ICPM Gives Top Research Award to Paper Exploring Active vs. Passive Investing

The International Centre for Pension Management gave the top prize in its annual research awards to a paper that uses a proprietary database to explore the relationship between the structure and size of defined benefit pension plans and their choice of management style and asset allocation.

The Canadian nonprofit oversees an academic research program that awards C$50,000 ($37,600) to the top three academic papers chosen following a peer review by its research committee.

The ICPM looks for papers with implications for fund management, engagement of plan participants, pension design, governance, long-term investing, risk management, environmental, social, and governance issues and other investment-related topics. To be considered, the papers must be completed or close to completion but cannot have already been published. Award winners are invited to present their research at a webinar or a discussion forum.

The top prize of C$20,000 went to “Scale Economies, Bargaining Power, and Investment Performance: Evidence from Pension Plans,” authored by Tjeerd de Vries, S. Yanki Kalfa and Allan Timmermann from the University of California, San Diego, along with Russ Wermers of the University of Maryland.

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The paper is based on a unique proprietary database used to explore the relationship between the structure and size of defined benefit pension plans and their choice of active vs. passive management, internal vs. external management and allocation to public vs. private markets.

“Our results indicate a strong role for economic scale in pension plan investments: large plans have stronger bargaining power over their external managers in negotiating fees as well as access to better-performing funds, relative to small plans,” the authors wrote. “Large plans, hence, pay significantly lower fees per dollar invested than their smaller peers.”

The ICPM awarded C$15,000 to “A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios,” written by Georgij Alekseev of Palantir Technologies, Stefano Giglio of Yale University and Quinn Maingi, Julia Selgrad and Johannes Stroebel of New York University. Their paper proposes a new methodology to build portfolios that hedge the economic and financial risks from climate change.

“We introduce a quantity-based approach to hedging aggregate news about climate change and other macro risks,” the authors wrote. “Our quantity-based hedge portfolios outperform traditional approaches to hedging climate risks.”

The ICPM awarded another C$15,000 to “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms,” written by Samuel Hartzmark of Boston College and Kelly Shue of Yale University.

Hartzmark and Shue developed a new measure of impact elasticity, which they define as a firm’s change in environmental impact due to a change in its cost of capital.

“We show empirically that a reduction in financing costs for firms that are already green leads to small improvements in impact at best,” the authors wrote. “In contrast, increasing financing costs for brown firms leads to large negative changes in firm impact. Thus, sustainable investing that directs capital away from brown firms and toward green firms may be counterproductive, in that it makes brown firms more brown without making green firms more green.”

The organization also awarded honorable mentions to “Quantifying the Impact of Impact Investing” by MIT’s Andrew Lo and Peking University’s Ruixun Zhang, and to “How the Provision of Inflation Information Affects Pension Contributions: A Field Experiment,” by Pascal Büsing, Henning Cordes and Thomas Langer from the University of Münster.

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Sebastien Betermier Named Executive Director of ICPM

Tags: 2023 Research Awards, environmental, ESG, Governance, ICPM, International Centre for Pension Management, long-term investing, pension design, Pension Funds, research paper, Risk Management, social

New cybersecurity rules adopted by the Securities and Exchange Commission last month will require investments in additional training and resources, according to compliance experts who have studied the rule.

Under the new rules, public companies need to disclose significant cybersecurity events within four business days of their discovery and maintain policies and procedures to ensure compliance. The first step for businesses to meet these regulations will be determining if a digital risk is “significant” or not, according to Richard Cooper, the global head of financial services at Fusion Risk Management. To do that, he says, firms must first understand what their business is and what security breaches would be a concern.

“This isn’t an IT problem; it’s a business problem,” he explains.

Different firms have different priorities, and a regulator such as the SEC does not have insight into the nuances of every business, Cooper notes. The word “significant” is ambiguous, but “it’s ambiguous for your own good,” because the alternative would be the SEC deciding how to run and protect individual businesses.

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Cooper gives the example of a bank’s access to cash, loans or key information on their clients and the market being breached or compromised as a “significant event.” But leaks of internal training material, preliminary data or publicly available information probably would not be considered “significant.”

Cooper adds that, for all relevant companies, employee training will be essential. If one department is compromised, then the entire firm only has four days to report it. This means employees will need to be able to recognize an event and know how to report it and to whom. Cooper asks, “Are you confident they will tell you quickly enough?” Companies should therefore focus training efforts on all departments rather than just the IT and legal divisions, he says.

If there is a significant digital event, a firm can request two 30-day extensions, followed by a final 60-day extension, by appealing to the U.S. Attorney General’s office to determine that disclosing the event would compromise national security or public safety, according to the rule.

Helen Christakos, a partner in Allen & Overy LLP, says, “It’s going to be a challenge to get in touch with the AG in that short a window.” She adds that, “there will be something of an art to writing these disclosures” to ensure compliance with the SEC’s rule while not complicating investigations taking place at the state or local level, since those officials do not have the authority to request a postponement of the disclosure.

Speaking of state law enforcement, Christakos recommends that companies “make sure everyone is in the loop and comfortable with what is disclosed,” but that, ultimately, a firm must still comply with the SEC rule.

There is no additional postponement for a significant cybersecurity event after 120 days, according to the rule.

Michael Borgia, a partner in Davis Wright Tremaine LLP, quips that, “after 120 days, it no longer matters what the AG thinks about national security; you have to disclose it.”

Tags: Allen & Overy LLP, Cybersecurity, Davis Wright Tremaine LLP, Disclosure, Fusion Risk Management, Helen Christakos, Michael Borgia, Richard Cooper, Securities and Exchange Commission