Part of a fiduciary duty is investing in things that not only give our members a return but also a world
to retire into. Paul Rhodes, Reach Pension Plan
Sumpster: People are looking for responsible investors to be the guardians of their money. We must be alert to the changing world we are living in. Halfon: It is not only climate change, but not being involved in a corruption scandal, harassment or racism. Sumpster: The benefit of private markets allows investors to get inside companies, form close relationships with them and really understand the assets. It is not just about making an investment decision but protecting it over its life. You must consider other stakeholders. The taxpayer or end user, the government, the regulator, your investors, the senior management of a company – there are many people you have to partner with in the right way to demonstrate that you are a responsible investor. Rhodes: Look at Danone. Their chief executive was not making enough of a return on investors’ capital, so they got rid of him. People like the fluffy, but it needs to be balanced with making money. Halfon: I agree, but you have to deliver what you promised. If you do not over promise, you do not have to take too much risk. Trow: On engagement, the industry is excluding anything that might be a risk, which eventually becomes a race to the bottom. By engaging with plan members, you could buy yourself a license to take a risk. If everyone is engaged and believes it is a
16 Dec-Jan 2022 portfolio institutional roundtable: Build Back Better
good option to invest in a tram system, you have that latitude if it goes pear shaped. We are talking about risk here and you can’t not take any risk. Halfon: Members are often more prone to risk taking than you assume. They will cut returns for environmental purposes, but I am not sure you are cutting that much because if a company you invested in gets fined for something they have done wrong, they risk making you lose a lot more. Frith: Part of it is understanding the risks you are taking before deciding if you are happy to take them. You also do not have to fool yourself into low yield investment strategies just because the markets move there.
If you are earning 5% on a wind farm that used to pay 10%, are you comfortable owning it because it looks like a low yielding asset and therefore must be lower risk? You could be taking a lot of risk that you do not understand. You have to be careful that you do not confuse a low return, low risk strategy with a low return strategy that has a lot of embed- ded risk. Halfon: We have become more risk averse, and changing demo- graphics are a factor. We have an aging society and risk takers are younger.
Because of the actuarial norms of discounting liabilities in defined benefit obligations, people do not want volatility
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