Universal Ownership in Practice: A Practical Investment Framework for Asset Owners
Winner of Best Paper for Potential Impact on Sustainable Finance Practices, GRASFI 2020
36 Pages Posted: 22 Jul 2020 Last revised: 1 Jun 2023
Date Written: May 28, 2020
Asset owners such as pension funds, university endowments, and sovereign wealth funds can be considered “universal owners” because they have an interest in the long-term health of the financial system as a whole. As such, they cannot diversify away from systemic risks such as climate change, biodiversity loss, rising inequality, and global pandemics, and can only counter whole-system threats by effecting change in the real economy. The following paper examines the current state of environmental, social, and governance (ESG) investing and its impact across asset classes and through shareholder engagement, suggesting that ESG in its current guise is not fit for purpose as a means to address systemic risks. This is because ESG typically aims to protect individual portfolios from systemic environmental and social risks, without attempting to mitigate these risks in the real economy. In contrast, universal owners’ interest is in directly mitigating systemic risks, which has the effect of internalising externalities and protecting the long-term health of the system as a whole; crucially, this approach also helps to preserve funds’ own long-term returns in the process. What follows advances the argument that an impact-focused universal ownership framework is therefore more compatible with fiduciary duty than either mainstream investing or ESG is equipped to be, in both the short- and long-term. Using climate change as an exemplar systemic risk, this paper proposes an evidence-based practical framework for universal owners that comprises several features designed to produce real-world outcomes at a low cost: a more urgent and tactical version of active ownership; asset allocation within the primary market; a particular focus on assets transitioning from the primary to the secondary market; “ungameable” metrics linked to real-world results; strategic engagement with public policy and standard-setting regimes; and forward signalling to reduce wastage and accelerate decarbonisation timelines. Together these elements of the framework have the potential to change the rules of the game, alter company behaviour and fundamental strategy, reallocate capital, and render externalities unprofitable – precisely what is required of universal owners in an era of worsening and increasingly global systemic risks.
Keywords: universal ownership, sustainable finance, corporate governance, climate risk, climate change, inequality
JEL Classification: G30, Q00
Suggested Citation: Suggested Citation