OW Bunker had said earlier in the week, while considering restructuring, that it had to be assumed that all of the group’s equity was lost.Most big Danish pension funds are believed to have some exposure to the stock.Statutory pension fund ATP said it had invested approximately DKK150m (€20.1m) in OW Bunker. This compares with the pension fund’s total portfolio of listed Danish equities of around DKK17bn at the end of the third quarter.An ATP spokesman said this, and the fact the pension fund had made a 19% return in the first nine months of the year on Danish equities, meant the effect of the corporate collapse on ATP’s investment result would be “very minor”.“Naturally, we have a very critical view on the course of events,” he said. “We are currently considering our options.”PensionDanmark said it had total exposure to OW Bunker of around DKK50m, divided between its Danish equities portfolio and its investment in the fund Altor II. Claus Stampe, investment director of the labour-market pension fund, said: “Our exposure to OW Bunker should be seen in the light of our total equities holdings of DKK40bn.”He said it was an extraordinary situation the fund took very seriously and was following closely.“Now we want to have some clarity about what has happened before we can draw final conclusions,” said Stampe.Meanwhile, engineers’ pension fund DIP said it stood to lose DKK16m in the wake of the collapse, compared with its overall equities exposure of DKK13.2bn.The loss will amount to a fall in total assets of 0.05%, it said.Lawyers and economists’ pension fund JØP – which shares an investment department with DIP – put its exposure to OW Bunker at DKK9m, equating to 0.015% of its total assets.“Of course we are following developments around OW Bunker very closely to see what steps we can take to minimise our loss,” the pension fund said.Pensions provider PKA, however, said it had no involvement with OW Bunker.In other news, Danish pensions provider PFA announced it has appointed a chairman for its fund management arm PFA Invest, and is merging two asset management divisions to form a new company.Peter Engberg Jensen, who retired in April 2013 as group chief executive of Nykredit, has been appointed as chairman of PFA Invest, which provides investment services to both individuals and businesses.At the same, it said it was merging PFA Kapitalforvaltning and PFA Portøljeadministration into a new company called PFA Asset Management.The two current directors of PFA Kapitalforvaltning – Poul Kobberup and Jesper Langmack – will have daily responsibility for investment in PFA Invest, as directors of the new PFA Asset Management.PFA Asset Management will be responsible for all investment functions for PFA, PFA Kapitalforening and PFA Invest, the pensions provider said. Danish pension funds stand to lose millions of kroner after major Danish stock OW Bunker officially went bankrupt on Friday following the discovery of a fraud in its Singapore subsidiary.Last week, shipping fuel company OW Bunker said preliminary findings suggested it could lose around $125m (€100m) from the crime.The company said it was forced to file for bankruptcy after banks failed to provide the financing lifeline necessary for a restructuring.On Friday, the probate court in Aalborg issued a bankruptcy order for the company.
The €27bn Pensioenfonds ING is thinking to divide itself into two pension funds in light of parent company ING Group’s recent division into a banking and an insurance firm. The board of the now-closed scheme said the interests of two fully separated employers and their stakeholders would best be served by two separate pension funds. The scheme’s board also cited differences in collectively agreed salary increases at ING Bank and NN Group, which could cause imbalances in the indexation for employees at both companies.This would also apply for deferred members and pensioners who receive indexation based on pay increases at ING Bank. “A bigger inflation for one group would come at the expense of other groups, as granting indexation would lead to a decrease of the pension fund’s coverage ratio,” the pension fund said.Rob Oosterhout, the scheme’s vice-chairman, added that separate pension funds would be able to provide participants with tailor-made information.He said the two new schemes could, in future, use their purchasing power – together with the new collective DC pension funds at ING Bank and NN Group – to make joint investments, as well as for pensions provision.However, the board took pains to make clear that no decision had been made yet, and that it was studying all aspects of a possible division together with its accountability division, which has the formal right of advice on the matter.It said it wanted to assess “meticulously” the possible effects and risks for the various stakeholder groups, and that the probability of any rights cut or indexation must remain virtually the same for all groups.The Pensioenfonds ING said it would also consult the central works council, unions, employers and ING’s pensioners association VSI, although these organisation do not have a right of advice.Oosterhout said the new pension funds for ING Bank and NN Group would be allocated approximately €18bn and €9bn, respectively, of the pension fund’s current assets of €27bn.At the moment, the Pensioenfonds ING has almost 72,000 participants in total.Oosterhout could not provide a time-scale for the decision-making process.“The most important thing is that the procedure be conducted carefully,” he said.The Pensioenfonds ING became a closed pension fund on 1 January 2014, after the social partners of unions and employers agreed pension arrangements would be changed from defined benefit to collective defined contribution (CDC).At the same time, the social partners decided to establish two new CDC schemes on the back of ING Group’s division, forced upon it by the European Commission after the Dutch government provided support to the company during the financial crisis.
German regulator BaFin has announced that the number of Pensionskassen – insurance-based occupational pension plans – failing a stress test has fallen from nine in 2015 to seven.BaFin said the seven schemes were smaller Pensionskassen “not among the 40 largest pension plans” in this sector.The regulator took pains to emphasise that the schemes that failed the stress test missed the required funding level by “a small margin” of between 0.4% and 4.23%.However, BaFin president Felix Hufeld conceded that “individual Pensionskassen may be unable to finance their liabilities in full without external help”. He also confirmed the regulator was in talks with those plans, and that most of them had already increased their buffers, although he said he doubted the extra funds would meet requirements. Hufeld noted that “protection mechanisms” were in place, but he acknowledged these might soon be “put to the test”.One of these mechanisms includes the Protektor insurance lifeboat scheme, into which many insurance-based financial service providers pay.Hufeld said BaFin was “encouraging” companies – or shareholders where the Pensionskasse is organised as a listed company – to put more money into their funds before drawing on the protection scheme.He did not specify how many Pensionskassen might be affected, but the statistics published in BaFin’s 2015 annual report show that the average funding level in the sector has dropped from 136% to 132% over the last year.BaFin said the sector’s “short-term risk-bearing capacity” was “ensured”, but it admitted that, “should individual funds need to reinforce biometric standards or cut the discount rate, it will be increasingly difficult for them to find the necessary additional funding”.Overall, there are 140 Pensionskassen in Germany, managing a combined €148bn in assets, a 6.5% increase compared with the year previous.
In addition, the ONS reported that pension funds alone invested a net £31bn in UK government bonds in 2016, the highest annual figure on record. Although a provisional estimate, the ONS said the figure was the highest it had recorded since it started collecting the data in 1963.Pension funds withdrew a net £9bn in the fourth quarter, the largest disinvestment total since the fourth quarter of 2008, when £18bn was taken out.The ONS has also reported a surge in consumer price inflation in the UK, to 2.3%. Its forecast is for inflation to hit 2.8% by the end of the year. The retail prices index measure of inflation hit 3.2%.Meanwhile, the combined shortfall across the UK’s local government pension scheme (LGPS) fell by more than a quarter between 2013 and 2016, according to estimates from KPMG.The aggregate deficit for the LGPS’ 89 funds in England and Wales fell from £47bn, according to the 2013 actuarial valuations, to roughly £35bn based on the 2016 actuarial valuations.In a press release, KPMG said it had anticipated a £70bn shortfall based on the calculations used in 2013, but a higher discount rate used by actuaries for the LGPS meant the deficit was reduced “significantly”.However, KPMG warned that schemes might be taking on more risk due to the actuaries’ decision. They raised the discount rate by 25 basis points a year relative to UK government bond yields.Steve Simkins, pensions partner at KPMG, said: “The fact that the deficit fell in such difficult market conditions highlights the increasing reliance of the LGPS on the future performance of its assets and this puts employers in a higher risk position.”Insurer Phoenix Life completed a £1.2bn buy-in with its own pension scheme last year, according to consultancy LCP.The deal was only announced this week, and was the largest completed during 2016. It is the fourth-largest buy-in transaction seen in the UK.Despite the size of this transaction, Legal & General (L&G) dominated the UK de-risking market again in 2016, backing 33% of the deals completed during the year, LCP said.In total, £10.2bn was transferred from UK pension funds to insurers through buy-in or buyout transactions, the consultancy said. Of this, L&G accounted for £3.3bn, with Pension Insurance Corporation taking £2.5bn.Scottish Widows – a relatively new entrant to the UK market – was third with just under £1.5bn, a 14% market share.The majority of transactions – worth £7.5bn – were completed in the second half of the year, “highlighting the surge in activity following the EU referendum”.LCP said volumes in 2017 “could exceed £15bn for the first time”.Notable 2016 deals included ICI Pension Fund’s five transactions totalling £2.7bn and split between L&G and Scottish Widows, and the £1.1bn full buyout of the Vickers Pension Plan by L&G.Charlie Finch, partner at LCP said economic volatility and high-profile pension cases such as BHS had helped drive demand in 2016. In addition, pricing had been “at its most favourable level for five years relative to holding gilts”. “Following the introduction of Solvency II last year, insurers have innovated and, in a post-EU referendum world, have been able to source attractively priced assets and pass back savings to pension plans through lower pricing,” Finch added. Finally, the Financial Reporting Council (FRC) wants investors, analysts, and listed companies to help construct new risk and viability reporting standards.The project, led by the FRC’s Financial Reporting Lab, “will explore how companies can develop effective principal risk reporting and viability statement reporting to meet the needs of investors,” the council said in a statement.“The project will commence in May 2017 with output expected to be published in time to be helpful for December 2017 year-end annual reports,” the FRC said.Responses are invited by 21 April. The full statement is available here. Insurance companies, pension funds, and trusts withdrew a net £40bn (€46bn) from “longer-term financial instruments” in 2016, according to the Office for National Statistics (ONS).It was the first time the ONS had recorded a net disinvestment by this group of investors.The same investor set withdrew £18bn in aggregate in the fourth quarter of 2016, the second consecutive quarter of net disinvestment. In January, JP Morgan Asset Management’s Sorca Kelly-Scholte suggested the disinvestment data could be an indicator of pension funds becoming cash flow negative as they mature.A net £45bn was withdrawn from overseas securities, the ONS added, the largest figure since the dataset began in 1986.
“If they are material, the law already requires these risks to be reported, but it is good to see the FRC start to catch up and provide some clarity.”Alan MacDougall, managing director at Pensions & Investment Research Consultants (PIRC), said: “We welcome the revision to the FRC guidance that now corresponds with the position of the law.”Last year, PIRC accused the FRC of failing to reflect the requirements of the Companies Act in its strategic report guidance.MacDougall told IPE: “The error seems to have occurred due to the prior guidance transcribing only the short title of the section heading of s172, rather than the full content of the section itself.”The FRC rejected the claims in a strongly worded rebuttal letter.The updated guidance from the FRC coincided with the release in July by the European Union of non-binding Guidelines on Non-financial Reporting.Although the EU directive addresses climate-change disclosure, it is possible for a company to comply with its requirements by complying with a comparable reporting framework.All UK-incorporated companies are required to prepare a strategic report as part of their annual report unless they are exempt. The report is supposed to contain an overview of the company and explore the principal risks that it faces.The collapse of BHS and the impact on the firm’s pension scheme has shifted the focus to s172 in recent months. In particular, s172 refers to the duty on directors to have regard to “the interests of the company’s employees”.In addition, environmental campaigners such as ClientEarth have latched on to s172 as a means of forcing companies to report on climate-change risk.Last year, ClientEarth lawyers brought two regulatory complaints against Cairn Energy and SOCO International, alleging that the two companies had failed to report adequately on climate-change-related risks in their 2015 strategic reports.The FRC has refused to disclose its findings on those complaints, citing confidentiality.The new sections of the draft guidance require businesses to report on the effect of “the risks and opportunities” arising from environmental factors.The disclosures also require directors to report on the effect of “long-term systemic risks” caused by, for example, climate change or changing technology.Meanwhile, ClientEarth has also urged the FRC to be more ambitious with the final draft of its new guidance and embrace the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).Alice Garton said: “As an industry-led global initiative, which has received widespread support, the TCFD’s work provides an excellent starting point to help companies meet their existing legal duties.”The FRC, she added, “should be making the most of it”.Interested parties have until 24 October to comment on the new guidance. Campaigners have given a cautious welcome to proposals from the UK’s Financial Reporting Council (FRC) to update its guidance on the contents of a company’s strategic report.The update follows criticism of the FRC over a perceived failure to reflect existing UK laws in its guidance for non-financial reporting.Section 172 (s172) of the Companies Act 2006 puts a duty on UK company directors to take decisions that promote the success of the company “for the benefit of its members”.ClientEarth lawyer Alice Garton said in a statement: “Climate change and the clean energy transition are creating clearly foreseeable risks for many companies.
In its suggested revised form, the corporate governance code would acknowledge the importance of boards considering the way their companies interact with the workforce, customers, suppliers and wider stakeholders. Should the Stewardship Code more explicitly refer to ESG factors and broader social impact? If so, how should these be integrated and are there any specific areas of focus that should be addressed? The FRC noted there had been more focus on section 172 duties as part of recent corporate governance reform discussions. The accounting watchdog said it had been suggested that, if boards were to be required to report on the way in which they have carried out these duties, investors should also be encouraged to monitor and engage on these issues. Luke Hildyard, PLSALuke Hildyard, policy lead for stewardship and corporate governance at the pension fund trade body, said: “Despite the reduced length, the proposed [Corporate Governance Code] contains many positive new measures, particularly the recognition of the importance of corporate culture and employee voice. However, monitoring and enforcement of these provisions will be critical. PLSA research found that most companies already pay lip service to these issues in annual reports, but provide little concrete data demonstrating the strength of their relations with the workforce. “The proposals to require long-term incentive plans to be at least five years in length is welcome and will accelerate existing progress in this direction. However, the changes are unlikely to reduce levels of executive pay or address societal concern about gaps between executives and the wider workforce.” The Investment AssociationAndrew Ninian, director of corporate governance at the asset management industry body, said: “The launch of the revised UK Corporate Governance Code is a welcome step in the evolution of our corporate governance system. The government’s Green Paper [released in November 2016] set out important challenges to the UK corporate governance system, particularly on stakeholder voice and executive pay. It is important that the governance code responds to these challenges so that the UK remains globally competitive and that investor stewardship continues as a key tenet.”ShareActionBethan Livesey, head of policy at the responsible investment campaign organisation, said: “The FRC shows that it is willing to amend the Corporate Governance and Stewardship Codes to ensure that both can help engender trust and long-termism in business. The onus is now on the corporate and investment sectors to press the FRC to be ambitious in taking this agenda forward to build a sustainable UK economy.” The UK’s Financial Reporting Council (FRC) has set out an initial line of inquiry about the future of the country’s Stewardship Code, including a focus on the roles of different organisations in the investment chain. Comments and questions relating to responsible investment, long-term investment, sustainability, and environmental, social and governance (ESG) factors pervaded the stewardship section of the watchdog’s consultation document regarding the UK Corporate Governance Code.Within the consultation, the FRC asked respondents whether the Stewardship Code should set out expectations for asset managers to consider a wider group of stakeholders as part of their engagement.This would reflect the aim of section 172 of the Companies Act, according to which a director of a company is required to act in the way s/he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to a range of matters. The FRC does not have a mandate to impose duties on asset managers – this falls under the remit of the Financial Conduct Authority – but said it believed “a greater focus on how investors assist companies to build long-term success would be helpful”.It was therefore seeking views about how this could be better reflected in the Stewardship Code, “including through the use of a ‘section 172’ for asset managers”.The FRC asked:How could an investor’s role in building a company’s long-term success be further encouraged through the Stewardship Code?Would it be appropriate to incorporate ‘wider stakeholders’ into the areas of suggested focus for monitoring and engagement by investors? Should the Stewardship Code more explicitly refer to ESG factors and broader social impact? If so, how should these be integrated and are there any specific areas of focus that should be addressed? The watchdog’s view was that the Stewardship Code should not only be relevant for ESG decision-making, but it said it was interested in views about how it could be amended to refer more effectively to ESG factors and integration.It has also asked whether the stewardship code should be amended to ask investors to consider company performance and reporting on adapting to climate change – a suggestion made by the UK Committee on Climate Change in June – and whether board and executive pipeline diversity should be included as an explicit expectation of investor engagement.The FRC also called for views on whether the code should support disclosure of a manager’s approach to directed voting in pooled funds, given that some asset owners have questioned their ability to do so.As signatories to the current Stewardship Code, asset managers, asset owners and service providers are expected to provide a public statement about their approach to stewardship, using the code as a framework. The FRC is considering revising the code to provide more specific expectations about best practice more in line with the ‘comply or explain’ format of the corporate governance code.It also asked for views on the idea of separate codes for different signatory categories, either by type of organisation or according to whether they invest directly or indirectly.The FRC also noted that some signatories “consider themselves responsible investors, as opposed to responsible shareholders” and that it was therefore interested in how it could addressed the fact that investors view their responsibilities in different ways.A detailed consultation on specific changes to the stewardship code is slated for late 2018.Trimmed corp gov code ’about purpose’ The watchdog today also launched a formal consultation on changes to the UK’s Corporate Governance Code.The FRC said changes would make the code “shorter and sharper” – down from around 11,000 words to under 5,000, the Pensions and Lifetime Savings Association noted.The accounting body said the revised code would focus “on the importance of long-term success and sustainability”, while addressing “issues of public trust in business” and ensuring the attractiveness of the UK post-Brexit.The corporate governance consultation closes on 28 February 2018.Industry reactionsThe Pensions and Lifetime Savings Association
Sir Philip Green was criticised by politicians regarding his ownership of BHS. He later paid £363m towards the company’s pension schemes.The proposals follow the high-profile pension scandals involving high-street department store chain BHS and engineering and outsourcing firm Carillion.Both went bankrupt with their DB schemes in deficit by hundreds of millions of pounds. Senior staff in both cases were subsequently criticised by politicians for neglecting their pension funds.ConsolidationThe DWP said it would consult on a “legislative framework and authorisation regime” to facilitate consolidation of DB schemes.It specifically cited work by the Pensions and Lifetime Savings Association (PLSA) on the topic.The UK pension funds’ industry body last year proposed the creation of so-called ‘superfunds’ to facilitate consolidation, particularly for small schemes. However, the white paper stopped short of granting TPR the power to veto mergers or acquisitions, an idea promised by prime minister Theresa May in the run-up to last summer’s UK election.The DWP also decided against allowing schemes to change their measure of inflation or “simplify” their benefits, despite many industry commentators arguing that such measures could save schemes money. Frank Field, chair of the Work and Pensions Select Committee, has led calls for punitive fines for negligent scheme sponsors since 2016.The paper set out potential requirements for commercial consolidator vehicles – primarily regarding funding levels and a requirement for trustees to take legal, actuarial and covenant advice before agreeing to detach a scheme from the sponsoring employer.Graham Vidler, director of external affairs at the PLSA, said: “We are pleased to see that the white paper takes forward the work on consolidation developed by the PLSA’s DB Taskforce over the past two years.“The best support for a DB scheme is a strong employer and we believe the current flexible funding framework remains the right approach”Lesley Titcomb, TPR“There is a growing body of evidence that consolidation in its many guises could provide the benefits of scale for those schemes that choose to consolidate.“We look forward to working with DWP on this issue going forward as we work to strengthen DB pensions and give more members a better chance of receiving full benefits.”TPR would also be given additional powers to oversee consolidator funds, the DWP said.Among other notable ideas put forward for legislation or consultation, the DWP proposed:Reviewing the regulated apportionment arrangement process to “make improvements” to the system of separating schemes from employers;Toughening TPR’s information gathering powers;Revising the scheme funding code to support TPR’s enforcement;Working with the regulator to promote awareness of consolidation options; andIntroducing a requirement for DB scheme chairs to report to the regulator after every three-year actuarial valuation.Lesley Titcomb, chief executive of TPR, welcomed the proposed new powers for her organisation, saying they would “enable us to be clearer about what we expect from employers in relation to scheme funding and tougher where a scheme is not getting the funding it needs”.“The best support for a DB scheme is a strong employer and we believe the current flexible funding framework, which allows employers to balance growth with meeting pension benefits, remains the right approach and we will aim to retain this flexibility in any new approach,” Titcomb added.The full white paper is available here.Industry viewsDespite the government’s emphasis on criminal sanctions, the paper left many industry commentators underwhelmed…“We applaud the extra powers to be given to TPR, including the ability to fine company bosses. However, these will need to be exercised with care and discretion. Hopefully the powers will strike home where necessary. It is not clear whether the regulator will need extra resources to carry out these additional duties, which are unlikely to receive legislative approval before 2019-20 at the earliest.”Simon Taylor, actuary at Barnett Waddingham“What we have is a bundle of small-scale measures that are probably modestly helpful changes, though we doubt whether they will make that much difference in practice. Under its breath, the government seems to be acknowledging that the current regime strikes a reasonable balance between protection of benefits and commercial enterprise. It’s just a shame that it couldn’t make much more of that in the white paper.”Alastair Meeks, pensions partner at Pinsent Masons“This is a missed opportunity to build a pensions system that’s fit for the future. It’s good that employers won’t be able to slash pension rises without members’ consent. But ministers are doing nothing to stop the closure of good-quality pension schemes. Millions of workers across the country will still worry about poverty in retirement.”Frances O’Grady, general secretary of the Trades Union Congress“We are glad to see that the government has been looking at the relationship between good corporate governance and good outcomes for pension scheme members. The Pension Regulator’s ability to regulate the system effectively depends on effective governance of both pension schemes and the companies which stand behind them.”Graham Vidler, director of external affairs at the PLSA Company directors who neglect to fund their defined benefit (DB) pension schemes could face criminal charges under proposals put forward by the UK government today.In its keenly anticipated white paper, Protecting Defined Benefit Pension Schemes, the Department for Work and Pensions (DWP) said it would legislate to introduce a new criminal offence “to punish wilful or grossly reckless behaviour of directors” in relation to a DB scheme.In addition, the department pledged to grant The Pensions Regulator (TPR) more powers to fine directors and companies “to tackle irresponsible activities that may cause a material detriment to a pension scheme”.The paper also included plans for a tightening of the “voluntary clearance” system, whereby companies can inform TPR when significant corporate activity might affect a DB scheme. The DWP said it would review the “whole framework” to ensure it covered all relevant activity and was sufficiently clear.
AP4, FRR and Church Commissioners for England are among the major asset owners backing Tobacco-Free Finance, a new initiative launched this week by the United Nations.The initiative’s pledge – which has already been signed by 90 asset owners, managers, banks and advisers overseeing $6.8trn (€5.8trn) – cited previous work by the UN, Principles for Responsible Investment, and the World Health Organisation on raising awareness of the health implications of smoking.The Tobacco-Free Finance pledge stated: “With 7m deaths worldwide each year and a forecast of 1bn deaths this century due to tobacco-related illnesses, global and multi-stakeholder collaboration is needed to tackle the devastating impact of tobacco on society, as well as on the environment.”European financial services companies including NN Group, BNP Paribas, Natixis, AXA and Robeco have signed the pledge, as have pension funds such as Denmark’s Laegernes Pension, the UN Joint Staff Pension Fund and 15 Australian superannuation funds. Citing the UN’s third Sustainable Development Goal – “ensure healthy lives and promote well-being for all at all ages” – Tobacco-Free Finance said its signatories would “collaborate to raise awareness of the issue of lending to, investing in, and insuring tobacco companies”.A number of European pension funds and asset managers have independently moved to cut tobacco companies from their portfolios this year, including Europe’s biggest pension fund, ABP, and France’s Ircantec.Kempen, Robeco, Candriam and BNP Paribas Asset Management have also introduced or extended tobacco bans this year. All four are signatories to the Tobacco-Free Finance initiative.Separately, index provider MSCI has launched five new equity benchmarks excluding tobacco-related investments.The Global Ex Tobacco Involvement indices do not include any tobacco producers, and also exclude “companies deriving 5% or more aggregate revenue from distribution, retail and supply of tobacco-related products”, MSCI said.The five new benchmarks are:MSCI ACWI ex Tobacco Involvement indexMSCI World ex Tobacco Involvement indexMSCI EAFE ex Tobacco Involvement indexMSCI Japan ex Tobacco Involvement indexMSCI Emerging Markets ex Tobacco Involvement index“There is growing demand for exclusionary indices globally, including interest among the world’s largest pension and endowment funds for tobacco exclusion benchmarks,” said Deborah Yang, global head of ESG indices at MSCI.
London-based Northill Capital has bought a majority stake in leading US fiduciary manager Strategic Investment Group.Northill completed the acquisition of the majority equity interest – previously held by FFL Partners – last week. The financial terms were not disclosed.Strategic’s senior management and investment teams also increased their direct ownership of the firm as part of the transaction, with further increases expected over time, according to a statement from Northill and the $26bn (€22.9bn) fiduciary manager. According to the statement, Strategic is the largest independent investment manager dedicated to what in the US is called the “outsourced CIO” (OCIO) sector. All of its clients approved the transaction. Brian Murdock, chief executive of Strategic, said: “We are thrilled to be entering into this partnership with Northill, with whom we share a strong philosophical and cultural alignment. Northill provides a patient and permanent capital base and complete autonomy to manage our business and our investment process. Credit: MrPanyGoff, Wikimedia Commons/FlickrAerial view of Arlington County, Virginia, where Strategic Investment Group is based“The transaction also provides a mechanism to ensure cross-generational stability by increasing the equity ownership of the current and future leaders of our firm.”Jon Little, partner at Northill, said Strategic was “the gold standard independent investment firm in the OCIO/solutions sector”. “The management team’s increased ownership of the business is a strong vote of confidence in its future and that of the sector,” he added. The transaction is Northill’s sixth acquisition, taking its assets under management to over $79bn, from $53bn as at 31 December. In early 2016 it took over a majority stake in Danish asset manager Capital Four, which at the time was running an SME loan fund backed by some of Denmark’s largest pension providers. BMO launches SDG-targeted small and mid-cap fundBMO Global Asset Management has launched a global small- and mid-cap equity fund designed to deliver long-term growth and a positive social or environmental impact through targeted engagement with investee companies.The new fund is seeded by UBS’ wealth management arm, and will hold 40-60 global small- and mid-cap companies. BMO said these must meet strict criteria around quality and value as well as offering scope for helping to achieve the UN Sustainable Development Goals (SDGs).BMO said that, for each company the fund invested in, engagement objectives would be set with a view towards driving progress against key targets set out in the SDG framework. Mark Haefele, chief investment officer at UBS Global Wealth Management, said: “In our view, responsibly engaging with public companies and changing their behaviour for the better is one of the most exciting new areas of impact investing.” The BMO SDG Engagement Global Equity Fund has an ongoing charge of 1.05% for institutional investors.
Conflicts between shareholder value maximisation and stakeholder satisfaction could be resolved if all external impacts of a corporation were fully pricedIn the case of accountability, The Economist makes the fair point that it is not clear how CEOs should know what “society” wants from their companies. The domination of the economy by large firms means that a small number of unrepresentative business leaders “will end up with immense power to set goals for society that range far beyond the immediate interests of their company”. The power of social media companies like Facebook is a clear illustration that this is already occurring, even in the absence of collective capitalism.Collective capitalism leans away from change, The Economist argues: “In a dynamic system firms have to forsake at least some stakeholders: a number need to shrink in order to reallocate capital and workers from obsolete industries to new ones. If, say, climate change is to be tackled, oil firms will face huge job cuts.”However, influential economist Milton Friedman argued that companies should not “make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment”.What that has meant is that companies are free to cause a negative impact to other stakeholders in the pursuit of maximising shareholder value as long as they stay within the law as it stands. Corporations are able to operate without the impact of their activities fully priced into their profit and loss statements because they are not legally forced to do so. It justifies private gains at the expense of public losses.The conflict between shareholder value maximisation and stakeholder satisfaction could be resolved if all external impacts of a corporation were able to be fully priced and accounted for.In the US, an initiative was set up in 2011 called the Sustainability Accounting Standards Board Foundation with the objective of establishing industry-specific disclosure standards across ESG topics.Though it is still essentially an independent entity with no legal powers, it is modelled on the Financial Accounting Standards Board and the International Accounting Standards Board. A key element of its activities is dialogue with the US regulator regarding accounting disclosures.Accounting for all externalities would be only a first, albeit essential, step.Knowing that burning a rainforest to create cattle grazing land may produce far more in terms of public losses than the private gains to the cattle rancher (and taxes accrued to the government) is one thing. It may prevent ESG-focused investors from investing, which may only benefit other investors with less scruples.What would resolve the issues raised by The Economist – and promote sustainable investment with a shareholder maximisation philosophy – would be if corporations were charged for all external negative impacts created by their activities.However, it may never happen – not be because it is such a revolutionary concept, but because many of today’s corporations would be producing large overall losses rather than net profits. The battle lines are being drawn up in the debate over whether shareholder value maximisation or satisfying all stakeholders should be the primary objective of corporate management.It is a critical issue for investors focused on environmental, social and governance (ESG) issues – but the arguments can often be off the point. The Economist magazine sees itself as a standard bearer for “the classical liberalism of the 19th century”. This means it is a great supporter of the traditional idea of free markets with the view that “government should only remove power and wealth from individuals when it has an excellent reason to do so”.Its leader on 22 August – in response to the revised statement of corporate purpose issued by the US Business Roundtable – was excoriating: “However well-meaning, this new form of collective capitalism will end up doing more harm than good. It risks entrenching a class of unaccountable CEOs who lack legitimacy. And it is a threat to long-term prosperity, which is the basic condition for capitalism to succeed.” These arguments are worth considering by all ESG-focused investors. The Economist argues that the sort of “collective capitalism” espoused by the US Business Roundtable suffers from two pitfalls: a lack of accountability and a lack of dynamism.