When member engagement should take a knee
From the blog: Pension schemes are under increasing pressure to invest responsibly. On this side of the pond, this discourse largely revolves around environmental and social investment.
But in the US, ethical investing has taken a very different shape at one fund. Last month, a retired police officer called upon the council responsible for New Jersey's public pension fund to review its holdings in sportswear giant Nike.
Marty Barrett, who sits on the board of trustees for the Police and Firemen’s Retirement System of New Jersey, reportedly objected to a Nike advertisement featuring American football star Colin Kaepernick.
These sorts of claims are going to be much, much more common in the UK
Kaepernick, a staunch civil rights campaigner, has been ostracised from his sport for refusing to stand for the US national anthem and encouraging others to do the same.
A spokesperson for the New Jersey pension fund confirmed that during a state investment council meeting on September 27, Barrett raised the issue of the Nike investment.
The state investment council voted on a motion to have the matter referred to its environmental, social and governance subcommittee, which will now review the Nike holdings.
The $78.2bn (£60bn) New Jersey fund has $26m in the company’s equities and $18m in Nike fixed income.
In the UK, many pension funds are increasingly winding down their investments in fossil fuels. This is uncontroversial, given the existing consensus on the threat of climate change and the financial risks posed in things like stranded assets.
But how should UK schemes reconcile the views of its membership with its fiduciary responsibilities, when it comes to brands that take a side on divisive social issues?
From NJ to DC
Barrett told regional news outlet NJ Advance Media that Nike had "made one of the worst business decisions of all time" in making Kaepernick the face of its commercial.
He also said the advertisement disrespected military personnel and first responders who were killed in the terrorist attacks of September 11 2001. Barrett did not respond to our request for comment.
Arguments for divestment often focus on the investment risk of assets that do not meet certain ESG criteria. But Nike has not suffered financially from the ad’s fallout, and the investment case for divesting from Nike is relatively easy to debunk.
In fact, Nike sales grew 31 per cent over the bank holiday weekend following the launch of the ad, according to research provider Edison Trends, compared to 17 per cent during the same period in 2017.
While there was a minor sell-off in Nike shares after the ad went live, the company’s stock price has since recovered. It is worth acknowledging that the fund’s holdings in Nike make up a tiny proportion of its investments.
According to Rebecca McKay, partner at law firm Trowers & Hamlins, we are therefore dealing with what the Law Commission describes as a ‘non-financial factor’.
The Law Commission says trustees can make investment decisions based on these factors, provided that “they have good reason to think that scheme members share the concern” and “there is no risk of significant financial detriment to the fund”.
A defined benefit member's benefits will have their losses made up by the sponsoring employer, McKay said, should an investment decision on these grounds lead to financial detriment.
Defined contribution schemes, on the other hand, are at greater risk from member complaint. McKay confirmed that DC members could sue their trustees for breaching their fiduciary duties.
DWP scraps plans for schemes to check members’ ethical views
Controversial plans by the government to force trustees to outline how they have taken members’ ethical views into account in their investment strategies have been scrapped, it was revealed on Monday.
“That is a big future risk in the pensions industry in the UK, for DC schemes that have not invested appropriately,” she said.
The DC generation is mostly still some years from retirement, McKay observed. She added that members are becoming more sophisticated in their understanding of their investments.
“And so I think that will come in the next 10-20 years, these sorts of claims are going to be much, much more common in the UK, in my opinion.”