Unlocking Pension Funds: Impact Investing With Fitzpatrick And Omidyar

Will Fitzpatrick, Council to Omidyar Network, speaks on impact investing and how it can be used to unlock pension funds. Omidyar Network India is an investment firm that focuses on impact investing by partnering with bold and purpose-driven entrepreneurs who are working to improve the lives of India’s Next Half Billion. Impact investing can help pension fund managers invest in areas that their members care about, creating a positive impact on society and the environment while generating sustainable financial returns. In 2015, the impact investing industry took a step forward when the Department of Labor Secretary Thomas Perez repealed restrictive guidance that prevented pension funds from engaging in impact investing. This allowed pension plan managers to consider whether an investment may positively impact the community and advance their social responsibility goals.

Pension funds' social responsibility goals

Pension funds are increasingly being used as a vehicle to drive social change and promote environmental sustainability. This phenomenon, known as "impact investing", involves making investment decisions that not only aim for financial returns but also seek to positively impact society and the environment.

In the past, pension plan managers were restricted by regulations that prevented them from considering social and environmental factors when making investment choices. However, with the repeal of restrictive guidance, pension funds can now actively pursue investments that align with their organisation's social responsibility goals. This shift has unlocked significant capital for entrepreneurs and businesses focused on creating social value.

Impact investing allows pension fund managers to invest in areas that their members care about, such as renewable energy, energy efficiency, and health. By aligning investments with the values of their members, pension funds can engage and attract younger investors, leading to improved financial security for individuals in the long term. Additionally, impact investing provides an opportunity for pension funds to contribute to societal and environmental well-being while still meeting their fiduciary obligations and maximising long-term returns for their beneficiaries.

Pension funds that embrace impact investing can follow several principles to maximise their social impact. These include setting clear and impactful objectives, appointing investment consultants and managers who share their values, using their influence to drive change through stewardship guidelines, and regularly monitoring and reviewing their impact against established indicators and benchmarks.

By integrating social responsibility goals into their investment strategies, pension funds can play a pivotal role in driving positive change while also generating sustainable financial returns. This approach not only benefits society and the environment but also helps pension funds connect with their members and promote long-term financial security.

Impact investing and fiduciary duty

Pension funds are increasingly adopting impact investing as a way to reconcile financial returns with positive social and environmental outcomes. Impact investing can be aligned with fiduciary duty, as research on UK pension funds has shown.

The Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for most voluntarily established pension and health plans in the private industry in the US. It requires plans to provide participants with plan information, establishes fiduciary duties for those who manage and control plan assets, and gives participants the right to sue for benefits and breaches of fiduciary duty.

In October 2015, the impact investing industry took a significant step forward when the Department of Labor Secretary Thomas Perez repealed restrictive guidance that prevented pension funds from engaging in impact investing. This change allowed pension funds to consider environmental, social, and governance factors when making investments, recognizing that such factors can maximize long-term returns for pension fund beneficiaries.

Pension funds can now consider the potential positive impact of an investment on the community when evaluating investment options. This shift enables organizations to advance their social responsibility goals and unlock capital for entrepreneurs and businesses focused on social change.

For pension fund managers, impact investing offers a powerful tool to invest in areas that their members care about. It also provides an opportunity to engage members, especially young people, by showing them the positive impact their money can have.

To get started with impact investing, pension funds can follow these principles:

• Set impactful objectives: Establish and incorporate 'impact objectives' as part of your pension scheme's statement of investment principles (SIPs) or policies, which can be explained to your members and are designed to serve the scheme's purpose.
• Appoint consultants and managers with impact integrity: Identify and appoint investment consultants and managers who align with your investment beliefs and can achieve your scheme's impact objectives through their investment and stewardship activities.
• Use your voice to make a change: Formulate stewardship guidelines for your or your investment manager's voting and engagement activities to progress your impact objectives.
• Manage and review your impact: Monitor progress against your impact objectives by identifying relevant indicators and benchmarks with the help of your investment managers.

Pension funds' environmental, social, and governance factors

Pension funds are increasingly considering environmental, social, and governance (ESG) factors when making investment decisions. This shift towards impact investing allows pension funds to align financial returns with positive social and environmental outcomes. In the UK, research by Pensions for Purpose found that impact investments in renewable energy, energy efficiency, and health can reconcile fiduciary duty with social impact.

The inclusion of ESG factors in investment decisions is a result of policy reforms that have removed barriers to impact investing. Notably, in October 2015, the US Department of Labor Secretary Thomas Perez repealed restrictive guidance, allowing pension funds to consider ESG factors. This change recognised that environmental, social, and governance issues could directly impact the economic value of an investment and maximise long-term returns for pension fund beneficiaries.

Pension fund managers can now evaluate investments that positively impact communities and advance their organisations' social responsibility goals. Impact investing also provides an opportunity to connect with members, particularly younger individuals, by demonstrating the positive social and environmental impact of their investments.

To successfully integrate impact investing, pension funds can follow principles such as setting impactful objectives, appointing investment consultants and managers with impact integrity, using their voice to drive change, and actively managing and reviewing their impact.

By considering ESG factors, pension funds can contribute to sustainable, positive long-term results for individuals and societies while fulfilling their fiduciary obligations.

Pension funds' impact on society and the environment

Pension funds can have a significant impact on society and the environment. In October 2015, the impact investing industry witnessed a major development when the Department of Labor Secretary, Thomas Perez, repealed restrictive guidance that previously prevented pension funds from engaging in impact investing. This change allowed pension funds to consider environmental, social, and governance (ESG) factors when making investment decisions, recognising that these factors could maximise long-term returns for pension fund beneficiaries.

The ability of pension funds to consider ESG factors in their investment choices has had a positive influence on society and the environment in several ways. Firstly, it has enabled pension funds to align their investments with positive social and environmental outcomes while still achieving financial returns. For example, research by Pensions for Purpose found that UK pension funds investing in impact areas such as renewable energy, energy efficiency, and health showed competitive returns across diverse asset classes. This indicates that pension funds can contribute to societal and environmental well-being without compromising their financial goals.

Secondly, impact investing by pension funds has empowered individuals, especially young people, to invest earlier in life. When individuals see the potential for their money to create positive change, they are more likely to engage in investing, leading to improved financial security in the future. This two-fold benefit of impact investing demonstrates how pension funds can positively shape society by promoting both financial stability and social responsibility.

Furthermore, the consideration of ESG factors by pension funds has unlocked capital for entrepreneurs and businesses focused on driving social change. This has resulted in increased investment opportunities that drive both investment returns and positive social impact. Pension funds, therefore, play a pivotal role in fostering innovation and supporting initiatives that create a more sustainable and equitable future for society.

The impact of pension funds on society and the environment is also evident in their ability to influence corporate behaviour. By prioritising investments that meet specific ESG criteria, pension funds can encourage businesses to adopt more sustainable and socially responsible practices. This influence can lead to widespread changes in how corporations operate, ultimately contributing to a more sustainable and ethical business landscape.

Overall, the consideration of ESG factors in pension fund investing has had a profound impact on society and the environment. It has facilitated a more holistic approach to investing, where financial returns are balanced with the well-being of people and the planet. By embracing impact investing, pension funds have the potential to drive systemic change, create long-term value, and build a better future for generations to come.

Pension funds' long-term investment outlook

Pension funds are increasingly adopting impact investing, which considers environmental, social, and governance (ESG) factors, to achieve long-term investment goals. This approach aligns with the interests of younger generations who are keen to see the positive impact of their investments in society and the environment.

Pension funds are taking a long-term outlook of 10 to 30 years when it comes to impact investing, aiming to balance financial and impact goals. This strategy is particularly attractive to younger investors, who are more likely to invest earlier in life if they understand the social and environmental benefits. This trend has led to the emergence of pension schemes that focus on impact investing, such as Cushon, which won the 2021 Social Impact Award for Pension Funds. Cushon has branded itself as the 'world's first Net Zero Now' pension fund, investing in climate-driven initiatives like wind and solar farms, green hydrogen, and social housing.

The shift towards impact investing was facilitated by the US Department of Labor's repeal of restrictive guidance in 2015, which previously prevented pension funds from considering ESG factors. This change acknowledged that ESG factors are key to maximizing long-term returns for pension fund beneficiaries. Pension plan managers can now evaluate investments based on their potential positive impact on communities, aligning with organizations' social responsibility goals and unlocking capital for socially-minded entrepreneurs.

Research by Pensions for Purpose found that UK pension funds investing for impact tend to focus on renewable energy, energy efficiency, and health. These funds comprise both private markets (47.3%) and listed assets (52.7%). The research also revealed that impact investments in private markets, particularly real estate and private equity, constitute a significant portion of pension funds' allocations, indicating a strategic preference for these asset classes.

Pension funds adopting impact investing demonstrate a commitment to balancing financial returns with positive social and environmental outcomes. This approach has the potential to engage younger investors, improve financial security, and contribute to a more sustainable future.

Frequently asked questions