04 Jul 2018 | 10.07 am
Guest Blog: Deirdre Timmons, Bank of Ireland Investment Markets
Where is your pension invested and should you care?
04 Jul 2018 | 10.07 am
Responsible investing in Ireland is still in its infancy but it will assume greater importance in future years, writes Deirdre Timmons (pictured), Senior Investment Manager, Bank of Ireland Investment Markets
As a pension investor, your main objective is to provide for your future. You invest your money in a pension fund and hope for the best that your fund delivers returns which can provide that future for you. Now that employer occupational pension schemes are becoming more a thing of the past, pension investors need to be more aware of how our money is being put to work as our ‘pension pot’ is no longer guaranteed.
It is in your interest therefore to know that the investments made on your behalf by your pension fund is into companies which are capable of generating long term returns, and that those companies are also generating those returns in a way that is sustainable for the long term. In other words, you want your money to be managed responsibly.
So what does ‘responsibly’ mean? Over 20 years ago, the Principles of Responsible Investment were established by the United Nations. These principles state that a responsible investor should incorporate Environmental, Social and Governance (ESG) factors into account when making investment decisions.
There have been a number of examples over the past number of years that highlight the materiality of assessing these factors before making an investment.
BP’s Deepwater Disaster
A well-known example of where a company failed both environmentally and through its governance is the Deepwater Horizon oil spill which was suffered by BP plc in 2010. This was the single largest marine oil spill in the history of the petroleum industry and resulted in the deaths of 11 people, 17 serious injuries and the releasing of 4.9 million barrels of oil into the ocean, with devastating results for marine and wildlife.
BP was found guilty in 2014 by a US federal judge of deliberate misconduct and gross negligence and fined billions of dollars. It took approximately six and a half years for the share price of BP to return to the level it had been at prior to the incident.
If BP had been assessed prior to the oil spill by an ESG analyst, they would most likely have noticed that BP had incurred 760 Egregious Wilful Citations issued by the US Occupational Safety and Health Administration in the three years prior to the oil spill.To put this in context, the combined total of citations during the same period for 145 refineries in the US was just one. The safety warning signs were there but they weren’t to be found by just performing a financial analysis of the company.
At first glance, Tesla, the electric vehicle car maker, looks the antithesis of BP, with the company’s mission of being at the forefront of the transition from a fossil fuel to a solar electric economy, an environmentalist’s dream.
So Tesla must be near the top of every responsible investment fund list? Not necessarily. Issues such as Tesla’s workplace safety record and the outsized remuneration package of founder and CEO Elon Musk means Tesla fails to make the grade for many responsible investors. They will not risk holding the stock, regardless of how ‘clean’ or ‘green’ the company appears to be.
Other investors believe that Tesla is on the right track and choose to actively engage as shareholders with the board, and encourage Tesla to improve on these issues. Thus the investment opportunity is not lost and Tesla can improve on its safety and other risks to survive and thrive into the very future it envisages.
Invest or divest? If you have a strong opinion either way, it’s important to know which approach your fund manager takes. That is assuming that you are invested in ‘actively’ managed funds in the first place.
The reality is that many investment advisors and trustees have moved towards recommending ‘passive’ investment for pension clients, where funds replicate the performance of a stock index and will always achieve the same return as the market return.
The main reason for using such trackers is cost: the less input into the investment decisions, the cheaper the fund. But that means that the chances of your fund experiencing a Deepwater Horizon type catastrophe is very high, as large companies such as BP tend to feature in these indices. In a passive fund, there is no-one managing it to mitigate the potential risks of these disasters.
Responsible investing is still in its infancy in Ireland in general, it is fair to say. But that is changing. Many governments around the world have adopted the 2015 Paris Agreement and the United Nations 2030 Agenda for Sustainable Development.
Europe has traditionally been at the forefront of the adoption of sustainable practices globally and intends to remain in that position with the March 2018 announcement of the EU Action Plan on Financing Sustainable Growth, which aims to mobilise capital towards climate mitigation, amongst other initiatives.
A number of proposals in this plan will bring ESG gradually into the mainstream, including the incorporation of sustainability in the suitability assessments of financial instruments and products in the provision of investment advice. As an investor, you will be asked to decide whether you want to invest sustainably, or not. We will all have a choice.