“Universal Ownership recognises the role played by highly diversified asset owners (like pension schemes and insurers) in tackling global externalities such as climate change. This reading guide provides an introduction for actuaries wishing to contribute to this evolving debate.”
Actuary and Postgraduate Researcher in Development Policy and Management at The University of Manchester
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The United Nations Environment Programme Finance Initiative 2011 Universal Ownership Why environmental externalities matter to institutional investors paper.
Externalities created in one part of the portfolio will be paid for in other parts through clean-up costs, higher insurance premiums, taxes and input price costs. It is in the interests of a Universal Owner to internalise these externalities across its entire portfolio, sacrificing profits in some sectors to benefit the whole. Universal Owners take a systems thinking view of financial returns, and recognise that, over the long term, financial returns are boosted by acting in a pro-social and pro-environmental way.
Universal Ownership offers a ‘lens’ through which to view finance and investment. By treating portfolio beta as endogenous, it offers an alternative to Modern Portfolio Theory. An early paper by, Jim Hawley, one of the main proponents of Universal Ownership Theory – The Long and Short of It: Are we Asking the Right Questions? Modern Portfolio theory and Time Horizons and is especially relevant to actuaries working in finance and investment.
The concept of Universal Owners came to the fore in 2010/11 with a United Nations Environment Programme Finance Initiative 2011 paper. A comprehensive guide and definition of Universal Owners can be found in Roger Urwin’s 2011 paper Pension Funds as Universal Owners: Opportunity Beckons and Leadership Calls The Thinking Ahead Institute produces regular reports on the world’s largest asset owners, including the top 5 universal owners. The world’s largest pension scheme, the Government Pension Investment Fund (GPIF) of Japan, and Hiro Mizuno, its former Chief Investment officer frequently talks on the subject - see this video interview Leading in extraordinary times with Hiro Mizuno
Universal Owners are well placed to help with the profound societal challenges posed by climate change, biodiversity loss, and other sustainability issues. For a more recent summary of the issues involved, see Ellen Quigley’s two recent papers:
- 2019 paper - Universal Ownership in the Anthropocene
- 2020 paper - Universal Ownership in the Age of COVID-19: Social Norms, Feedback Loops, and the Double Hermeneutic
The challenge for the pensions industry is for other pension schemes to acknowledge their role as Universal Owners. With more funds investing in passive indexed funds, systems beta becomes an issue for small funds too, but the costs of them taking action directly outweigh the thinly spread benefits – there is a temptation to free ride. The theory has been described in academic circles as ‘premature’ (see Benjamin J. Richardson's paper from 2015 - Universal Investors and Socially Responsible Finance: A Critique of a Premature Theory).
However, there is a growing weight of evidence to suggest that portfolios that promote Environmental, Social and Governance (ESG) issues may perform better than those that don’t (see study Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020 by Tensie Whelan, Ulrich Atz and Casey Clark, CFA). As pressure mounts for pension schemes and other institutional investors to act in a more pro-social way, both from their own members and wider society, more will self-acknowledge their status as Universal Owners, and will likely benefit from higher returns whilst contributing to a more sustainable future.
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