Burgess COMMENTARY

Peter Burgess

A hacker approach to rewiring pension funds In part one of a series on remodelling pension funds, Brett Scott unpicks the power structures which stymie sustainable change

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What is the point of returns if the underlying society which upholds the monetary system is fundamentally compromised in the process? Photograph: Dana Romanoff/Getty Images

There is a spectre haunting the global pension fund industry. It is the spectre of a complete failure of common sense. It is driven by an outdated and increasingly dangerous ideology of infinite growth, and is held in place by structures of power and cultural inertia.

Guardian Sustainable Business has been exploring a variety of progressive financial innovations and reforms over the last few months, each of which attempts to disrupt some aspect of this status quo. They are a collective effort – almost like an open-source project – with different people selecting where they can be most effective in creating change.

It's important though, to have a sense of what we are collectively trying to achieve: we need to break down existing unsustainable structures and build new.

To draw an analogy with computer systems, it's like trying to decommission huge legacy software packages that people are still deeply reliant on, while simultaneously increasing uptake of new unfamiliar packages. The legacy systems are slowly exhausting our planetary hardware, but entrenched technocratic elites gain much from keeping them there.

Our financial system is an extensive, interconnected social technology dominated by major funds and banks, operating as opaque and private concentrations of power. That's why hacker philosophy is a useful approach. A key principle of positive hacker movements is the attempt to increase the openness of systems that otherwise concentrate power. It's this that underpins the open-source movement and DIY groups. Such movements fuse together acts of rebellion – challenging an existing setup – with acts of proactive creation. The pension fund industry is in dire need of financial hackers.

Shaking up the status quo

So what about pension funds needs challenging? On the surface, the immediate aim is to change the array of investments they choose to support. Investments made today play out in the future, and in climate terms, these portfolios point to a future world far above two degree temperature changes.

Pension funds are heavily invested in the shares of major fossil fuel companies, buying into a 'carbon bubble'. They also lend to such companies via bond markets. They invest in property and infrastructure, but seldom is it sustainable.

Climate change is just one issue they don't take seriously. Institutional investment into commodity markets, for example, is implicitly relying upon the future suffering of vulnerable people.

What is a pension?

At core, these portfolios reflect a crisis in investment philosophy, and a failure to understand the real objective of investment. We produce things to survive and to thrive. We then exchange these, frequently using markets to do so. We facilitate that market exchange via the medium of money, which comes to be an abstract representation of the things we produce.

If you are lucky or privileged enough to acquire a surplus of such money, you may choose to deposit it into a pension fund. The fund in turn is supposed to steer it into other people's productive endeavours via financial instruments, which gradually extract value from those ventures and steer them back to you over time.

The point of this is to buffer your future self in some imagined future world. The end goal though, is not merely to have these accumulated monetary returns waiting for you when you retire, so you can sit on them like a squirrel guarding a pile of inedible golden nuts. The end goal is to exchange those returns to obtain meaningful goods and services.

Cultural inertia

Financial professionals though, arbitrarily fetishise the monetary returns rather than the world in which those returns will mean something. Indeed, when questioned about sustainable investment – investing as if you cared about the underlying robustness of the planetary ecosystems we rely upon – the question is always 'but will it compromise returns?' But what is the point of returns if the underlying society which upholds the monetary system is fundamentally compromised in the process? That question appears too abstract or uncomfortable.

It's important to stress that the pension fund industry – which includes the pension funds themselves, the fund managers to which they delegate money, and the investment consultants that advise them – are not a bunch of gung-ho cowboys. Nevertheless, they are generally very comfortably-off individuals (mostly men). They appreciate reasoned analysis, provided it doesn't infringe upon the status quo.

Technical barriers to change

Some fund managers may even be intellectually aware that their portfolios are predicated on the disruption of planetary boundaries, and may nod their heads at conferences when this is brought up. But in response, they emphasise the technical challenges to change. They have huge portfolios, the sheer industrial size of which is hard to shift, especially when coupled with a perceived lack of alternative investments. They have difficulty modelling or understanding non-monetary costs and benefits. They're constrained by their existing legal mandates. They struggle to even know what the sustainability credentials of companies are, something not helped by lax stockmarket listing requirements.

But there is systematic overemphasis on these technical barriers to change. Each professional is locked into a web of obligations, peer-group pressures, and personal gains that stem from managing such unsustainable portfolios. Such interests manifest in an expedient set of cultural beliefs about economics and inspire technical arguments for why change cannot happen.

This complacency extends to corporate managers, the governments that tax them, and the layers of employees who draw salaries from them. To put it bluntly, it's an industrial complex locked into a short-term situation of comfort that most professionals won't challenge.

Positive innovation

This sluggishness is at constant odds with attempts at positive innovation. We see it in the broad and loose sustainable investment pledges – such as the UN-backed Principles for Responsible Investment – and in important, but moderate, disclosure initiatives such as the Carbon Disclosure Project.

There are slow-moving attempts to jack up international climate finance, limited government efforts such as the Green Investment Bank, and attempts to 'mainstream' responsible investment by buying into the existing values and language of the sector.

There is also an authentic upwelling in creativity aimed at designing alternative financial instruments to target different parts of mainstream asset allocation. In equity markets there are sustainable funds and index initiatives like FTSE4Good and Environmental Tracking Indices. In bond markets we have innovations like climate bonds and green infrastructure bonds, attempting to steer capital into positive projects. There are sustainable property funds, and green venture capital funds pushing forward the cutting edge of cleantech.

A blueprint for sustainability

We are incrementally building a blueprint for a hypothetical alternative pension fund, one which does not extract value from dwindling resources in an attempt to hoard wealth for wasteful consumption.

Rather, our hypothetical fund would back a meaningful, regenerative vision of the future, characterised by large-scale networks of sustainable energy and transport, hi-tech smart-grid technologies, energy efficiency initiatives, creative industries, healthy food production, inclusive financial institutions and water efficiency. Investors would be a force for driving accountability in corporate supply chains.

It's a tantalising vision. Social and green entrepreneurs though, are often naively over-optimistic that they can change whole systems by merely introducing a positive new design into the mix. To truly set the stage for change requires us to hack into, and contest, the deepest layers of social code that supports unsustainable practice. This includes the ideological structures of the financial industry, and the political power it exerts, and it's to this that we will turn in part two of this series.

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