Pension capital should lead

Pension capital should lead

Major investors must also look at the impact of their own actions on the stability of the financial markets and on the real economy. Pension capital should not follow, but lead, says Marcel Jeucken, PGGM's managing director for responsible investment, in an interview with Financial Investigator (download Dutch version).


‘Capital must take responsibility’


An asset manager who looks beyond just the financial aspects of its investments: PGGM is taking the next step in responsible investing. Marcel Jeucken, managing director for responsible investment, explains: ‘Money should not follow, but lead.’


What good to you is a decent pension if the world around you has become unliveable? This simple fact makes pension funds and pension providers the ideal frontrunners when it comes to responsible investing. At least, that is how it should be, says Marcel Jeucken, Managing Director for Responsible Investment at PGGM since 2006. ‘It is no longer defensible for an investor to be purely concerned with achieving the highest financial return possible. Look around you and you can see that we are living in a world where major crises are lurking just around the corner. If investing helps bring on these crises, what remains of that financial return?’ he asks.


‘For too long the mantra in the financial sector has been that money follows, that money is amoral. And that makes life easy, since that means that you as bank, insurer, asset manager or pension fund have no social responsibility for how you use the capital available to you. This excuse is still being used, even though we are well aware now that it is money that sets the course, that our investment decisions determine whether and how economic development takes place and how sustainable that development is. Although companies have realised for some time that they are ‘corporate citizens’, the financial sector must also become aware of its role in broader society and its ‘licence to operate’ related to that. The entire financial sector can no longer play dumb when it comes to sustainable economic and social development.’



That still happens, but looking at the pension sector Jeucken believes there has been some progress. ‘Awareness continues to grow and institutional investors are increasingly showing the courage to play a more active role and take more responsibility for the effects of investments on the real economy and on sustainability. But we still have a long way to go to achieve the goal: a situation in which investing is, by definition, responsible investing.’


There are numerous obstacles. Jeucken sees for instance that investors have difficulty trading in the micro perspective for a macro perspective. ‘Traditional economics teaches that you’ve done well if you earn money from an investment in a chemical plant that pollutes a river upstream if, within legal bounds, that is the most economical way for that company to operate. But imagine that if you, as universal investor, invest at the same time in a plant downstream which first has to clean up the river before it can make soft drinks. In that case, as a universal investor you are doing it wrong from a macro perspective if it is in fact less expensive both for the company and you as investor to refrain from polluting the river altogether.’


‘The entire financial sector can no longer play dumb when it comes to sustainable economic and social development.’



Perhaps it is more worthwhile for a long-term investor, like a pension fund, to take that macro perspective, thinks Jeucken. ‘A large pension fund will usually be a universal investor and will suffer a great deal from major shocks. An investor with only short-term interests will be more inclined to think that he can withdraw from his investments. So a broader social role could, in the long run, also be the right decision financially; but aside from that, as a ‘corporate citizen’ you have broader responsibility.’


The risk factor of ‘shocks’ means for PGGM that the concept of responsible investing has to be interpreted much more broadly than on the basis of the traditional criteria of CO2 emissions and working conditions, for instance. Jeucken: ‘Following on the financial crises of the past years we now also explicitly pose the question of the sustainability of the financial system. That means that we ask ourselves how our investment decisions and actions on financial markets can help make this sector more future-proof. So that shocks or the worst effects of them can be prevented.’


PGGM is thinking about issues like pay structures in the financial sector, whether or not to use derivatives or other financial instruments, destabilising actions at financial service providers with which it works, et cetera. ‘You start with yourself of course. How does your remuneration policy measure up and how do you prevent perverse incentives for your clients and ultimately the pension participant? What destabilising effect does the way in which you invest or operate on the financial markets have? But we also look at the different links in the financial sector. There are some financial products whose soundness you have to question. And there are some pay incentives which make you wonder whether the interests of the financial service provider indeed run parallel with those of the client.’



Jeucken sees how responsible investing has developed through various phases. It started in the 1970s, when religious organisations started deciding that they no longer wanted to invest in certain things, like fur, pornography or weapons. Later people also started looking at selecting positively, for good working conditions and environmental policy, for instance. Since the 1990s institutional investors have played a bigger role and active shareholdership has developed, also in the Netherlands, for instance with the establishment of Eumedion at the beginning of the new millennium.


Financial considerations then prompted attention to the integration of ESG factors (environment, social and governance) in the investment process. ‘The cluster bomb affair in 2007 was a real wake-up call for the Dutch pension world. Many funds now have a policy which states in what areas they do not want to invest. But that is not the same as integrating ESG in all steps of the investing process and in all investment categories. There is still much to be done.’


Jeucken says that a new phase has started: ‘More attention is being devoted to what we explicitly do want to invest in, where we want to generate a positive social impact.’ Pension capital does not follow, it leads. ‘We invest for example in clean technology and sustainable energy and in doing so the participants in the pension fund themselves contribute to a more liveable world.’ It is important to also make this measurable and communicate to the participants what impact they have with their pension money, he says.


In this phase, major investors will also have to look at the impact of their own actions on the stability of the financial markets and on the real economy. Here the broader problem arises that the distance between the owner of capital and the decisions regarding that capital has become increasingly greater. ‘You see that on the level of the listed companies, where CEOs and managers are increasingly acting like owners. And you see that in the investment world, where the financial intermediary has acquired too much power. There has to be a turnaround in this trend. We think that the owner of the capital, like the pension fund, must once again demand his original role. He must determine how that capital is used and all financial intermediaries must act in the interest of the owner of the capital.’


Jeucken notes that this is new and will require a lot of pioneering and innovation. ‘We have taken the first steps and now invest approximately four billion euros with this positive impact. Our biggest client, Pensioenfonds Zorg en Welzijn, has formulated an ambitious goal for 2020, namely to quadruple these investments. That must take place in the areas of climate, water scarcity, food security and health. We call this “investing in solutions”.’


PGGM asserts that a good financial return can be achieved on these investments while a contribution is also made to solving a few of the large social issues facing the world. Marcel Jeucken believes that this could hold the key to restoring trust in the financial sector. In addition to ‘using money to steer’ towards positive social impact, he said it was also important for investors in the financial system to take a critical look at their own behaviour: ‘As part of the financial sector we must change our behaviour, because chasing short-term profits results in destabilisation of the financial sector and has a negative impact on the real economy. We have the opportunity and responsibility to contribute to a liveable world.’


Translation by SustFin of Dutch article in Financial Investigator