Danish Pensions Dump UNPRI over Governance Concerns

(December 13, 2013) — Six of the largest European pension funds have dumped the United Nations-backed Principles of Responsible Investment (PRI), citing continued fruitless attempts at improving the organisation’s overall structure.

The national fund ATP, Industriens Pension, PensionDanmark, PFA Pension, PKA, and Sampension, released a joint statement this morning saying they would continue to invest using the principles, but would “remain outside the organisation until it again lives up to basic requirements for good corporate governance—including restoring membership democracy in the organisation”.

The PRI was established to embed six basic environmental, social, and governance principles in investment decisions. Some of the world’s largest investors have signed up to the principles, including pension and sovereign wealth funds, along with large asset managers and insurance companies.

The principles were launched by a group of international investors with the support of the United Nations Environment Programme Finance Initiative and the Global Compact in 2006.

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The Danish funds said today: “The UN-backed PRI have an important role to play in promoting responsible investment—including emphasising the importance of good governance in companies around the world. We have, nonetheless, over a sustained period of time observed with concern that the governance of the PRI organisation does not live up to the basic standards we as investors would expect of the companies in which we invest. Despite numerous attempts to improve the conditions within PRI, we must, unfortunately, acknowledge that these attempts have not been successful.”

This week, ING Investment Management said western Europeans were the most concerned of all institutional investors about incorporating ESG issues into their portfolios. Some 86% responded to the asset manager’s survey to say it was an important consideration when making decisions.

The Danish funds did not shut the door on the organisation completely. “Should the PRI organisation at a later stage endeavour to substantiate that the governance of the organisation has improved to a satisfactory level, we will as individual investors give serious thought to re-entering the organisation,” the statement added.

“The PRI is deeply disappointed that this has occurred,” said PRI Managing Director, Fiona Reynolds. “At our annual Signatory General Meeting in Cape Town in September, the PRI committed to undertake a review of its governance. The Council’s Governance committee has already begun to define the scope of this review, which will be led by a new Council Chair expected to be appointed in early 2014.

Reynolds said accountability and transparency were fundamental to all of the PRI’s work and it have recently launched a new mandatory public Reporting Framework for its 1,200 signatories to ensure both they and the PRI itself continued to lead by example.

“We had previously arranged to meet with our Danish signatories in Copenhagen on January 13 and we plan to continue with this meeting and hope all of the funds concerned attend,” she added. “Given the important work of the Danish pension funds in responsible investment, we hope that the funds concerned will reconsider their decision at some point in the near future.”

(December 13, 2013) — Rising flows into insurance-linked securities, such as catastrophe bonds, has prompted the European pension regulator to voice its concern about whether investors are sophisticated enough to handle them.

During the past year, there has been a significant increase in investments in insurance-linked securities, driven by institutional investors seeking returns in a subdued economic environment.

In its round up of the year, the European Insurance and Occupational Pensions Authority (EIOPA) has warned it had concerns that pension funds and other investors may not have the modelling capabilities and experience to fully analyse the underlying risks of these investments.

“Without adequate supervision, such developments could cause systemic risk,” EIOPA said.

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In addition, the regulator highlighted the impact of significant natural events in the past 12 months.

The costliest natural disaster this year was the massive flooding event across Central and Eastern Europe in May and June 2013.

However, economic losses of $22 billion and insured losses of $5.3 billion were still below the 10-year (2003-2012) average and “do not seem to have caused any major financial stability concerns yet”, EIOPA said.

The regulator’s concerns were largely driven by research published this spring by Aon Benfield. As aiCIO reported in April, catastrophe bonds returned 12.7% in the year to the end of March, but there were three high profile blow-ups which resulted in investor losses of $500 million, following severe natural disasters and storms in Japan and in the US.

In addition, the catastrophe bond market is still largely dominated by repeat issuers, something that led to Aon Benfield’s Chris Parry, director and head of international capital markets, to call for more encouragement for new players to enter the ILS market.

Parry also noted that while there is a large supply of capacity, and as such, pricing is very competitive, there were a number of reservations shared by investors and pension funds about entering the European reinsurance market.

“We will overcome these challenges as people become more comfortable with the capital markets and the association with third party capital,” he said.

“It is very much an educational process to get people comfortable with the structures and costs associated with accessing the market. But it is certainly going to move forward if prices continue to come down, as we are seeing at the moment.”