Regulatory expectations of engagement a 'systemic flaw', says USS

The regulatory expectation on institutional investors to “fix society’s ills” is a systemic flaw and does nothing to help investors engage with companies, Universities Superannuation Scheme Investment Management (USSIM) has said.

The in-house investment arm of the UK’s largest pension fund, USS, said investors were often blamed for failures at the corporate level, and that it was impractical to address all the issues faced by companies.

Speaking at the OECD Roundtable on Long-term Investing in Paris, Daniel Summerfield, co-head of responsible investment at USSIM, said it was unrealistic of regulators and organisations to expect investors to engage with all of their holdings.

USS has £42bn (€53bn) in assets, with around 44% invested in listed equities.

“We own a large chunk of the investible universe,” he said. “And one needs to prioritise and have a reasonable chance of success with engagement.

“The regulators expect investors to fix society’s ills. [The notion] that, if we do not fix it, then it is our fault is a systemic flaw in the regulatory environment.

“Simply shifting the blame to investors is not a good call.”

Summerfield was backed by Invesco’s CIO for global equities, Bernhard Langer, who said there was a mismatch between calling for pension funds to engage and what engagement actually meant.

He cited the pressure placed on the UK’s Local Government Pension Schemes (LGPS) to engage with their equity holdings, but said there were few tangible outcomes in place.

“There is the expectation to be engaged, but what is this expectation?” he asked. “Is there a tangible objective? As a human being, I understand where you are coming from, but as an investor, I need more concrete outcomes.”

He also criticised external organisations “jumping on bandwagons” such as diversity and encouraging pension funds to engage on aspects that have no material outcome to their portfolios.

“Is this relevant to our investment?” he asked. “No. Has it proven that it improves returns? As a member of society, I hope in the long-term it will help, but it has no impact on our portfolio.”

However, Fiona Reynolds, managing director for the UN-backed Principles for Responsible Investments, said the engagement of pension funds and their asset managers was key for long-term sustainability.

“Pension funds are intergenerational,” she said. “So when you invest in companies, you want companies that will be around for the long term and provide the best value. The best way to ensure that is engaging with them.

“Obviously, this does not mean you never sell, but engagement is an effective tool to ensure long-term value.”

She also rejected Langer’s point, arguing that proven companies with diversity policies outperformed those without.

Langer also said, in many cases, it was easier to sell shares in companies rather than allocate resources to engagement.

Agreeing with Langer, Summerfield said sometimes the only course of action was to sell, quoting failed British bank Northern Rock as an example.

He also defended asset managers that did not actively engage and said the right incentives were not in place.

“It is up to asset owners to set instructions and parameters clearer, rather than going to asset mangers after the investing and asking what they are doing about climate change,” he said.