Chair of the Board
Principles for Responsible Investment (PRI)
To an outsider, the world of business and the world of institutional investing may seem like two sides of the same coin. But to Martin Skancke, these are very different worlds, subject to very different base rules and incentive structures. Businesses can choose to focus on their own markets and operations and ignore the cost of externalities like corruption or pollution, while large institutional investors cannot. When you measure the size of your investments in tens and hundreds of billions of dollars, these things will eventually have a negative influence on some part of your portfolio.
In a sense, when investors like large pension funds grow to a certain size, their focus shifts from being on how individual investments are developing to how larger parts of the economy and society can best develop.
“Investors cannot rely on a company’s management to be maximizing shareholder value because the management’s incentive structure may not be aligned with the incentive structure of a long-term investor; they may have a shorter time horizon and there may be some externalities in individual companies that are internalized in the portfolio of a large institutional investor,” says Skancke.
As Head of the Asset Management Department at the Norwegian Ministry of Finance, Skancke helped design and establish the Norwegian Government Pension Fund, one of the largest pension funds in the world and with a total value of approximately USD 900bn (spring 2015). He is the current Chair of the Board of UN-supported Principles for Responsible Investment (PRI) and also advises other sovereign wealth funds on governance and investment issues.
“Take the issue of corruption. If we just for a moment set the ethical aspects aside and look at it from a purely practical point of view, then a company might benefit from paying a bribe to win a contract,” says Skancke.
However, from the point of view of one of the large institutional investors that invests in that company, things look very different, he explains. This investor is likely to own a small part of hundreds, even thousands, of companies and probably also has shares in the companies that did not get the contract because of the bribe.
“The investor actually doesn’t care which company wins the contract, because it owns a bit of each of them. From the point of view of the investor, the bribe is just a waste of money,” he says.
This illustrates why investors should focus on high general standards in all the companies in which they invest. “This is why the partnership between the PRI and UN Global Compact is so important – the PRI provides a platform for engagement
between investors and investee companies, while the Global Compact develops standards and guidelines that should form an important part of the content of that dialogue,” he adds.
Investors have often been accused of lagging several years behind business in the transition towards more sustainable business models, but Skancke disagrees. Not about the fact that investors can do better, they certainly can, but he points to two facts: first, there is a very big difference between investors – as in business – and second, he sees a growing momentum – especially on the part of the largest wealth funds. To a large extent, this is driven by beneficiaries.
“The big pension funds and university endowments are feeling pressure from their beneficiaries, who want to know how the funds are performing on sustainability and that pressure is being transferred to asset managers. I believe it is becoming increasingly difficult for large professional institutional investors to say that they don’t care about environmental, social and corporate governance issues. I don’t think that’s a valid business model today,” says Skancke.
That said, he points out that we still have not developed a good way to channel investor money towards financing sustainable development. Moreover, sustainability needs to move from a separate department staffed with “people you recruited from an NGO that travels around saying nice things about sustainability”, as he puts it.
“The real challenge, and what we try to facilitate in the PRI, is to make sustainability a part of the investor DNA.”
The financial crisis was a turning point for sustainable investment. When investment banks closed down, the market for many corporate bonds and other fixed income securities closed with them.
“I think that we realized then that risk is a characteristic not just of assets but also of the markets in which those assets are traded. For a long-term investor, it’s important to think about what a good marketplace looks like, and that’s a discussion we need to have,” says Skancke.