Universal Ownership in Practice: A Practical Investment Framework for Asset Owners

Abstract

Universal owners such as pension funds, insurance companies, university endowments, and sovereign wealth funds have an interest in the long-term health of the financial system as a whole. As COVID-19 unfortunately has demonstrated, these asset owners cannot diversify away from systemic risks such as climate change, inequality, and pandemics, and can only mitigate whole-system threats by effecting change in the real economy. The following paper examines the current state of responsible investment and its impact across asset classes and through shareholder engagement, suggesting that responsible investment in its current guise is not fit for purpose as a means to address systemic risks – particularly climate change. This is because responsible investment tends to aim to protect individual portfolios from systemic environmental and social risks, without mitigating these risks in the real economy. In contrast, universal owners’ interest is in mitigating systemic risks themselves, which would have the effect of internalising externalities and protecting the long-term health of the system as a whole. This paper proposes an evidence-based practical framework for universal owners paper that includes several measures designed to produce real-world outcomes: a more urgent and tactical version of active ownership within public equity (and even within corporate bond holdings); asset allocation within the primary market; a particular focus on assets that make the transition from the primary to the secondary market; “ungameable” metrics linked to real-world outcomes; 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 bend the emissions curve permanently downwards – precisely what is required of universal owners in the year of COVID-19 recovery and during this last crucial decade of climate action.

Keywords: universal ownership, sustainable finance, corporate governance, climate risk, climate change, inequality

JEL Classification: G30, Q00