Abstract
Universal owners such as pension funds, insurance companies, university endowments, and sovereign wealth funds have an interest in the long-term health of the financial system as a whole (Hawley and Williams 2000; Dimson et al. 2013; Quigley 2019). These asset owners cannot diversify away from systemic risks such as climate change, inequality, and pandemics, and can only mitigate whole-system threats by effecting change in the real economy. Conversely, traditional socially responsible investment (SRI), responsible investment (RI), or environmental, social, and governance (ESG) frameworks tend to adopt a climate or social risk lens, with a focus on risks to the portfolio from the real economy. These (S)RI or ESG frameworks therefore typically apply wholly or largely to public equity portfolios (Hill 2020a), from which returns and dividends to the portfolio disproportionately flow but which have little to no impact on the real economy from an asset allocation perspective. For universal owners whose goal is to mitigate systemic risks, the focus must instead be on positive investment: the impact of asset owners’ investment decisions on the real economy, not the real economy’s environmental and social risks to these asset owners’ portfolios. A positive investment approach, then, eschews stock-picking in the public markets in favour of a focus on primary market asset allocation – flows of new capital to the companies they own – and forceful stewardship within the secondary market. In essence, (S)RI and ESG aim to protect individual portfolios from systemic risks; universal owners aim to mitigate systemic risks in the real world, which has the effect of internalising externalities and protecting the long-term health of the system as a whole. An (S)RI or ESG framework, then, is not fit for universal owners’ purpose. A new framework is necessary – one that replaces the lens of climate risk with the lens of universal ownership: real-world, real-economy social and environmental impact. The universal ownership framework proposed in this paper includes the following: a more urgent and tactical version of active ownership within public equity (and even within corporate bond holdings); asset allocation within the primary market; a particular focus on assets that make the transition from the primary to the secondary market; “ungameable” metrics linked to real-world effects; strategic engagement with public policy and standard-setting regimes; and forward signalling to reduce wastage and accelerate decarbonisation timelines. Together these elements of the framework have the potential to change the rules of the game, alter company behaviour and fundamental strategy, reallocate capital, and bend the emissions curve permanently downwards – precisely what is required of universal owners in this last crucial decade of climate action.
