Universal Owners Research Articles

Universal Ownership in the Anthropocene

This paper reviews the existing literature on Universal Ownership Theory and expands on it to encompass a theoretical and practical framework for Universal Owners in the Anthropocene era. This extension of the theory is necessary because of the scale and urgency of the climate crisis, on one hand, and the expansion of the category of funds considered to be Universal Owners on the other – through the rise of fiduciary capitalism and the increase in institutional ownership, and through the increasing prevalence of passive investing. This paper incorporates several novel elements into Universal Ownership Theory: an Existential Risk lens, which highlights the portfolio risk of civilisational collapse; a theoretical framework that reflects advances in behavioural science; a practical investment framework based on the tenets of Positive Investment, including asset class-specific recommendations with a focus on capital allocation, the primary-to-secondary market transition, and “ungameable” metrics; and the proposition of a “duty of expansion” for Universal Owners to extend participation to communities and regions of the world currently underrepresented among the body of large institutional investors.

An Honorable Harvest: It Is Time for Universal Owners to Take Responsibility for Their Portfolios

There is now an established industry dedicated to making business more responsible for its impacts on the environment and society. An alphabet soup of organizations promotes “sustainability,” “corporate social responsibility” and “ESG (environmental, social and governance) integration.” To date, the efforts have been insufficient to the task, as illustrated by our failure to address the climate and water crises, growing political instability and continuing shameful abuses of human rights in supply chains. (This is by no means a criticism of sustainability efforts — things could be much worse without them; it is instead a call to find a path to success for this vital movement.) This essay argues that current efforts are failing because they require individual companies to make difficult decisions about complex social and environmental issues. However, companies are a poor locus for these decisions because they are in competition with one another to provide a return on equity capital. Even without the pressure of competition, the calculation of optimal returns on equity is incommensurable with the calculation of what businesses must do to maintain a healthy environment and society: there is no rational way for a corporate director to compare a ton of carbon and a penny per share of profit. Businesses respond to this combination of competitive pressure and incommensurability by only implementing those sustainability measures that are compatible with optimizing returns on equity, rather than those necessary to actually solve the sustainability problem. In an economy based on market competition, we cannot rely on individual businesses to self-impose basic sustainability rules that take priority over profit. By their nature, these critical sustainability boundaries must be implemented collectively in order to be effective. While law and regulation would be the traditional avenues for addressing the broad societal concerns that comprise sustainability, governments themselves suffer from collective action issues in a global economy where jurisdictions compete for jobs and revenue. The ongoing failure of either business or government to systematically address these issues has created a crisis: business practices are eroding the environmental and social structures that undergird our civilization. If we cannot devise a method for implementing difficult decisions about carbon, inequality and other systemic issues, we will continue to just tinker around the edges of concerns that threaten human thriving, rearranging deck chairs as our global economy sinks. This essay argues that at this historical moment, the global investor community is the appropriate locus for the collective decision-making necessary for a sustainable economy. The power exerted by institutional investors through allocation and stewardship of equity capital can be used to insist on more sustainable business practices. Because they are diversified across thousands of companies, these investors can bypass the competitive bottleneck for margin and capital that holds sustainability back at the company level. I urge asset owners to consider these arguments, and to act to begin establishing sustainability parameters for all businesses, as our window of opportunity is rapidly closing.

The Firms’ Reaction to Changes in the Governance Preferences of Active Institutional Owners

Universal owners can systemically diffuse their investment preferences to a large share of the market. We use the unexpected release of a corporate governance expectation document by Norway’s sovereign wealth fund as a natural experiment to understand how active universal investors can influence firms’ governance. Expectation documents are an emerging activism tactic used to enhance a broad range of sustainability practices. We introduce a novel decomposition to explore the effectiveness of expectation documents. We show how firms adapted to the fund’s new portfoliowide governance expectations expressed in the document and explore their heterogeneous response across ownership levels and firm characteristics. We also show how the fund changed its investment policy to meet its new stated preferences, even at the expense of financial returns. Overall, our research uncovers the potential wide-spread effectiveness of a low-cost activism tactic that universal owners can deploy to influence sustainability globally.

Do Universal Owners Vote to Curb Negative Corporate Externalities? An Empirical Analysis of Shareholder Meetings

This paper tests whether very diversified and patient investors, also known as universal owners, tend to vote in favor of shareholder resolutions instructing corporations to reduce or communicate on the negative externalities they produce. Our sample includes 213 US fund families that voted on 13,108 different shareholder resolutions at 2,352 companies over the period from 2013 to 2016. We find that, contrary to the common ownership logic, universal owners’ support for issues related to externalities is lower than the one of otherwise similar fund families. Instead, support is positively associated with the proportion of socially responsible investment funds in the family. We discuss various practical implications of our results.

The New Permanent Universal Owners: Index Funds, (Im)patient Capital, and the Claim of Long-termism

Fundamental change is happening in asset management – the shift from actively managed funds to index funds. This money mass migration into index funds has far-reaching consequences, because it leads to a concentration of corporate ownership in the hands of the ‘Big Three’ asset managers. We call BlackRock, Vanguard, and State Street the ‘New Permanent Universal Owners’ as they are invested indefinitely in thousands of member firms of stock indexes. We provide novel findings on the combined ownership of the Big Three in 17 major stock indexes from nine countries. Furthermore, we shed light on the impact of index funds on the dichotomy between ‘patient’ and ‘impatient’ capital. The Big Three have proclaimed themselves champions of long-termism. We analyze their voting behavior in five countries concerning two proxies for corporate short-termism: share buybacks, and mergers and acquisitions. So far, they have not unambiguously acted as champions of long-termism.

Blackrock vs Norway Fund at Shareholder Meetings: Institutional Investorss Votes on Corporate Externalities

Do institutional investors engage with companies on corporate externalities such as greenhouse gas emissions? And if so, why? We study voting at shareholder meetings by two emblematic global investors: BlackRock, a major asset manager, and the Norway Fund, a responsible sovereign wealth fund. Our data cover 2014 and include the two institutions’ votes on 35,382 resolutions at 2,796 corporations across the world. Both of these so-called universal owners oppose management significantly more often on externality than on financial issues. The Norway Fund is more active on shareholder resolutions concerning externalities related to environmental and social issues rather than governance issues. The difference between the two investors’ voting behavior is larger when we focus on resolutions related to greenhouse gas emissions, a clearly identified externality. Overall, universal ownership (see, e.g., Monks and Minow, 1995) and, more importantly, delegated philanthropy (see, e.g., Benabou and Tirole, 2010) both appear to provide incentives for institutional investors to combat negative externalities generated by firms.

The Path to Fossil Fuel Divestment for Universities: Climate Responsible Investment

Should university endowments divest from fossil fuels? A public discussion of this question has included some university presidents issuing statements that they would not, that investments should not be used for “political action.” Many universities hold large endowments that have significant positions in fossil fuel companies and/or funds that hold fossil fuel assets. Universities consume fossil fuels in most aspects of campus operations. But universities also support most of the research that has identified the existence, nature, and consequences of climate change, and the principal purpose of the university is to educate, particularly the young adults who will live and work in the climate of the future.Arguments for divestment by universities from fossil fuels are frequently based on moral grounds. Ignoring the moral issue at the core of the climate challenge presents real peril to the reputation of universities and their standing in society. The costs of climate change stretch across generations due to the long atmospheric lifetimes of greenhouse gases (GHGs) and the inertia in the Earth’s climate system, posing the question of what the impacts of today’s societies are on the well being of their children and grandchildren. The poor bear the brunt of the economic and health impacts of climate, a relationship that holds within every nation, and between rich and poor nations. Climate change requires development of the capacity to manage our collective impact on our environment, and universities have a duty to help foster this development. Universities cannot pretend they have no such responsibility without forsaking the role they have historically engendered as trustees of humanity’s capacities, values, and understanding.But the case for divestment is not limited to moral imperatives. Holding assets in fossil fuel companies, and in companies that are fossil fuel-intensive, poses a significant array of risks for universities that appear on multiple, simultaneous fronts. Fossil fuel companies will eventually experience a dramatic decline in demand for their products, producing so-called “stranded carbon.” Price volatility of fossil fuel assets is the norm, and it will be exacerbated by rising concerns about extractive practices and the forced internalization of external costs, shareholder advocacy, the elimination of generous subsidies, and intense competition from energy efficiency and fast-developing, low-carbon sources of energy. Taken as a whole, the financial, moral, and reputational risks associated with holding assets in fossil fuel companies create a compelling case for divestment, even without considering the rising opportunity costs of not transferring investments to cleaner alternatives. Careful examination of the stated reasons for not divesting shows that they do not hold water.Instead of viewing the choice as “business as usual” or “disinvest,” universities should engage with other universal owners and learn how to invest responsibly. Aligning their financial interests with their commitments to sustainability will not be accomplished overnight, but that does not justify turning a blind eye to the fact that a healthy portfolio requires a healthy economy. Universities can first disinvest in the highest polluting and irresponsible operations, and launch a process of learning where to reinvest in the cleaner opportunities of the future. Developing the capacity to identify good investments that make sense from both a moral and a financial standpoint, and doing that work will help inform the rest of us. Doing this work visibly fulfills the university’s role in society, and will attract high quality students, faculty, and donors. Once this work is commenced, the question concerning where the line is to be drawn recedes in importance.These actions would provide the world with a lesson worthy of educational institutions that really are concerned with the future. These actions would demonstrate that universities understand that money management is not separate from its moral and environmental consequences, and that they will not participate in the fiction that holds that they are separate. That alone would have incalculable value because it would help convince others. Even the most cold-blooded investor will eventually have to acknowledge that these risks are growing, as is the value of industries that are not vulnerable to regulation, resistance, and devaluation. University leaders should recognize how intelligently going down the road of divestment fulfills their role in society, and that failing to fulfill the university’s basic mission will eventually degrade its reputation and capacities.

Socially Responsible Investing for Sustainability: Overcoming Its Incomplete and Conflicting Rationales

AbstractIn the wake of the Global Financial Crisis and worsening collateral social and environmental problems, socially responsible investing (SRI) has garnered more interest internationally as a potential civilizing influence on the financial economy. In particular, SRI is increasingly conceptualized as a means to promote environmentally sustainable development by disciplining financial markets to be more attentive to their ecological impacts. In this sense, SRI emerges as a putative form of transnational governance that utilizes non-state actors and mechanisms to promote sustainability in an economic sector that traditionally has had little accountability for its environmental performance. But as a largely voluntary movement, with rudimentary legal support, SRI so far has wielded limited clout.A hindrance to the aspirations of SRI is deficiencies in its rationales. This article critiques the main theories advanced to justify SRI from the perspective of their contribution to promoting environmental sustainability: the complicity-based doctrine, leverage-based responsibility, and the universal owner thesis. Apart from gaps or limitations shown in each rationale, the article demonstrates that they conflict with the existing parameters of fiduciary law responsibility of financial institutions. An alternative rationale that emphasizes the temporal perspective to invest over the long term is suggested as a better approach for SRI if it is to be relevant to the pressing challenges of promoting sustainability and governing global financial markets.

Pension Funds as Universal Owners: Opportunity Beckons and Leadership Calls

Pension Funds as Universal Owners: Opportunity Beckons and Leadership Calls

Responsible Investing 2.1 - A Top-Down Multi Asset Perspective

Many large institutional asset owners (in particular pension funds and sovereign wealth funds) have started to move into alternative asset classes over the past few years or so and today represent key players in these markets. With their market power, they are the ones who finally determine the rules of the game. Parallel to the diversification process that was driven by financial risk and return considerations and triggered by the experience of bursting stock market bubbles, the same group of asset owners began to embrace Responsible Investing ideas, not least triggered by the debate around the effects of climate change on the value of their investments. Today they are the main protagonists of the Principles for Responsible Investment, the UN PRI. The challenge that these investors – often characterised as ‘universal owners’ – face, is that they pressed ahead with their move into alternatives without having established a systematic and consistent multi asset approach and now need to fill the gap that has emerged retrospectively. To do so we propose a combination of the concepts of ‘strategically aware investing’ (SAI), a term introduced by RI legend Matthew Kiernan, and which in our interpretation describes the idea of integrating ESG information in order to enhance the quality and added value of financial analyses and investment decision processes, and of ‘Impact Investing’, which calls for a systematic consideration of non-financial investment impacts. As a result we present the main features of a strategic asset allocation (SAA) process for the entire RI portfolio (including the alternative asset classes) and an ‘enhanced passive’ investment process (including tactical asset allocation (TAA) and selection) for the conventional asset classes that make up 70% of our model portfolio. Besides helping to address some of the perceived contradictions of Responsible Investing as it is practised today (e.g. related to cases like BP), our approach is rich in implying changes to the current status quo.

Allocations to Sustainable Investing

This paper presents a framework intended to provide pension funds and other institutional funds with practical guidance to their specific allocations to strategies in the fields of Responsible Investing (RI), Sustainable Investing (SI) and ESG (environmental, social and corporate governance factors in investment). While recognizing is growing footprint, RI/SI does not influence the investment of institutional capital that much yet. This is a normal trend-line in that whenever there is new investment thinking and practice it takes a while to become mainstream. The RI/SI industry though has the additional obstacle of confusing legal context to overcome. It follows that to establish their legitimate arguments, RI/SI strategies have to be taken beyond parity with traditional strategies and deliver a more compelling proposition both with respect to investment theory and the application of theory in practice.In investment, critical thinking is captured in beliefs – conjectures and guides as to how the investment world works and how it can be exploited – those beliefs will be sourced from argument and measurement using critical tools of research and benchmarks. Developing strong and sharp beliefs is not that easy – it requires funds to deploy considerable governance. The beliefs that result from this process will generally cluster in three types: those that see stock-specific ESG factors as essential to risk control; those that identify ESG related assets that will benefit from tail-wind effects and nearly mover advantages; and those that adopt long time horizons and universal owner perspective in off-setting the longer-term risks and costs of natural resource depletion with ESG related investment. Such beliefs can then be aligned with two distinct approaches to sustainable investing: the integrated approach where ESG and active ownership are mainstream elements of the mandate; the targeted approach where specialist investment is concentrated in ESG related themes like clean tech and environmental opportunities. Whatever the belief, the critical discipline is to employ a process for determining the suitable allocation to these sustainability strategies. Such a process starts with clarity of mission; works with a set of beliefs that have gained strong support from the fiduciary board; applies a quantitative discipline with respect to risk including the risk that departures from previous practice produce shorter term under-performance- The process is completed by overlaying a monitoring process that considers in parallel the returns and risks arising from both the financial and extra-financial missions; and ensuring that the beliefs and strategy are gradually adapted in the light of a fresh information that comes from monitoring process. For funds and asset managers that are signatories to the UN PRI code of responsible investing, the framework put forward has the merit of strengthening the audit trial to demonstrating adherence to the code.

Racine à l'école de Molière:Britannicus

Abstract This paper is essentially theoretical. It lays out prolegomena for an alternative to share-holder theory. It links the corporation as the owner of the firm, a team theory of the firm that defines corporate governance as a co-ordination game and the crucial role of the board of directors as an integrator of stakeholders' interests. The spur of intangible assets as sources of value creation has enhanced the diversity of claimants on the firm's value. The paper shows that the coordination game has multiple stable solutions, leading to diverse modes of governance. The stock market cannot pick up one best way. The outcome of the game depends on the power structure within corporations, which in turn is linked to the dominant pattern in the financial system. The paper emphasizes the upcoming preponderance of long run institutional investors, including the rising sovereign wealth funds, which can be considered as universal owners. Their strategic asset allocation induces them to maximize total long run v...

The Puzzle of Financial Reporting and Corporate Short‐Termism: A Universal Ownership Perspective

This study considers the controversy surrounding financial reporting and corporate short‐termism as a puzzle. The question remains as to why corporate managers and investors persist in exhibiting behaviours that trade off long‐term value creation for meeting short‐term financial targets. Using inter‐temporal choice theory, the myopia characterising decision‐making is entirely rational, given the set of incentives faced. This study views the puzzle through the prism of universal owners (pension and superannuation funds), arguing that the investment policies or ‘mandates’ implemented by these financial behemoths is the source of the myopic behaviour. The paper explores a range of policies that universal owners may consider implementing to ensure that the payoffs to corporate managers and investors are optimised through the pursuit of long‐termism.

Beyond the Credit Crisis - A Responsible Investment Perspective

This article examines the credit crisis and the role that different agents played, including institutional investors. It suggests a series of actions that we can take to improve the integrity and resilience of the financial system going forward. Whether or not you agree with all the suggested actions that pension funds might take, the bottom line is that a change to the market conventions that we have come to rely on for many decades is inevitable. As universal owners, institutional investors will benefit from collaborating with other industry agents, regulators and policy makers in shaping the future investment landscape. The focus in designing any new regulatory measures should be on ‘nudging’ agents in the right direction through improved transparency and accountability standards that directly target the behavioral mishaps we have observed. The credit crisis highlights our vulnerability to systemic issues; let’s hope this has been a sufficient wake up call for policy makers, corporations, investors and consumers alike to take other systemic risks more seriously, such as climate change – which in my opinion, is the next ‘elephant in the room’ that needs to be tackled with more urgency than is currently the case.

Corporate governance and the long‐run investor

This paper lays out prolegomena for an alternative to shareholder theory. It links the corporation as the owner of the firm, a team theory of the firm that defines corporate governance as a co‐ordination game and the crucial role of the Board of Directors as an integrator of stakeholders’ interests. The spur of intangible assets as sources of value creation has enhanced the diversity of claimants on the firm’s value. The paper shows that the co‐ordination game has multiple stable solutions, leading to diverse modes of governance. The Stock market cannot pick up one‐best‐way. The outcome of the game depends on the power structure within corporations, which in turn is linked to the dominant pattern in the financial system. The second section of the paper emphasizes the upcoming preponderance of long‐run institutional investors, who can be considered as universal owners. Their strategic asset allocation induces them to maximize total long‐run value of all the firms in the whole economy, to integrate extra‐financial risks associated with intangible assets and with long‐run liabilities and to use voice rather than exit in corporate governance. The paper suggests how the activism of those investors can introduce checks and balances in the corporate power structure.

Universal Owners and ESG: leaving money on the table?

ESG (environmental, social and governance) issues represent both a “tragedy of the commons” and a golden opportunity for a positive system change. Universal Owners should recognise both their power and their responsibilities, and then to leverage their investment strategies to catalyse ESG improvements in their investee companies. This can be done through both stock selection and direct engagement with companies. To date, unfortunately, a myriad of largely cognitive barriers have prevented Universal Owners from mobilising their considerable investment power in this way to any significant extent. There is, however, some encouraging evidence that this is beginning to change.

Norwegian Petroleum Wealth and Universal Ownership

How useful are universal owner arguments for a large, diversified investor such as Norges Bank Investment Management (NBIM)? This article presents concrete issues, such as climate change and corruption, which can be analysed using universal owner arguments. However, it also discusses potential weaknesses of this argumentative strategy. The article includes a general background to Norway’s Government Pension Fund Global – now one of the world’s largest funds – and concludes that such a fund could utilise universal owner insights in its work as an active owner by (1) addressing both companies and standard setters on issues of portfolio‐wide, long‐term importance; (2) respecting a division of labour between different actors in the market place; and (3) taking part in collaborative arrangements, both within organised networks and informally between investors.

Universal Owners: challenges and opportunities

This special issue of Corporate Governance is devoted to the concept of “universal ownership” (UO) and grows out of a conference of universal owners, institutional investors, investment professionals and academics held in April 2006 at Saint Mary’s College of California, under the sponsorship of the Center for the Study of Fiduciary Capitalism (A report of the conference is available at http://www.fidcap.org). Four of the seven articles in this issue are based on papers presented at the conference, while an additional three (by Lydenberg, Syse and Gjessing, and Lippman et al.) were written specifically for this issue. The conference purposefully developed a practitioners’ perspective on universal ownership and these articles reflect this orientation, although each article in its own way breaks new ground which academics, policy researchers and practitioners can and should develop.

Increasing Long‐Term Market Returns: realising the potential of collective pension fund action

This paper seeks to offer a perspective from two practitioners on how the potential for retirement fund collaboration to improve long‐term market returns could be realised. After looking at the Universal Owner hypothesis and long‐term market returns, and their relevance to pension funds, the paper looks at collaboration to date, and the problems of collective action in general. After outlining several current collaborative opportunities, the ways in which they address the problems of collective action are outlined. The paper ends with a call to action to the leaders of the world’s largest pension funds.

The Universal Owner's Role in Sustainable Economic Development

Toward the end of the twentieth century, ownership of corporate equity in the United States and Great Britain has once again become relatively concentrated, but this time in the hands of institutional owners such as pension funds and mutual funds. An important implication of this concentration is that ownership has become professional and, because these institutions are fiduciary institutions, subject to the fiduciary duties of loyalty and care. Furthermore, because of an institution's size or because of an explicitly policy of indexing, many institutions have become “universal owners”. A universal owner owns a small, but representative fraction of most of the companies in an economy. Thus, its ability to satisfy its fiduciary duties depends heavily on overall macroeconomic efficiency and performance rather than on the performance of any particular firm that it might own. Consequently, universal owners have a natural interest in issues of sustainable development because they receive the benefits from positive externalities generated by portfolio firms and are likewise harmed by their negative externalities.