2020 underlined just how closely connected the world is. The pandemic broke out in a market in China but quickly spread to the rest of the world. The health crisis soon escalated into a serious economic crisis – a crisis of which we still do not know the full consequences of. Being able to act quickly and safely in a changing world is more important than ever. Many of PensionDanmark’s members and companies have endured periods of lockdown, and jobs have been lost as a consequence. The hotel and restaurant industry, the transport industry and the many employees at Denmark’s airports have been particularly hard hit. Many of the companies that were not shut down had to implement restrictions and other measures to protect themselves against COVID-19.
Throughout the crisis, we stayed focused on our core mission:

Enable our members to have a long and productive working life and give them a financially secure retirement. Our highly digitalised and automated work processes – combined with the responsible and professional conduct of our employees – proved to be key assets in those periods when most of our employees had to work from home. Our call centre operated smoothly with response times of just a few seconds, web service traffic was record-high, and our investment team was busier than ever.

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The incorporation of ESG factors within the investment process has evolved from a nice-to-have to a necessity. Client demand has grown strongly, with 68% of the PRI’s asset owner signatory base addressing ESG considerations in their requests for proposals (RFPs). This means that many asset owners expect investment managers to include financially material ESG factors within their funds and investment strategies. In addition, policy makers around the world are introducing regulatory requirements for both investment managers and asset owners to disclose and report on responsible investment practices.

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A growing number of asset owners now expect their investment managers to incorporate ESG factors into their investment processes. This means that ESG needs to be at the core of the relationship between the asset owner and the investment manager – and that ESG considerations need to be addressed at every stage of that relationship, from setting the initial investment strategy, to drafting requests for proposals, to selection, appointment and monitoring.
Thorough and consistent monitoring is critical to ensure the delivery of the terms and conditions on which the manager was appointed and that it is meeting the asset owner’s requirements. Regular monitoring of and reporting by the investment manager will provide the asset owner with insight and necessary detail to understand the manager’s approach to responsible investment, its alignment to the mandate and the investment management agreement (IMA), and to its stated investment principles.
Leading practice is developing quickly. The 2019 PRI Leaders’ Group provides examples from asset owners in our signatory base who have demonstrated leading practice in monitoring (see Box 1: The PRI Leaders’ Group).

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Asset owners increasingly include ESG considerations in their investment management agreements (IMAs) and other legal documentation. More than two-thirds (69%) of PRI asset owner signatories typically implement ESG
requirements in contracts such as IMAs and limited partner agreements (LPAs).1 To ensure that investment managers abide by their clients’ ESG requirements, certain legal aspects are becoming standard features of the asset owner-investment manager relationship.

The PRI believes that ESG should be at the core of the relationship between the asset owner and the investment manager. To reflect the importance of these issues, clauses like those set out in the sample ESG clauses section of this document should be included in the agreements governing that contractual arrangement.

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A Greener Fiscal Future? Looking Ahead, Governments’ Stimulation Will Be Concentrated in Pursuing Environmental Goals

With fiscal policy now the dominant lever supporting growth in most economies, it has become even more important to understand how the various fiscal policies will flow through to GDP, inflation, and different markets. We have been working to get our understanding of fiscal policy to the same level as our understanding of monetary policy. This is a difficult task, as fiscal comes in so many forms, each having different implications at the macro and micro levels. Some policies can be clearly counter-cyclical (the best of these are typically direct checks and shovel-ready infrastructure), while others aim to address more structural problems (like low productivity or environmental issues) but are less effective cyclically, as they are typically longer-term.

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Against all odds, there is an air of optimism in 2021. The world feels a little different, a little bit more hopeful, even in the face of a global pandemic. We have entered a new era in US politics, and the inauguration of the Biden-Harris administration brings renewed hope for sustainable investment, particularly climate policy both in the US and internationally.

Clearly, there is much to be done. The government and the private sector need to work together to tackle the pandemic, address climate change and to build back better. We need a global economic recovery that includes a new social contract, creates green jobs and delivers economic prosperity for the many, not just the few.

Investors in the United States—and around the world—are now looking closely at the new administration and its policy directions. Although it is still too early to predict the impact of the new administration on sustainable investment, we are seeing positive signals. On his first day in office, President Joe Biden hit the ground running. He issued an Executive Order to re-join the Paris Agreement, to protect public health and the environment, with a list of agency actions to review including Financial Factors in Selecting Plan Investments.

Ahead of Earth Day on 22 April, President Biden also announced plans to host a global Climate Leaders’ Summit, a sign of the new President’s commitment to strengthen America’s renewed climate goals.

In addition, he has set goals to achieve a carbon pollution-free power sector by 2035, which puts the United States on an “irreversible path to a net-zero economy by 2050”. The US will also “promote a significant increase in global ambition” around the Paris Agreement goals. The order starts the process of developing America’s “nationally determined contributions” under the Paris Agreement, as well as a “climate finance plan.”

Following the Trump administration’s efforts in recent years to roll back progress on ESG investing, however, the future standing of the US in the responsible investment movement hangs in the air. Compared to progress in Europe and Asia, the last four years have seen the decline of the integration of ESG considerations in US investment policy and regulation.

US policymakers now have a unique opportunity to advance new policies that support sustainable investing and strengthen accountability, good governance, and shareholder rights.

The PRI wants the new administration to reverse the course that had been set by American regulators over the past few years including a 2019 executive order from President Trump which directed the Department of Labor (DOL) to review regulation of private retirement plan fiduciaries (or “ERISA fiduciaries”) with an eye towards promoting the oil and gas sector. In response, the DOL proposed rules that, if finalised as proposed, will make it harder and more costly for ERISA fiduciaries to integrate ESG factors into their investment actions and participate in proxy voting aimed at advancing corporate responses to investors’ demands on ESG factors.

A new Congress will have the opportunity to overturn the rule through the Congressional Review Act. The need for congressional intervention won’t stop at the DOL — the Securities Exchange Commission (SEC) recently finalised rules that make it more difficult for investors to participate in proxy voting to advance ESG factors. The PRI responded to both the DOL and SEC.

Another priority should be establishing mandatory ESG disclosure for publicly traded companies. Investors need access to consistent, comparable data about material ESG factors to efficiently incorporate that data into their investment practices. The SEC could mandate such disclosures, or Congress could direct them to institute these requirements.

Reform is also needed to modernise fiduciary duties. Specifically, American regulators should require pension and investment fiduciaries to integrate material ESG factors into their investment processes. Altogether, laws and regulations from the DOL and SEC need to be updated to eliminate any uncertainty that fiduciaries have an obligation to consider ESG issues.

It is promising to see the commitment to progress already demonstrated by the new US administration. Coupled with public counsel from the responsible investment community, including the PRI, we look to the new President to step up and demonstrate real leadership on responsible investment, for the sake of both people and planet.

Fiona Reynolds is chief executive of the PRI.