Member activism could lead to pension funds investing for impact

By Graunt Kruger, PhD

Pension funds are the biggest investors globally but to date they have not directed much of their funds towards impact investments. However, the disconnect between their investment strategies and the wishes of their beneficiaries is becoming clear. Beneficiaries, as evidence from the UK shows, would like their pensions to drive impact, not just financial returns.

“Make my money matter” is a campaign in the UK to mobilise individual members towards encouraging their pension fund managers to direct investments to drive positive social and environmental outcomes and good governance. The campaign follows a study by the department of international development in the UK, released in September. The study found that seven out of 10 UK citizens with pension funds would like their pension investments to be used for good, not just for financial returns.

Impact investment advocates such as Sir Ronald Cohen – former private equity investor and chair of the Global Steering Group (GSG) on Impact Investing – believe that pressure from individual members is essential. Speaking at the GSG Global Impact Investment Summit in Buenos Aires this week, Cohen said: “$80-trillion are sitting in pension funds. We need to overthrow the dictatorship of profit … and use those funds for impact investments.”

The core challenge is shifting the mindset of pension fund managers from focusing only on the traditional risk-return nexus to a risk-return-impact paradigm. Understandably, pension fund managers are reluctant, as they must ensure that pension funds are not only protected but are also growing to meet future needs of beneficiaries.

Changes are afoot. Evidence is mounting that impact-focused investments outperform traditional investments. This means that investments with an impact-return focus deliver financial returns higher than those that focus only on financial returns. A report by Global Knights released at the World Economic Forum in January showed that the world’s top 100 most sustainable companies made a net investment return of 127.35% compared with 118.27% for the MSCI All World Index  – the global equity index that represents the performance of large- and mid-cap stocks across 23 developed and 26 emerging markets.

South Africa’s Public Investment Corporation (PIC) – the largest institutional investor in Africa – might be an exception when it comes to the inertia of pension funds managers to invest in impact-driven portfolios. The PIC, along with the South African impact investing organising committee, launched the Africa Impact Report: Impact Investing Opportunities and Gap Analysis at the summit in Buenos Aires. The report highlights the investment opportunity that arises from Africa having the world’s highest forecasted population and urbanisation growth rates. The report also focuses attention on the energy sector that has the potential to unlock “multiple economic and developmental outcomes” and the vast opportunities in infrastructure investments.

Underlying Cohen’s call to action for member activism is a deeper issue that is worth highlighting. Members are actually the ultimate owners of the capital that pension funds use to invest. Up to now, because pension contributions are directly deducted by employers and moved to pension fund managers, members (or workers) are distanced from their capital. If this call to action works, it could not only cause a revolution in how pension funds direct their investments, but it has the potential to awaken a deeper connection to the economy, to society and to community by the true owners of the capital in pension funds: the workers. Now is the time to act and put Cohen’s idea to the test.

The next Global Impact Summit will be held in South Africa in September 2020.

Listen to an interview with Sir Ronald Cohen at the summit here.

  • Kruger is head of strategy reserach at Intellidex