The FT has an article making an important argument this morning. As it notes:
The huge rise in environmental, social and governance-based investing is funnelling money into companies that pay less tax and provide fewer jobs than many counterparts with lower ESG ratings, analysis shows.
ESG is investing with a focus on the environment, society and good governance. It is what used to be called corporate social responsibility. It is increasingly trendy: ESG funds under management are growing rapidly. But as the FT notes there is a problem, most especially with big tech, which o9thjerwise seems to meet ESG requirements.
It employs few people but outsources, maybe not on the best of terms, a great deal.
And as is widely known it pays low rates of tax. Some of that is, without doubt, by choice and as a result of the use of tax havens, which is why so many of these companies are resistant to the use of country-by-country reporting.
What is the answer? First, of course, tax awareness in the ESG community.
Second, better tax disclosure. I argued very strongly for this in a recent submission to the Financial Reporting Council.
Third, there is a very strong case for ESG indices to demand verification from organisations like the Fair Tax Mark, which I co-founded and still advise.
Fourth, investors (that is, those who actually provide the funds for investment) have to make noise on this issue.
ESG can never embrace tax abuse.
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This subject just makes my blood boil. I spent 7 years as a workplace pension trustee of a medium sized pension fund and my motivation for taking on this huge responsibility (and it is a huge responsibility which is too often not taken sufficiently seriously by those who are trustees – to many “yes men” and “nodding donkeys”) was that I wanted to do something about how my pension fund was investing. So I was very attracted to using ESG factors in designing investment strategy and principles. It is a laudable aspiration but it doesn’t work. I could write a thesis to set out why it doesn’t work (and in fact have done so in the form of a paper “Proposals for a National Pension & Investment Fund (NPIF)” ) but what I will say here is that the pursuit of ESG in investment is like putting new wine in an old bottle.
We need a new bottle…..I believe my proposed NPIF is that new bottle.
Write an 800 word version…..
Jim & Richard, congratulations on your fascinating new thinking on a complex topic which affects everyone and has been the subject of massive misunderstanding, incompetence and fraud as well as many instances of exemplary management down the years. Although I spent most of my working life in accounting and consultancy roles, I readily admit to an almost total ignorance of pension fund management, so I’m intrigued by the proposals you are making. In Scotland’s case, having a workable pensions proposal which benefits commercial, ecological and social interests while providing an assured and adequate income for retirees, could be a very persuasive matter when it comes to securing votes for independence.
From first reading, it looks like a more stable solution than the casino-investment basis that underpins so many UK pension funds. Jim, to what extent are the politicians aware of your proposals? It’s essential in my view that the initial thinking and design are done by people who understand the pension industry, seek better outcomes and aren’t part of existing gravy train practices. However, to bring it into existence will necessitate getting politicians who can get things done on board and that might be tricky, frustrating and almost certainly time-consuming.
Jim
Who have you sent this to?
Richard
This is a cut down copy of the Abstract (original 1072 words) of the main paper. The original Abstract was posted on Progressive Pulse by Peter May last September
Proposals for a Scottish National Pension & Investment Fund (NPIF)
The full paper setting out the proposals for Scotland can be found in the documents collection on the Scottish Currency Group Facebook Page at https://www.facebook.com/groups/715532695555527/permalink/993420067766787
It was clear, however, that having a sovereign wealth fund to support a new Scottish economy was important. The proposals that were developed were, therefore, designed to create such a fund from the assets held by the pension funds that had been built up to benefit Scottish workers when they retire.
The proposal was to create a single national fund through consolidation of these pension funds with a dual function of (a) investing directly in the Scottish economy (b) providing a pension of 80% of earnings for all citizens.
A new investing paradigm was proposed for the NPIF, based on the familiar process of investment in real estate and infrastructure, where the investment is made in return for negotiated shares of the cash flows generated by the enterprise. The investing model is known as “Evergreen Direct Investment” (EDI) and is a form of direct equity investing, distinct from the more familiar buying and selling of shares through securities markets.
Creating the NPIF addresses several key flaws in the current pension system
– Investment risk is transferred from employers who provide DB schemes and from individuals who bear this risk in DC schemes — the investment risk is collectivised.
– Collectivising risk means companies can allocate their capital to running the business without having to fund pension fund “deficits”.
– EDI investing will involve the withdrawal of capital from the securities markets where enormous volumes of stocks and shares are traded in secondary markets and asset values are completely detached from conditions in the real economy where productive activity creates use value for people.
– The formation of the NPIF will define its legal and constitutional status, replacing the current influence of the law of “fiduciary duty” with a legal duty to serve the interests of all of Scotland’s citizens collectively and individually. The NPIF will be accountable to the people through Parliament for its decisions and its performance.
– The NPIF will be underwritten by the state and, assuming Scotland has its own currency, the Scottish government will have the means to provide additional capital to the fund in the event of short term liquidity challenges. This means that assessing fund adequacy no longer requires triennial “valuations” of the fund balance sheet to determine the multi-generational values of assets and liabilities and measure the extent of any “deficit”. The adequacy of the NPIF can be assessed simply by cash flow accounting over immediate and near term timescales.
– EDI investing is a cash flow based investment paradigm through which the negotiated sharing of enterprise revenues can be matched with predicted outgoings from the fund so that cash flow in = or > cash flow out.
The pension benefits side of the fund are designed to deliver a pension of 80% of earnings at retirement by combining an NPIF based pension with a supplementary state pension.
The design parameters need to take into account the following factors
– The dependency ratio (the number of workers compared to the number of pensioners)
– The start date for contributions (scheme membership) and a defined normal retirement age (this then specifies the maximum number of pensionable years of employment)
– The accrual rate — the rate at which pension entitlement builds up each year
– The contribution rate and how this is shared between employee and employer
– The balance between the contribution of the NPIF component of total pension and the state contribution.
The following values are proposed for the scheme
– Pensionable period of employment 20 until 65 but with a maximum of 40 years
– An accrual rate of 1/80.
– A contribution rate of 24%
These factors produce a scheme with the following outcomes for a range of earnings
wage Accrual 1/80s yrs of work NIPF pension state % top up state pension total pension % wage
8000 0.0125 40 4000 60% 2400 6400 80%
10000 0.0125 40 5000 60% 3000 8000 80%
12000 0.0125 40 6000 60% 3600 9600 80%
15000 0.0125 40 7500 60% 4500 12000 80%
20000 0.0125 40 10000 60% 6000 16000 80%
25000 0.0125 40 12500 60% 7500 20000 80%
30000 0.0125 40 15000 60% 9000 24000 80%
35000 0.0125 40 17500 60% 10500 28000 80%
40000 0.0125 40 20000 60% 12000 32000 80%
45000 0.0125 40 22500 60% 13500 36000 80%
OK
Useful, and thank you
Now what is the portfolio mix, and why?
In a nutshell, two portfolios essentially – an Equity Direct Partnerships (EDP) portfolio – EDPs across a diverse range of industrial sectors and enterprise types/size, and a diversified portfolio of financial assets selected using ESG factor analysis which relies on proper sustainable cost accounting, accounting standards and audit – all the stuff you are working hard on at the moment.
In addition this must be part of a wider redesign of the financial system which screens a domestic banking and financial sector from the speculative “secondary financial sector” (as I call it – although it is much bigger). This domestic sector then provides lower risk investment opportunities for the NPIF (and other investors). Banks are segregated by a “firewall” -the NPIF is partially segregated by a “gateway” which consists of a set of permissions or conditionalities for investing in the speculative financial markets – the application of ESG factors is part of the gateway conditions.