One of the grubby threads running through the ESG saga is the notion that, when it comes to making sure that capital is directed in the “right” sort of way, people’s savings/pension funds are fair game. Of course, with the notion of fiduciary duty still being on the books, there was a lot of talk about how ESG was a way of “doing well by doing good,” how it could generate superior or at least less risky returns.
But those claims are looking a little tatty, leaving only “climate” (of little direct relevance when it comes to most public-market investment) and talk about the importance of “long-term” investment (a common enough alibi for incompetent asset managers) as justification for the continuing attempt to hijack other people’s money in the pursuit of an allegedly good cause.
Now, however, a new predator is headed toward pension funds, at least in the U.K., this time in the name of some sort of industrial policy.
The government has proposed that 86 local councils across England and Wales hand over the management of all £392bn of their combined assets to one of eight pools — or so-called megafunds — by March 2026. . . .
“It’s great that the chancellor has backed our argument for fewer, bigger LGPS [Local Government Pension Schemes] investors with the in-house expertise to inject equity into infrastructure and housing assets,” said Tracy Blackwell, chief investment officer of the Pensions Insurance Corporation. “A country that needs more infrastructure investment needs more natural equity sponsors for strategic infrastructure projects.”
Others are less impressed. Quentin Marshall, chair of the Kensington and Chelsea council pension fund committee, which has been the best performing LGPS fund over the past five years but has not pooled any of its assets, said: “I think they [the government] will create big bloated unaccountable quangos . . . which will deliver worse returns at a higher cost.”
Quentin Marshall is right. These megafunds will be used to direct capital toward politically favored classes of investment, rather than investments designed to generate pension return. The result will be widespread malinvestment, but, if nothing else, it will confirm that industrial policy, like socialism, involves spending a great deal of other people’s money. And not spending it well.
Neil Record, writing for the Daily Telegraph:
There has already been some consolidation under previous administrations, but this plan is more radical. The Chancellor is planning to create these large funds which she claims will not only deliver better returns, but also allow a large pot of the money – she estimates £80bn – to be invested in green and tech infrastructure. This would represent 22 per cent of the latest value of £361bn of assets currently in LGPS.
Green infrastructure. Of course.
In the speech in which Britain’s Chancellor of the Exchequer (finance minister) announced this scheme, she explained that these funds would be “encouraged” to invest in projects the government liked, such as that green infrastructure.
Record:
These are very high risk, long-term and illiquid investments. Many pension funds are reluctant to risk their money on these sorts of investments given that there is already a huge universe of attractive domestic and international investments (like listed equities) currently available to them.
However, most problematic is the idea that the Government’s political agenda should determine investment choice. The remit given to the professional investment managers that currently manage LGPS funds is that they (a) stick to their area of expertise and investment guidelines, and (b) that they maximise the return/risk ratio for their chosen asset class.
The Chancellor may believe that £80bn can be productively invested in green and tech projects; but it seems likely that her incentive is primarily to promote her political agenda. By contrast, the investment professionals may or may not choose to invest in infrastructure.
If these investment “opportunities” showed decent potential, private investors would not need “encouraging” to put money into them. The mere fact that encouragement is required is a good reason for any prudential investor to keep clear.
As Record explains, pouring money into infrastructure investment is no guarantee of economic growth. Whole-economy growth, he writes, “requires sustained improvement in the labour productivity of the working population, as well as maintaining constant or rising levels of workforce participation.” Construction is a low productivity sector, meaning that if money spent on that increases its share of the economy, the result may be to hit overall productivity.
But construction is only an intermediate phase. What really matters is what is being constructed:
Obvious examples of productivity-improving physical capital investment include modern automated and robot production facilities, making the same or more products with a smaller or much smaller workforce.
By contrast “green” infrastructure (wind farms; solar; nuclear) is heavily subsidised in the UK, otherwise less would be built. Measured against international market energy prices, the energy they produce, carry or store is very expensive, increasing the cost of energy for the general population, making them worse off. This is the opposite of economic growth.
Net zero is what it is.