In some situations, society permits individual citizens to not fulfil otherwise binding requirements when the latter conflict with the individual’s deeply held ethical convictions. The classic example are pacifists who obtain an exemption from military service. I submit that an argument along these lines also applies to collective pension plans. Such plans need to offer their participants a minimal level of influence over their portfolios to be legitimate.
This line of reasoning differs from the motivation underpinning some recent high-profile divestment decisions. Just this summer, for instance, the University of California pension fund divested its $13.4 billion endowment, and its $70 billion pension fund is to follow soon. Their decision is based on financial risk – fossil fuels represent stranded assets and are likely to lose the fund money over the next few years – whereas I argue that we have a moral obligation towards the participants in collective pension funds.
To see why we might have such a moral obligation, we need to ask what the goal of socially responsible investment (SRI) is in the first place? The current SRI paradigm holds that the goal is to change corporate behavior for the better, and the ensuing debate is one between shareholder activism, divestment, best-in-class strategies, and other potential approaches to achieve this goal.
However, note that not everyone shares this goal. Suppose that I am not interested in the impact of my investments, but that there are certain kinds of financial assets that I simply do not want to own. Say that I do not want to own stocks of arms producers, tobacco corporations, or firms that are active in the Albertan tar sands, period. We might call such a stance a clean-hands attitude towards investments. The activities of the corporations in question are incompatible with my ethical convictions.
Making room for this vision of SRI has implications for collective pension plans. The members of the board of a pension fund bound by their fiduciary duty towards participants can justify their choices between different tools to change corporate behavior – shareholder activism, divestment, etc. – by pointing to empirical evidence. However, no parallel justification is available when it comes to determining the goal of investment. If you tell a clean-hands investor that you will do your best to make the arms producer adopt better business practices, she will be unphased.
Voice or exit
Participants in collective pension plans have a right to some leverage over their investments to make sure that these do not conflict with their deeply held convictions. Different institutional strategies are available to give force to this right.
A first option is to put the SRI strategy of the pension fund up for a vote. While this does not of course ensure that everyone’s deeply held convictions are respected, it at least gives everyone a voice in the decision process.
Second, one might give participants the choice between different investment profiles, in the hope that everyone finds an investment package that reflects their deeply held convictions. For instance, one might require that participants have the choice between at least three packages: a) the responsible investment package, which does not invest in arms, tobacco, and fossil fuels; b) the responsible investment package ‘light’, which excludes arms, tobacco, and the ten corporations with the worst environmental record c) an SRI strategy that is limited to shareholder activism.
The details of the different packages are of course up for discussion. When investors in pension funds make these choices in relatively large groups – for instance province-wide or even nation-wide rather than just among individuals with the same employer – this makes more fine-grained investment packages possible.
Divestment advocates might baulk at such an arrangement and criticize it as too timid. But note that on the premise that investors should have a say over their portfolio, imposing divestment on everyone is hard to justify.
Will everyone’s ethical convictions be reflected in such a menu? Probably not, but it would represent a step in the right direction. Some countries, such as Australia, already require offering participants in collective pension plans a certain level of choice about their investments. Yet, a widely diversified portfolio still represents the default in Australia.
According to a 2017 report by the Organisation for Economic Co-operation and Development (OECD), in several rich countries the ratio of assets under management in pension plans now exceeds 100% of GDP. It is unacceptable that the people this money belongs to often do not have any say in how it is invested.