After the recent financial crisis, institutional investors are increasingly unwilling to sit on the side-lines and accept public policy as a “given”.  The latest report on Investor Engagement in Public Policy from the PRI and UNEP Inquiry makes interesting reading and sets out a strong case for investors to engage with policy makers plus practical “how to” steps.  As well as commending the report, I would make four additional observations:

1.   Policy, Politics and Public Opinion.

It’s helpful to think about a closed loop rather than a “one way” linear process in which investors influence policy makers. Institutional investors typically represent (large numbers of) individuals who vote for politicians who shape the policy landscape, which in turn affects the investment world.  This is a major issue with the climate change debate today, i.e. the general public still doesn’t accept the need for radical change, so politicians are unwilling to act.

2.   Investors’ Objectives. 

Investors should reflect carefully on what they seek to achieve when engaging in the policy debate.  Just as policymakers need to consider a wide range of factors, so institutional investors, particularly pension funds, are increasingly encouraged to consider “non-financial” issues, for example considering the impact of their actions on the shape of the future society in which their members will retire.  Therefore, those investors should be cautious about homing in on detailed single issues while remaining silent on broader topics, for example offering prescriptive advice on how to reform the European Emissions Trading Scheme without reflecting on the wider issues around energy policy.  In this vein, it’s interesting to note the different discount rates used by government and the private sector.  The UK government is currently using 3.5% (real), while private sector investors (and their actuaries) use higher rates: actions or investments that pay back over the longer term may make sense to government but fail to move the needle for pension funds.

3.   The Skills Gap. 

Policy-making is usually complex and often requires technical knowledge.  Staff working at institutional investors may not have the breadth of skills or the time to master the details, and so are handicapped from engaging.  Equally, employing external groups or individuals to perform this work is usually costly – most institutions appear reluctant or perhaps constitutionally unable to dedicate the funds necessary to support this.  Collaboration can of course help.  Unless they can “get into the weeds”, investors run the risk of being side-lined by policy-making staff in favour of those, often corporate lobbyists, who have the specialist skills.

4.   It’s All about Risk.

So why does engagement with policymakers matter?  The PRI/UNEP report points to three reasons why engagement makes sense today:  financial reform, economic recovery and sustainability.  However, financial reform and economic recovery are underway (we hope) and may one day be complete.  Perhaps a more fundamental driver is risk management – recent events have demonstrated that public policy hasn’t effectively shielded investors against a wide spectrum of risks, for example malfeasance in the financial system, banking collapse, structural economic weakness, poor corporate governance, inequality and environmental stress.   By recognising that they need to “close the loop” and engage with policy makers, investors can take an additional step towards understanding and perhaps mitigating these risks.

Ian Simm

Founder & CEO

Ian Simm is the Founder and Chief Executive of Impax Asset Management Group plc, one of the world’s leading investment managers dedicated to investing in the transition to a more sustainable economy. Prior to Impax, Ian was an engagement manager at McKinsey & Company advising clients on environmental strategy.

Outside Impax, Ian is a member of the UK government’s Net Zero Innovation Board, which provides strategic oversight of public sector funding of energy innovation programmes, and is a board member of the Institutional Investors Group on Climate Change, the European membership body for investor collaboration on addressing climate change. He is also a commissioner with the Energy Transitions Commission, a global coalition of leaders developing transition roadmaps to achieve net-zero emissions. Between 2013 and 2018, he was a board member of the Natural Environment Research Council (NERC), the UK’s leading funding agency for environmental science. He supports charities in the clean energy, healthcare and a range of scientific and environmental sectors. 

Ian has a first-class honours degree in physics from Cambridge University and a Master’s in Public Administration from Harvard University. In the last century he initiated and led an expedition to complete the first summer crossing of the Sahara Desert by tandem bicycle.

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