Pension funds indirectly fund excluded companies, research finds

Pension funds end up indirectly supporting blacklisted companies when they invest in banks which underwrite debt and equity capital, according to Oxford research.

The ongoing research, presented at the eighth annual World Pensions Forum in Brussels, found that the $1trn Norwegian Pension Fund Global (GPFG) has allocated 7.4 per cent, or $40.7bn, to banks which fund the same companies the GPFG has excluded from its investment portfolio.

When presenting the findings, University of Oxford member of the economy and society: transformations and justice research Michael Urban said the banks have “very little to no consideration for ESG performance of the companies they underwrite”.

“The majority keep making sizeable loans to some of the most environmentally and socially destructive industries and corporations,” Urban said.

The banks also keep helping the same blacklisted companies and industries raise billions in debt and equity capital through their underwriting activities, which go unnoticed because of the lack of ESG measuring metrics in the area.

“For example, since 2005, investment banks have underwritten $280bn of new debt and equity capital for coal companies, $145bn for tobacco producers, and another $108bn for companies responsible for severe environmental damage.

“The largest underwriters are also the largest underwriters for coal companies, producers of tobacco and producers of cluster mines and so on,” he explained.

“It matters because asset owners that practice negative screening are likely to be indirectly exposed to companies they exclude through their investment in financials. This is a reflection of the sheer size of the financial sector.”

The research was focused on the underwriting activities of investment banks and has filtered through 13 years’ worth of debt and equity underwriting deals, crossmatched with the 153 corporations currently blacklisted by the GPFG.

The Norwegians, Urban said, have sizeable ownership rights in these banks and should in theory be able to engage with them directly to address this issue.

“However, to be able to do so, asset owners need granular metrics that capture the ESG performance of banks’ financial transactions. And there is a need for ESG metrics that can be tailored to specific sustainable investment strategies.”

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