Sunday, August 13, 2017

The Broader Social Consequences of Investment Decisions

In an essay appearing last month in Institutional Investor ("Avenue of Giants,"July 1, 2017), Ashby Monk argued for a broader definition of fiduciary duty. In polling more than 40 large "pensions and sovereigns," Mr. Monk noted that more than half of those surveyed rejected the notion that their decisions would be guided by the consequences for the community they inhabit. The rationale, it appears, is such considerations are quite simply beyond their fiduciary duties.

Mr. Monk went on to note that narrowly defined notions of fiduciary duty, however rational for individual investors or pension managers fosters damaging consequences for the larger investment community. Monks went on to raise a series of questions:

  • Where will the breakout innovations in our industry come from if investors are bound by a prudent-person rule?
  • If some investors hide fees paid to external managers, doesnʻt such secrecy prevent boards from understanding the true cost of producing these returns?
  • If the price of ʻaccessʻ to a given fund is conditioned by outrageous terms or side letters, doesnʻt this further empower private managers to extract higher fees over time? 
Each of these questions illustrated practices by institutional investors posing a larger problem for pension fund managers. A too narrowly defined notion of fiduciary duty overlooks the negative  consequences for not just beneficiaries, but also the larger society. As mentioned in my earlier postings, these are problems requiring, among other remedies, a radical transparency.

Yet even a much greater transparency is not enough to address what is perhaps the most damaging disconnect between a narrowly defined notion of fiduciary duty and the most threatening of consequences in our time. As Monks notes, many institutional investorsʻ strict definition of fiduciary duty discourages them from considering climate change as a legitimate issue.

It is clearly evident that among the pivotal issues confronting all Californians, is the urgent need to more fully comprehend the true costs of a fossil-fueled economy. Whatever the short-term calculus of satisfying a narrowly defined fiduciary duty at CalPERS, perpetuating fossil fuels and associated industries poses an existential threat to the survival of human civilization beyond the 21st century. As Governor Jerry Brown has noted, for those doubting the magnitude of climate threats, one only has to peruse the consensus statements by climate scientists (e.g. IPCC) to understand the especially damaging role of fossil fuels.

For these reasons, it is important for all voters to understand that the election of public-at-large board members of CalPERS in September is not merely a narrow choice regarding some abstract discussions about fiduciary duties and investment returns; elections of all sorts - from city councils to state treasurers to board members for one of the worldʻs largest pension funds will play an increasingly crucial role in making the urgently needed changes for transitioning to a new economy.

I look forward to posting more on this topic in future posts....and thanks for your readership and commentary.

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