Minister backs lower returns for ethical investments -- when savers agree

In a parliamentary statement, Denmark's Minister of Business and Industry Brian Mikkelsen has thrown more light on the persistent argument about whether pension funds can legitimately sacrifice financial return by choosing investments with stronger ESG credentials.

Photo: Jan Bjarke Mindegaard

Are pension funds bound by duty to invest their members' capital for the exclusive purpose of generating high returns, or can they also make less lucrative but more socially beneficial investments?

Though many claim there is not necessariliy a contradiction between seeking higher returns and investing in areas such as green energy, "returns versus responsible investments” is a recurring discussion in the pensions sector.

The dilemma has only sharpened in recent years with the shift away from defined benefit pension products, where members' pensions are guaranteed, toward market-return pension products, where it is the members who bear the investment risk.

Now the Danish Minister of Business and Industry Brian Mikkelsen (Conservative) has asserted that there is no contradiction between taking care of member’s interests and investing ethically.

Prudent-person principle

The statement appears in a ministerial reply to Lisbeth Bech Poulsen, member of parliament for the Socialist People’s Party). Poulsen had asked the minister about the legality of pension funds making investments that “serve society in relation to the established investment policies of pension funds, regardless of whether such investment can provide members with maximum returns.”

The minister explained that such investments are not a problem, and made reference to the so-called prudent person principle.

"The purpose of the prudent person principle is to ensure that the investment strategies of pension funds reflect the options which are presented to members,” the minister writes and adds that the principle applies to all types of pension funds.

The principle also entails pension funds being able to identify, measure and supervise risks related to investments – but does not require investment to take place within certain categories of active capital, the minister emphasizes.

“Nor does the principle interfere with pension funds establishing investment strategies with special provisions for ethical or environmental considerations, as long as the investment strategy reflects that which the pension fund has presented to members,” Brian Mikkelsen writes and stresses:

“I can confirm that a pension fund can legally incorporate social responsibility into its investment strategy, as long as the investment strategy reflects that which the pension fund has presented to members. It is permitted to incorporate social responsibility, even if a different investment taken in isolation could provide maximum returns within the framework of an approved strategy.”

The minister notes that the Financial Supervisory Authority has the responsibility for evaluating whether an investment is made in accordance to the prudent person principle, and that such evaluation is based on the specific product and thereby that which the pension fund has presented to members.

English edit, Daniel Frank Christensen

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