An incentive to mitigate risk

Universal ownership is the idea that you own a representative slice of the entire financial system. You’re a diversified long-term asset owner, like a pension fund or a sovereign wealth fund or a university endowment. And a long-term, fully diversified investor can’t stock-pick their way out of systemic risks.

Let’s say that you know the activities of one company or one sector in your portfolio causes what economists call “externalities”, or negative effects on the rest of the system. For example, this could be the fossil fuel industry emitting a lot of emissions that then contribute to catastrophic climate change. You’re not going to be able to stock-pick your way out of those risks; the costs from climate change will get picked up elsewhere in your portfolio.

This means that you have to actually address and mitigate these risks in the real world in order to truly protect your portfolio, because otherwise you end up with the traditional responsible investment approach, which is all about trying to protect your portfolio from risks stemming from climate change and other factors. That is not very effective at changing anything in the real world.

Making a real-world impact

If you’re a universal owner, you’re concerned about impact, and if you’re concerned about impact, you want to look at where the flows of new capital are coming from and where they’re going. You also want to think about how you can be a much more aggressive shareholder in public equity – companies that are listed on the stock market already. These shares are in the secondary market, meaning that if you invest in them, they don’t materially help the company. But in other asset classes, like bonds or private equity or venture capital, what you own really matters, because you’re actually contributing to those companies by investing in them.

As a universal owner, you could have an impact on climate change by refusing to purchase bonds or private equity holdings that contribute to fossil fuel production, especially fossil fuel expansion. You could also help change the behaviour of the companies whose shares you own in the public markets. That would involve doing things like voting against the re-election of directors, which is much more likely to prompt an actual change in company behaviour than some other methods of shareholder engagement. Those are just a couple of ways in which a universal owner could actually have an impact on mitigating these risks in the real world.

Ondrej Senk

The need for collective action

There are some funds today that self-identify as universal owners, but I still don’t see any fund that truly integrates that lens into the way that they invest. I suspect part of the reason is that you can’t just be an atomised universal owner. You have to work with others and collaborate to really have an impact.

Even the very largest universal owners, like the Norwegian sovereign wealth fund – which owns something like over 1% on average of every listed company in the world – can’t single-handedly create an impact through their activities. They need to work with other investors to do that. It’s a bit difficult.

There are a few very large funds that identify as universal owners, but they aren’t able to fully take some of this thinking into their practices; it’s not yet effective without that larger group coming on board. Part of my work involves convening these asset owners so that they can actually make these things happen much more easily, because it is a collective action issue.

A duty to prevent civilisational collapse

The risk of civilisational collapse is something that we need to take very seriously for a number of reasons. One is practical: we don’t want our cities and our countries to descend into chaos and conflict. But that, of course, has a moral dimension. We are the last generation that can do anything about this to prevent it; therefore, we have the responsibility to do everything we humanly can to avoid that future.

People probably discount the probability of that risk, but they’re not taking into account the real effects of mass forced migration, which is slated to happen if sea level rise continues and climate change continues unabated. I’m a huge fan of voluntary migration – that’s great. Forced migration, however, is a nightmare for everyone.

Look at the political and social issues that have arisen because of much smaller groups of people who’ve been escaping terrible conflict situations, such as the millions of Syrian refugees who came into Europe a few years ago. That is a very, very small preview of the numbers of people who will be forced to leave their homes if we don’t do something about climate change.

Is positive investment enough?

A positive investment would be in something that measurably draws down carbon and other greenhouse gases. I used to have a much different view of what a positive investment was; I thought that if we merely invested a whole lot into renewables, for example, that would automatically displace fossil fuel production. It turns out I was wrong, because what we’ve seen lately is not so much a transition as an addition.

We’re definitely building more solar panels and wind turbines and so on, and that is important and good, but it’s not necessarily displacing the new fossil fuels that we’re also building out. And that’s a real problem. It doesn’t matter how many wind turbines you build if you’re also building new fossil fuel infrastructure; emissions will still go up as long as we’re burning fossil fuels. So positive investment is now much less of a priority than the attempts to address the flows of capital towards new fossil fuel infrastructure, fossil fuel lock-in, fossil fuel expansion and other areas in which we’re continuing to make the problem worse as opposed to solving it.

TebNad

Energy efficiency is key

If you want to decarbonise an economy, you need to start with energy efficiency. If you start with energy efficiency, then you require less energy in the first place to run your system. And that needs to be the number one priority of everybody in the situation. But instead of focusing on energy efficiency, what we see is consumption patterns that contribute to growth in energy use.

People in wealthy countries consume so much more than people in low-income countries that it’s much more about the impact of the level of consumption than about the total population. The amount of energy that we use is still going up, and that doesn’t necessarily correlate with the standard of living that we have. If we had much more energy efficiency, then we wouldn’t need to build out new sources of energy, be they renewable or not.

Why we still use fossil fuels

Another thing holding us back from decarbonisation is that fossil fuels are still too cheap, and they aren’t exactly substitutable for renewables in all situations. Most oil is used for transport, for example. And we’re just on the cusp of life cycle cost parity between an electric vehicle and an internal combustion vehicle. But until we reach that point, you can’t actually directly compete between oil and renewables.

Nick Photoworld

Electricity, on the other hand, can be produced through renewables, or through coal or gas. That’s where you see a real possibility of substitution. But new coal plants are still being built, biomass plants are still being built, and that is because they fit with what we know how to build now. This is my view after having talked to some of the people in the utility space. We already have the supply chains, the skills that are required to build a coal plant. In most countries where that’s routine, that’s what people know how to do, whereas a completely different supply chain and different skills are needed to build out renewables.

So that’s a barrier that people might not consider when they’re thinking about the pricing of those technologies. Because let’s be clear, it is now cheaper to build new renewables than it is to build new coal in all major markets. That’s a relatively new development, but it’s huge. However, we’re still seeing new coal plants being built, because there are other factors in place other than the simple upfront cost.

Motivations apart from money

There are two major reasons why an asset owner would be drawn to universal ownership. One is that they have very different incentives from the average asset manager. To clarify, an asset owner would be a pension fund, for example, whereas an asset manager would be the firm that invests on behalf of that pension fund; one is the client of the other. An asset owner, like a pension fund, wants the best for the beneficiaries of that pension fund. They’re there to make sure that people can retire with dignity and a good quality of life.

People who work for pension funds tend to have taken a pay cut to work there, and they tend to have some other reason that they want to work in a place like that, as opposed to someplace they could make more money but have much more of a profit motive as part of their daily work life. So that’s one thing to note: asset owners in general don’t tend to be quite as red in tooth and claw as the financial system as a whole. They have other motivations for doing what they do other than just making money. There’s more scope for ethics to come into the way that they invest.

Financial benefits of universal ownership

The other thing that’s absolutely critical about universal ownership is that it's how you actually make money in the long term. If you don’t pay attention to externalities like climate change and inequality, you make less money in the long term, because they cost the whole system so much that it’s better to prevent these things in the first place than to allow them to fully manifest in the future.

Again, if you are a universal owner and you own a little bit of everything, you don’t want a couple of companies or a sector to make as much money as they could if it means that it’s going to cost the rest of your portfolio, especially over a long time period. You don’t want the companies that are going to contribute to climate change to continue to do so unabated. You make more money in the long term by preventing that from happening. So if you’re a long-term diversified owner, it makes sense whether you’re looking at it from a moral standpoint or a financial standpoint.

Discover more about

universal ownership

Quigley, E. (2020, May 28). Universal Ownership in Practice: A Practical Investment Framework for Asset Owners. SSRN.

Quigley, E. (2019, May 13). Universal Ownership in the Anthropocene. SSRN.

Universal ownership, the financial system and its impact on climate change