A panel of asset owners and money managers at Pensions & Investments' Global Future of Retirement conference in Washington on Tuesday came down strongly on the side of engagement as a more effective means than divestiture in pursuing environmental, social and governance-related objectives.
“The best way to make yourself felt and make good things happen, without being the least bit inconsistent with your fiduciary obligations to your beneficiaries, is through engagement,” said Ashbel C. Williams Jr., executive director and chief investment officer of the $179.5 billion Florida State Board of Administration, Tallahassee.
Panel members agreed that taking ESG factors into account increasingly is becoming just a standard step in a due diligence process when trying to determine the underlying financial prospects of a company.
“I don't spend any time thinking about exclusionary lists,” said Robert M. Wilson, a research analyst with MFS Investment Management, focused on integrating ESG factors into the Boston-based firm's investment decision-making process. Instead, the focus is on material factors that could affect the financial statements or valuations of “companies we're thinking of purchasing,” he said.
Philippe Desfosses, CEO of Paris-based ERAFP, the €25 billion ($28.1 billion) pension scheme for French public servants, said for pension funds managing money on behalf of beneficiaries who could be retiring in 40 or 50 years, ESG considerations are key in pursuing the “sustainable returns” needed to meet those beneficiaries' needs, which makes “getting maximum returns for this year, or next year or three years” less of a focus.
“We're running a marathon,” he said.
In that context, “engagement is very important,” said Mr. Desfosses, who noted that efforts by his fund, and other pension funds, to engage with French petroleum company Total SA have been productive.
Carol Boykin, representative of the secretary-general for the investment of assets of the $50 billion New York-based United Nations Joint Staff Pension Fund, agreed. Petroleum companies are often portrayed as “bad buys across the board, and yet we're seeing some very good things coming out of Total,” and some of the other industry players, including natural gas companies, she said.
“To the extent we can engage with those companies, and encourage (them) to use their resources more efficiently,” it becomes a win-win situation — good for those businesses, which become more efficient, and good for the pension funds that invest in them, Ms. Boykin said.
Mr. Williams said fiduciary duty requires that pension funds make the economic interests of beneficiaries “your guiding star,” and engaging with companies, rather than divesting from them, is the key to fulfilling that responsibility.
Asked how he would respond if a majority of the 1 million Florida public servants covered by his fund called for divestment from arms manufacturers following a string of gun-related tragedies in the state, Mr. Williams noted that other prominent funds, including the Harvard endowment, divested after the December 2012 killings of 26 children and teachers at Sandy Hook Elementary School in Connecticut.
“How many more tragedies have there been since then,” asked Mr. Williams, adding, “I don't think a public pension fund owning a company that manufactures an automobile, a firearm … or anything else is going to ultimately drive how that product is used.
“Simply selling something because it's associated with a current embarrassment, or heartbreak, or tragedy isn't necessarily going to produce a result.”
Instead, “formulating a mix of actions that forms a cohesive, prudent and effective strategy, suitable to your role, and the decision authority constituencies in which you operate,” is likely to be more effective, said Mr. Williams, adding that's why Florida has been an active member of institutional investor forums both at home and abroad.