COVID-19 has delivered an enormous global shock, leading to steep recessions in many countries. The baseline forecast by the World Bank envisions a 5.2 per cent contraction in global GDP in 2020—the deepest global recession in decades. Per capita incomes in most emerging and developing economies will shrink this year.

The pandemic highlights the urgent need for policy action to cushion its consequences, protect vulnerable populations, and improve countries’ capacity to cope with similar future events. It is also critical to address the challenges posed by informality and limited safety nets and undertake reforms that enable strong and sustainable growth.

John Adler has been chief pension investment advisor to New York City Mayor Bill de Blasio since 2015 and sits on the board of four of the five New York City retirement systems, which serve over 650,000 active and retired participants and assets in excess of $200 billion. He spoke to Amanda White about the most pertinent conversations around the board tables, the outlook for the five city plans, and the complex job of balancing politics, pensions and investments.

 

Amanda White: You chair NYCERS and sit on the board of three other New York city funds – Police, Fire, and the Teachers systems – what is on the boardroom agenda right now, what conversations are you having?

John Adler: There is a great deal of anxiety over this volatility and turbulence we are experiencing right now. The last three quarters have seen record gains and record losses, and then nearly record gains again. That kind of volatility is very hard on defined benefit plans in general. It’s hard on everyone.

What you do in the face of that volatility that’s the question, and there aren’t any easy answers.

One thing that is challenging for public pension plan sponsors, and it is no secret, is that we have serious budget problems. If we don’t get aid from the federal government then New York state and New York City will have huge problems, and we can’t just print money.

In any normal situation the government would be ensuring that cities and states can balance their budgets and don’t have to resort to measures like workforce reductions.

We have to deal with that at the same time that if returns are less than anticipated we may have to increase contributions. Like most funds we use smoothing so it doesn’t kick in right away. We hope that by the time we are facing the pain on contributions the economy is starting to recover, that’s what happened in 2008. But a lot of funds will be looking at needing to review their actuarial assumptions.

We are looking what we need to do as trustees in terms of investment policy and asset allocation to steer the ship through these choppy waters. We are paying very close attention, you can’t put it on auto-pilot.

Our return target is 7 per cent and in a low interest rate environment, and with the scale of borrowing, makes it very hard to achieve long term returns of that level.

The intersection of politics and the economy and pension fund investments, that’s the world I live in, and it’s very complex, and I don’t really know where we will all land. Part of my job is to navigate through it keeping the interests of the participants in mind, but I represent the mayor and he has to balance the budget.

 

Q: So let’s talk about NCYERS for a bit, how has the fund fared during the crisis?

A: We had already decided to take a little bit of risk off the table before the virus hit – we reduced our equities and increased and diversified our fixed income – which turned out to be a good thing to do.

The truth is it wasn’t radical, it was incremental, it helped us a little bit in the turbulence of March and overall it helped us.

With funds like ours you can’t much reduce your market exposure, we are long-term universal investors, and what happens in the market will translate to what happens to us. Our financial year is June 30 so that is a key date for us and we don’t have our results yet. I suspect it’s not going to be as bad as it looked in the first quarter of this year or as good as the end of the calendar year.

 

Q: Are you looking to add risk back in?

A: That’s a good question. There are conversations that are happening but we haven’t taken any action yet and I don’t know where we will land on that yet.

The truth is, given how volatile things still are, I think personally this is not the time to make major changes in direction. I don’t think anyone really knows where we are heading and until this virus is resolved which won’t be until the whole world is vaccinated probably at the end of 2021 then I don’t see the economy recovering until then.

Markets will do what they do in terms of believing what they want to believe. Markets are grasping at every scrap of hope – a vaccine, or positive results out of clinical trials – that’s crazy, but that’s the way the markets are.

We also have a major election coming in a few months which will impact the markets. But I would never predict what outcome it would have or what the outcome of the election would be. I know what I am hoping for but the Us electorate is extremely difficult to predict.

I have been involved in politics in this country for 40 years, and I’m an avid consumer of political news and I never seem to get any better in predicting.

There are extremely dangerous things happening, such as what we are seeing in Portland. Trump is so unpredictable, and we don’t know where it will end up. It is clear he is trying to change the narrative to one he thinks he can win. The economic narrative is not good for him now, and the virus narrative is terrible for him. So he’s scaring people into thinking if Democrats take over it will be a nightmare of looting and protest and only he can save that. We have got to hope that narrative falls flat and the majority of Americans will see through it for what it is. But I am really a terrible political prognosticator to my everlasting frustrating.

 

Q: John before you worked at the New York City as director of the Mayor’s office of pension and investments and chief pension investment advisor, you spent 23 years working with the Service Employees International Union working on “issues that were threats to members’ retirement security”. Would you say that the Department of Labor’s proposed amendment to investment duties regulation and ESG, is a threat to retirement security?

A: A short answer would be yes. I think it is an effort by the Trump administration and certain allies to pre-empt what is happening it the markets, which is the growth and popularity of ESG. The proxy voting rules just adopted by the SEC is a similar effort.

I think that certain corporate entities that have sway in the Trump administration are trying to get as much done as they can, thinking there may not be a second term. And they are seeking to sway the capital markets to defend themselves against efforts they don’t like.

In terms of accountability and allowing folks to invest as they see fit, the market is saying that people are interested in ESG and believe ESG influenced investments will generate better long-term investment returns. The irony is supposedly Republicans support free markets, but this is the opposite of that.

My understanding is that a rule is a much stronger statement and more binding on participants than what has been in the past interpretative guidance, so that makes it more nefarious.

For large fund managers who manage ERISA assets, I think that it is appropriate to say to the DoL we are responding to our customers and clients’ interests and needs here.

Regardless of whether we as Larry Fink think climate change is a crucial financial risk, our customers want this and for you to create this hurdle to our ability to offer customers what they want, doesn’t seem like an appropriate role for the DoL.

I understand the DoL ensuring that ESG is an appropriate financial consideration, but to say essentially that the default is that it is not and you have to prove it, is very difficult.

When we have managers come into present to us, we always ask them, how they express ESG considerations. For some of them it’s a check the box thing, they are trying to show us they care. But for many of them it is an integral part of their investment process. If you have a manager like that, they would now have to jump through some hoops to do that, it makes no sense. It doesn’t make sense from a free market perspective.

 

Q: Are you concerned about the impact this might have on the broader market and the interpretation of fiduciary duty more generally?

A: This doesn’t directly affect public pension funds because ERISA doesn’t cover us directly. But it does impact the fiduciary standard and prudent person rule laid out in ERISA, and we exist under that.

The other thing about it is with regard to fiduciary duty. I’ve always thought as a fiduciary you need to make sure you are using a prudent process, and documenting the process is what matters. If you arrive at an investment decision and you’ve gone through an appropriate process that’s good. You might end up with an investment that goes south but so long as you go through an appropriate process it’s ok. This is saying the process doesn’t matter if you end up with an ESG investment, you have to go through a whole other level that only applies to ESG, but to nothing else.

I’m not really a worrier, but I probably should be worried about the impact this might have on fiduciary duty.

People could use it as a cudgel and an attack for using ESG. This will be another weapon our opposition will use to criticise us – NYCERS and pension funds more broadly.

It feels like we are in Act II of a five-part Covid-19 play that Shakespeare could have written. This suggests we are not very far into the crisis with many uncertainties, twists and learnings left.

Act I delivered three defining moments. Australian bushfires in January made us stare at the complex truths of climate change. In March we realised that Covid-19 was truly deadly. Then George Floyd was unlawfully killed on 25 May, showing us just how deeply wounded by racial injustice our society is.

Act II is going to be about trying to make sense of it all by juggling more aspects, reactions and complexities as new characters, sub-plots and ideas emerge. We have three thoughts for the investment industry to ponder as the plot lines unfold: crisis circumstances, leadership responses and cultural aspects.

First, crises like this generate surges of anxiety, deep vulnerabilities and multiple tragedies. But the silver lining to these dark clouds can be finer values, deeper talent and better truths. This seems truly to be “the best of times and the worst of times”. Dickens’ Tale of Two Cities went on to say “…it was the age of wisdom and it was the age of foolishness”. We will need to go deeper into this play before we are sure where wisdom is and where foolishness lurks. Act III could be pivotal, when critical decisions must be made.

The crisis has revealed much of our prior foolishness: uncaring disrespect for others; status obsessions; reckless misuse of our planet; work / life imbalances; and short-term measured preferred over long-term meaningful, to name but a few. The silver lining is the improvements in relationships and values emerging in new experiences and actions that are tapping into our inner heroes. Think of all the new support networks, the family resets and the new respect for front-line workers. We are finding many more moments when we surprise ourselves.

Second, crisis management by good national leaders have been defined by authentic ‘it’s-all-about-you’ qualities. The bad leaders have acted out ‘it’s-all-about-me’ behaviours. Thankfully, many of our industry’s leaders have demonstrated ‘it’s-all-about-you’ qualities – understanding that people want to be listened to and led with honesty about the present and reasoned positivity about the future.

Third, strong culture has proved such an important underpinning for national and organisational responses and outcomes. It works through good values embedded in behavioural norms that when acted out, particularly in testing times, strengthen ties. Attitudes and actions towards diversity and inclusion are key indicators here. The bad news is the belated realisation of how unsafe black lives have been and still are. The better news is that industry leaders have publicly acknowledged this and have committed to act with urgency to making workforce diversity a cherished asset.

Act II is full of uncertainty and there is no one plot line. Our business strategies will surely need to change and pivoting with optionality will be the prime navigating skill for organisational leadership. There are three actions that should help here.

Work on trust

How we collaborate is being re-configured in the virtual world, impacting organisation’s teamwork- and client-delivery models. We have all experienced the advantages and disadvantages of working from home and, regardless, should recognise that the vital relational element of trust is vulnerable without physical meetings. Notably both the feedbacks and the bonds within relationships are weakened. To avoid decay the ingredients which build and maintain trust – authenticity, logic, empathy and connections – need investment. So paying special attention to moral integrity and values, over-communicating intention and action, and ‘all-about-you’ listening and caring are vital. And the logic of the case must stand up, that is being reasoned or fact-based where our emotions often favour opinions.

Trust does not desert an organisation overnight, but it can ebb away over time if investment is under-powered. Act III may prove defining for some organisations, so extra efforts now to maintain and bolster trust will be worthwhile.

Work on the nexus of purpose, organisational identity, culture and diversity

While there has been a refocusing on organisational purpose in recent years, the state of thinking and documentation of these soft concepts leaves much to be desired. Our proposition is that work on more purposeful organisations must cascade through the organisation, requiring considerably more focused effort. One way is to use online learning and development channels – often developed to train and refresh all staff on policy and compliance issues – to build a better understanding of the soft power of purpose and its connection to their culture.

Work on sustainability in the investment model

Our experiences in 2020 suggest that taking a multi-stakeholder approach really does increase actions around sustainability. It has also resulted in more resource and focus on sustainability in companies through: the integration of ESG; the strategic management of sustainability; and connections to the SDGs. While we have been travelling in this direction for a while, the pace is picking up, as more enlightened self-interest fuels motivation. However the ‘S’ in ESG still lags and more needs to be done to ensure that people – whether the workforce, the supply chain or others involved – are more respected and included than before.

To conclude, as we look into the future there are literally hundreds of paths that radiate out in front of us. Some lead to really bad places. But some lead to a world more healed and more beautiful than ever before where we have made sense of a new normal and not gone back to our old normal. Our transition needs to be to a more resilient, clean and inclusive state than before. Crises reveal the better paths and, if we are wise to seek them out, we can work this out.

As Nelson Mandela said: “It always seems impossible until it’s done”.

Roger Urwin is the co-founder of the Thinking Ahead Institute and head of global content at Willis Towers Watson

 

“Interdependence is and ought to be as much the ideal of man as self-sufficiency. Man is a social being.”
Mahatma Gandhi

We are still contending with its direct effects of COVID-19: millions infected, hundreds of thousands of deaths, mass unemployment, businesses and investments damaged and people forced apart. As with all crises, there are threats and opportunities, grounds for optimism and pessimism. Some doubt whether the world’s economies can be rebuilt, whether the globalised movement of people and goods will ever fully return and whether responsibility in business and investment will survive, perhaps replaced by a focus on short-term profitability and recovery. The pandemic has certainly highlighted and exacerbated inequality, and there will be considerable social consequences to widespread job losses, even if we see a relatively quick recovery.

Others see the crisis as an opportunity for transformational change. As we awaken and gain perspective on the conditions under which we had been living and working, we can address problems that we had been unable to solve. For example, although climate change was widely recognized as our greatest existential threat (and the pre-eminent example of externalised social and environmental cost) governments, regulators, businesses and investors seemed incapable of responding effectively and collectively. However, the present crisis has spurred us to urgent action, which inadvertently has had the effect of reducing carbon emissions and demonstrating the efficiencies and productivity associated with remote working for sections of the economy. Furthermore, it seems possible that people will continue to commute less following the crisis. Perhaps in being forced into a different way of life, we will be more open to flexible working.

A better understanding of systemic risk and a preparedness collectively to address this may be a positive result of the COVID-19 crisis. Whether this be in our approach to climate change or to the risk of pandemic itself. The International Corporate Governance Network (ICGN) has proposed that its members approach the systemic risk of coronavirus as a moral and economic imperative, as part of their responsibilities as investors and companies.

What might it mean to approach the pandemic responsibly? Surely this could include prioritising short-term investment performance? With the global economy is in its worst state since the Great Depression, we could and perhaps should act quickly and decisively to limit and recoup financial losses. As the initial market reaction suggests, investors feared the spread of the coronavirus would destroy economic growth and that governments were not able or willing to stop the decline.

However, as was already the case before the pandemic, investors’ focus on short-term financial performance risks undermining their own and their beneficiaries’ interests in the longer-term. The present crisis is an opportunity to extend our understanding and pursuit of shared purpose, working together to common benefit and realising the value of our interdependence as investors, employees and citizens. And this is precisely what the current pandemic has demonstrated: when we are forced apart, disconnected and unable to work together, economies shut down.

Interdependence

This crisis shows us how deeply we depend on each other. We’ll only come through this as a society through a huge collective effort. At a time of crisis, no one is an island, no one is self-made. The wellbeing of the wealthiest corporate chief executive depends on the outsourced worker cleaning their office. At times like this we have to recognise the value of each other, and the strength of a society that cares for each other, and care for all.

In amongst the suffering and damage of this crisis we can find hope in the many examples of compassion and kindness. From the dedication of frontline medical workers and our appreciation of them, to the actions of governments and companies in maintaining incomes and balancing interests. In our temporary separation we are finding a deep understanding of our need for each other, of our interdependence.

Social isolation provoked by Covid-19 has already manifested itself in the Dutch language, with its creation of a new word: Huidhonger – skin hunger, meaning a longing for human contact while in isolation. The need for connection is fundamental to our human nature, yet we have been operating in an economic system and under an investing paradigm that assumed we were discrete, profit maximising independent entities, whether individuals, companies or investors. This paradigm was already starting to break down, with the movement towards responsible investment and sustainable business and the emphasis on purpose and impact. With a greater appreciation of our interdependence, this movement can gain momentum from the present crisis.

Shared purpose

Drawing upon our work at Arkadiko, in the past three years we have seen investment managers starting to realise their shared purpose with their clients and the companies in which they invest. In certain markets, particularly in Europe and Asia, it is no longer acceptable to maintain the illusion of independence. Indeed, many investment managers are coming to see responsible investment and stewardship as strategic imperatives and companies increasingly expect their investors to be actively engaged, with a longer-term perspective.

Asset owners and investment managers still need to improve their understanding of each other’s positions, building trust and mutually beneficial relationships and the early signs from the crisis is that we expect this work to continue and strengthen. This means moving away from a focus on transactions, interactions in which selling a product is the end goal, and short-term investment performance. Investment managers are also starting to acknowledge that there is a strong connection between their own culture and purpose and those of their clients and the companies in which they invest. We also expect the emerging discussion on the purpose and culture of the investment industry to continue and strengthen.

Which again raises the theme of interdependence. To connect investment decision-making to the external world requires fund managers to bring their whole selves to work and to consider what matters to them as people as well as investors. We have found that organisations with a clear, authentic and positive sense of purpose, have stronger more affirmative cultures in which individuals feel empowered to contribute and do their best work. We expect such businesses to be more sustainable and have a greater impact in the long-term, supported by the formation of positive relationships with clients in which both parties recognise that they depend on one another for the best outcome.

Recovery

Restoring trust within and between atomised societies and economies, will require openness and constructive dialogue, and working together towards common purpose. If investment managers operate with an understanding of their interdependence, their investment decisions and engagements will naturally take account of externalities such as climate change, social injustice, and economic poverty.

Our investment chains contain multiple interdependencies and relationships that rest on shared purpose and mutual trust. Where connections have been damaged, whether with our clients, our businesses or their stakeholders, we have an opportunity to repair these, as patient long-term investors and owners, thereby emerging stronger from the crisis.

Colin Melvin is founder and chief executive of Arkadiko Partners

 

Investors  have only a few days to comment on the US Department of Labor’s proposed amendment to investment duties regulation and ESG – which many believe is out of step with the market and potentially damaging to retirees’ retirement income – with the window for comment closing on July 30.

The proposed rules would further burden the ability of fiduciaries of private-sector retirement plans to select investments based on ESG factors, but the momentum around ESG integration and the outperformance of sustainable products means the proposal is out of touch with the market reality according to Fiona Reynolds, CEO of PRI.

“In the face of the serious market disruption that COVID-19 has brought about, investors have not reverted to traditional strategies abandoning ESG integration, but instead we’ve seen ESG funds are thriving and in fact out-performing,” she says. “This is one of the reasons the steps that the Department of Labor are taking make little sense; they don’t match the reality of what is happening around the world and I can only assume therefore that they are politically motivated.”

Similarly, David Wood, who heads up the Initiative for Responsible Investment at the Harvard Kennedy School, says fiduciary duty typically follows rather than leads industry practice.

“The proposal is a misguided description of ESG integration and not responsive to any demand from investors,” he says.

In fact, the responses to COVID-19 and the discussions on the need to build back better have put sustainability and ESG issues higher on the agenda of investors, business and many governments than ever before.

The proposal reflects the DOL’s continued concern that ESG investment might “subordinate return or increase risk for the purpose of non-pecuniary objectives” when there is evidence to the contrary.

A recent report by Blackrock, Sustainable investing: resilience amid uncertainty, shows that in the first quarter of 2020, there was better risk-adjusted performance across sustainable products, with 94 per cent of a globally-representative selection of sustainable indices outperforming their parent benchmarks

Blackrock goes on to say that “these results are consistent with the research BlackRock has been publishing since mid-2018, demonstrating that sustainable strategies do not require a return trade off and have important resilient properties”.

“If the proposal disincentivises people from using all the tools available that can improve their performance then that is not good. It’s kind of anti-market,” Harvard’s Wood, whose department gave advice to the Obama administration’s Department of Labor rules, says.

“This needs to be understood within the context of the politics back and forth among administrations. But despite that back and forth we have a steady increase in the deployment and management of responsible investment. I would say to trustees, your peers are investors around the world and you have access to these tools and they improve investment outcomes,” he says, also encouraging fund executives and trustees to call on service providers to act.

“If fund managers and other service providers have said they incorporate ESG into their process because it improves investment returns then they should have a voice with regard to this proposal,” he said. “If asset managers have made a claim they believe in these tools then this is one way they can show it.”

A Harvard Law School forum on corporate governance points out that the proposal may be a headache for fund managers which have integrated ESG as they will be required to justify their investments with increased documentation which could increase fees.

“In order to select an investment with an ESG component, the plan fiduciaries would be required to compare investments or strategies on ’pecuniary’ factors such as diversification, liquidity and rate of return. Specific documentation would be required for the tiebreaker justification,” a Harvard corporate law paper says. “The extensive scope of criteria that the DoL considers problematic will also likely result in increased costs and fees as plan fiduciaries seek to filter for these criteria.”

The PRI is calling on signatories to oppose the proposal, as well as extend the comment period from 30 to 90 days.

The proposal puts the US position even further behind global markets, most notably Europe where the European Commission’s European Green Deal sets out a clear roadmap for making the EU’s economy sustainable. It sets out a plan to become carbon-neutral by 2050 and essentially fast-tracks sustainable investments.

“Any of our global signatories who have gone through the process of integrating ESG issues could only be bemused and confused by what is currently proposed by the DoL. As regulators in leading markets around the world move forward with requirements that investment fiduciaries consider ESG factors, the DoL’s proposed rule represents a significant step in the wrong direction, one that is out of sync with markets across the world.”

While this update proposal regarding the US Department of Labor’s investment duties regulation was intended to “provide clear regulatory guideposts for plan fiduciaries” it seems to have done the exact opposite, adding confusion in what is a misunderstood interpretation of ESG integration.

“We need to use our levers of influence as investors – to help create an enabling environment which accelerates, not hinders, our momentum. This DoL proposal does the opposite. It mischaracterises ESG integration,” Reynolds says. “It is our very strong view the Department of Labor’s responsibility is to protect millions of American savers and their retirement incomes which means ensuring 401(k) plans and pension funds consider all material risks, including ESG risks. It’s not its role to make doing so more difficult.”

The PRI’s Reynolds also makes clear that if asset managers and asset owners are signatories to the PRI they would be aware that Principle 1 is a commitment to incorporating ESG issues into investment analysis and decision-making processes.

“Therefore, we can’t accept proposals that stand in the way of investors implementing these commitments. You can’t either and we need your help, we need you to act.”

 

Waking up to science – how COVID-19 has highlighted the urgent need for action on climate change

Nigel Topping who was appointed by the UK Government as the High Level Climate Action Champion for United Nations climate talks, COP26 joins Fiona Reynolds, chief executive of the PRI, in conversation with Amanda White, editor of Top1000funds.com This episode focuses on climate change and how, amongst and despite, the short-term focus of this COVID-19 crisis, we can mobilise government, business and investors into action around this important issue of climate change.

• Nigel Topping, champion, COP26
• Fiona Reynolds, chief executive, Principles for Responsible Investment (PRI)

About Nigel Topping
Nigel Topping has been appointed by the UK Government as the High Level Climate Action Champion for United Nations climate talks, COP26. Most recently he was chief executive of We Mean Business, a coalition of businesses working to accelerate the transition to a zero carbon economy. Prior to that he was executive director of the Carbon Disclosure Project and has also been a board member of The London Pension Fund Authority.. He has 18 years of experience in the private sector, including as a senior vice president of supply chain for a global automotive component manufacturer. He holds a BA in Mathematics from Cambridge University and an MSc in Holistic Science from Schumacher College.

About Fiona Reynolds
Fiona Reynolds is responsible for global operations. She has more than 20 years’ experience in the pension sector, working in particular with the Australian Government, and has played a key role in advocating pension policy change on behalf of working Australians. She has a particular interest in retirement outcomes for women. Prior to joining PRI, she spent seven years as chief executive at the Australian Institute of Superannuation Trustees, an association for Australian asset owners. Reynolds has been a director of AUSfund, Industry Funds Credit Control, the United Nations High Commissioner for Refugees, and Women in Super. In September 2012, she was named one of Australia’s top 100 women of influence by the Australian Financial Review, for her work in public policy. Reynolds also serves on the International Integrated Reporting Council, the council for Tomorrow’s Company, the Global Advisory Council on Stranded Assets at Oxford University, and the Business for Peace steering committee.

For PRI’s whitepapers and resources for asset owners visit www.unpri.org

About Amanda White
Amanda White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of Top1000funds.com, she is responsible for directing the global bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts. She holds a Bachelor of Economics and a Masters of Art in Journalism and has been an investment journalist for more than 25 years. She is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Sustainability in a time of crisis is a Top1000funds.com podcast collaboration with PRI, with support from Robeco

Sustainability issues have never been more important than they are right now. How can investors work together to use this unprecedented opportunity to put the promise of purpose-driven leadership and stakeholder capitalism into practice? This collaborative work with the PRI, with the support of Robeco, will showcase leadership in sustainability during a time of crisis.

Check your ad settings