In my view, encouraging voluntary cooperation is, ultimately, far more effective than compulsion, whereby the ten points of the UN Global Compact are an extremely important benchmark.”
"Far from asset managers and asset owners being one another’s natural enemies, they should work together to achieve the objectives of the PRI."
Ethics versus risk management
One argument frequently put forward against responsible investment is that it could endanger the fiduciary responsibility of pension funds and other pension providers to ensure a good return. However, Den Uyl does not agree with this view. “Empirical research has shown that responsible investment reaps rewards in the long term. Not illogical, because an organisation which is managed in a sustainable way will have a long life. You could even turn the question round. Doesn’t fiduciary responsibility actually force you to invest responsibly? Whatever the case, the two responsibilities must always be well aligned. In the Netherlands, that has been translated into the pension fund’s obligation to invest prudently. Amongst other things, the ABP is, to a significant degree, guided by this alignment.”
Personally, Den Uyl finds the discussion about ethics versus risk management extremely interesting. Why do you decide to invest responsibly? “Larger organisations will always look at the management of the risks of responsible investment, in particular the risks associated with reputation and trust, but also the return risk. I don’t think you should allow the policy to be too governed by exclusions. But I’m firmly convinced that institutional investors can make a difference. For example, important initiatives have come from the International Investors Group on Climate Change, the IIGCC. And every year the PRI organises a congress with workshops about contemporary developments. A year and a half ago in Montreal, Ms Figueras gave an impressive speech about the role of institutional investors that resulted in the ‘Montreal pledge’. The signatories of this pledge committed themselves to making the carbon footprint in their investment portfolios transparent. The next step is to act decisively, for example by disposing of certain shares or actively entering into dialogues with companies. Consequently, as an organisation, the PRI and its members play an important role and are at the centre of the discussions. With the caveat, that investing sensibly in the interests of the participants is always the first priority.”
Obligation of transparency
Compiling a responsible investment policy is number one, actually implementing it, or having it implemented, is number two. How can institutional investors best monitor their policy? “Within the PRI, there is much discussion on that topic. Is a duty of disclosure sufficient or should you, as an investor, actively have to report on the consequences of the implementation of your policy? Custodians, such as KAS BANK, can help regarding the obligation of transparency. An external auditor can carry out an audit of the policy. But this will not tell you the extent to which certain ESG factors have been taken account of in your policy nor what criteria are to be used to assess the success of the policy. Personally, I’m very much in favour of as objective as possible an assessment; one which is laid down in international legislation and regulations and by organisations such as the PRI and OESO. But the substantive consideration of the effectiveness of the policy must be undertaken by the clients/participants themselves. As far as that’s concerned, Dutch pension funds have an organisational advantage in the form of their Accountability Bodies.”
Den Uyl is a strong advocate of participants being able to influence responsible investment policies. Within his own ABP, he can see that the participants’ engagement is growing. “But engagement has to result in investment decisions. You could possibly link the investment decisions to your pension fund target group, for example by investing in sustainable organisations which genuinely tailor their policy in respect of people with an occupational impairment. In this way, a fairly abstract discussion can acquire real substance.”
Principles for Responsible Investment
The organisation Principles for Responsible Investment (PRI) was established in 2006 by the United Nations and a large number of institutional investors, including ABP and PGGM. Currently, the PRI has 1,400 members, including 900 asset managers, 300 asset owners and 200 consultants. Thirty-eight of the members classified as ‘asset owners’ come from the Netherlands.
The PRI is governed by a Board consisting of two UN officials, ten elected members, including Xander den Uyl (in his day job a member of, amongst other things, the board of ABP Pension Fund), and an independent chairperson. Primarily, the PRI focuses on trying to ensure socially responsible investment becomes more mainstream. To this end, the PRI facilitates academic research and an ‘Engagement Bank (the PRI clearing house)’, under the flag of which members can collectively unite to get certain initiatives off the ground; in addition, there are a number of committees, including the Asset Owner Advisory Committee (AOAC).