By Donald MacDonald
reported 20 per cent decline in the value of pension fund assets in
OECD countries in the first 10 months of last year has meant the
current round of pension fund valuations is unlikely to bring much
cheer to pension beneficiaries or their sponsors.
are a powerful reminder to all institutional investors that decisive
action is needed to protect our investments over the long-term.
So perhaps this is an appropriate occasion to consider how this
crisis might change investor behaviour in the months and years to come.
Will the behaviour of pension funds (particularly larger ones) better
match the fact that their long-term horizons for liabilities and
investments and diversified portfolios give them a direct and genuine
fiduciary interest in the long-term economic health and wellbeing of
To rebuild trust and confidence within financial
markets, investors need fundamental improvements in risk management and
transparency. To help achieve those goals, some suggest a commitment to
active ownership must surely be at the heart of any successful
long-term response from institutional investors.
That is why the
global asset owners who sit on the board of the UN-backed Principles
for Responsible Investment (PRI) are issuing a statement today asking
fellow institutional investors to acknowledge, as owners and clients of
many of the institutions involved, some responsibility for the
behaviours that led to the crisis and to work together to respond to it.
There are four priorities for action from institutional investors and our agents.
first is to acknowledge how a flawed understanding of some complicated
financial instruments put not only our immediate investments at risk,
but also the wider global economy.
To remedy this,
institutional investors need to exercise proper due diligence of the
investment chain and enhance our capacity to research, understand and
address the full range of risks and opportunities.
includes environmental, social and corporate governance (ESG) issues,
which can be material to the interests of beneficiaries and clients,
and a thorough assessment of counterparty risk.
of toxic assets, and unsustainable risk-taking, lay at the epicentre of
this financial earthquake and these are the sorts of issues a more
holistic approach to investment research should detect.
also consider how to encourage the fund managers, asset consultants,
brokers and research providers they work with to ensure those agencies
can also address ESG issues.
The second priority for investors is to consistently monitor companies and ensure risks are managed properly.
Collectively, we need to put greater resources into shareholder engagements.
active ownership enhances accountability and should reduce the need for
one-size-fits-all regulatory responses. There is no doubt that properly
managed regulation, both hard and soft, with proper oversight, will be
an important part of building well-functioning markets. However,
regulation alone is not enough. Investors must take it upon themselves
to ensure assets are managed in the best interests of end beneficiaries
and clients. Where investors are restricted from exercising such
shareholder rights they should engage actively with governments and
The third priority is to tackle the lack of transparency that
was such a major contributor to the severity of the crisis. As active
owners, investors should work with investee companies to ensure
comprehensive and systematic disclosure of the information they need in
order to make responsible investment decisions. Ensuring the disclosure
of information on ESG and other issues will enhance investors’
understanding of their underlying investments and avoid a repeat of
When it comes to transparency investors must
also practice what they preach. We should publicly disclose the
measures we are taking to respond to the crisis and our responsible
investment activities in general.
Finally, if we are to address
the problems facing the economy then investors must adopt a
collaborative approach. Many of the problems, particularly around
systemic issues, are too great for any investor to tackle on their own.
is an ambitious agenda. However many institutional investors are
already responding to the crisis using the Principles for Responsible
Investment Initiative as a robust framework for action.
all institutional investors to consider becoming signatories to the PRI
and join a global network of peers working to address these priorities.
Donald MacDonald is chair of the UN-backed Principles for Responsible Investment Initiative. www.unpri.org