Pensions or the planet?

Fund managers are torn between maximising clients’ savings and saving the Earth

Tim Congdon

This article is taken from the August/September 2021 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issue for just £10.

What is the main task of the fund management industry? Fund managers act on behalf of savers, the people who are to benefit from pension funds when they retire or have saved via insurance policies to limit risks to their dependents, and so on. Surely, fund managers’ job is to obtain the best possible returns for them.

That sounds simple enough. Indeed, regulators make a big fuss about the importance of fund managers putting clients’ interests first, as when orders are placed for stocks and shares. A long-standing problem is alleged to be that fund managers have friends in the brokerage community and allocate excessive commissions to chums.

The Financial Conduct Authority insisted, in a 2017 “thematic review”, that the only valid objective was “best execution” for clients. In words of complaint, talking about the British fund management industry, the FCA’s verdict was that “the pace of change in improving client outcomes in best execution was slow, with few firms having a cohesive strategy for improving” their conduct.

But these matters are not simple at all. Suppose that a high-level consensus has emerged that the Earth’s future is imperilled by long-established human behaviours. Then the prevention of those behaviours becomes an overriding concern for everyone, at least in theory. At present a high-level consensus has become established that mankind is to blame for global warming.

There was no such consensus 50 years ago, when fears were widely expressed about another Ice Age, and there may be no such consensus 50 years from now. But, given that this consensus prevails, it is understandable that senior figures in fund management should have to acknowledge it. After all, to plan for the pensions of 35-year-olds would be crazy if life on Earth had become impossible by the time they hoped to retire.

Fund managers are duty bound to obtain the highest possible return for customers

Larry Fink, chairman and chief executive of BlackRock, the world’s largest fund management organization, writes an annual letter to the CEOs of the businesses in which BlackRock invests. In the last few years, and with some emphasis this year, he has warned them that they must respond to climate change. In his words, the pandemic “has driven us to confront the global threat of climate change more forcefully.”

As has just been explained, fund managers are duty bound to obtain the highest possible return for customers. But, as has also just been explained, pressure is growing for them to combat climate change as a top priority. Which comes first — maximum returns or saving the planet?

On the face of it, fund managers must not support new capital expenditure in coal mining, and oil and gas exploration because these activities will significantly increase the world’s temperature. (Or so we are told.) By extension, they must not finance such expenditure in the traditional energy industries, regardless of potential high rates of return on offer.

Further, they must not, for example, include oil company equities in their portfolios, even if their future earnings are low-priced relative to those of, say, Apple, Alphabet (which owns Google) and Amazon.

Who can quarrel with the case for a better world?

Mr. Fink’s letter is well-argued, a fine example of what the British economist, the late David Henderson, once called “global salvationism”. Who can quarrel with the case for a better world?

But in this context it creates a tension between conflicting imperatives. The attainment of the best possible return for savers over often quite short time horizons may involve investment in activities which are supposedly ruinous for the health, wealth and happiness of nations in the very long run. Yet stock-picking driven by environmental do-gooding will cause high-return investments to be ignored or cold-shouldered, leaving savers worse off.

One risk here is that environmentally dubious quoted companies will become so under-valued that private equity investors will acquire them and take them off the public markets.

Professional investors, who know how to direct money to private equity funds, will continue to achieve strong investment returns, whereas retail investors will have no alternative to investing in ethically whiter-than-white, but over-valued securities, which will deliver low returns. (Apple and Alphabet are valued at almost 43 times last year’s earnings, and Amazon at 84 times. On 15 April Mr. Fink said he was “incredibly bullish” about the stock market. He has been right so far.)

The worry has to be that the global salvationists in the investment world are engaged in virtue-signalling: they care too much about their reputations as virtuous citizens, and not enough about the results they deliver to ordinary savers.

The attack on the oil and gas sector is undoubtedly discouraging investment in it. Global capital expenditure on upstream energy development and production is at present running at little more than $200 billion a year, sharply down on almost $700 billion in 2014. Fears are growing about another oil price spike, perhaps to $100 a barrel or above.

Britain’s savers will be understandably upset if, over the next few years, environmentally-friendly stock selection leads to seriously inadequate investment returns. But they will, of course, have helped to save the planet.

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