SIRI Spotlight

Research by a professor at the Sustainable Investing Research Initiative (SIRI) at SIPA is having an impact at an unusual location – the House of Lords of the UK Parliament.

In a debate over proposed pension legislation, Lord David Pitt-Watson cited the work of SIPA Adjunct Professor and Brandmeyer Fellow, Jon Lukomnik by name in calling for pension trustees to “take into account systemic issues in their investment and stewardship, and they should do so in the interests of the economic, environmental and social interests of their beneficiaries. We make a mistake if we separate those interests because they go together. If we want evidence of the significance of that, we might look at research from Columbia University suggesting that 85% of the return you get from your pension fund will be systemic and only 15% will be from idiosyncratic things that your fund managers have done.”

He was referring to 'Moving Beyond Modern Portfolio Theory', a book co-authored by Lukomnik and James P. Hawley that found that 75-94% of the variability of a pension fund’s return is due to the overall price level of capital markets, which in turn is affected by the health of the financial, environmental and social systems. “This systemic investment stuff was pioneered at Columbia University by one of my co-authors, Jon Lukomnik,” Pitt-Watson said.

Lukomnik and Pitt-Watson, along with Harvard Law School Senior Fellow, Stephen Davis wrote two influential books about pension funds and the economy (The New Capitalists, 2006 and What They Do With Your Money, 2016). They examined issues such as fiduciary duty, systemic change, pension structure and stewardship (the ownership obligations/responsibilities of institutional investors) as well as considering broader issues such as how well the financial system serves society.

Pitt-Watson touched on all those subjects in his comments. “As part of this, we need a capitalist system, where there are owners and companies are held to account for what they do—the owners are typically pensioners through their pension funds and fund managers—but it is difficult to do that. People sometimes push back claiming legal constraints where it is not clear that those legal constraints exist.

“The Principles for Responsible Investment are very clear that the signatories want to integrate ESG issues into investment and ownership practices. That feels to me as if they are dealing with a systemic issue, and we have more than £100 trillion signed up to the Principles for Responsible Investment,” noted Pitt-Watson.

The issues Pitt-Watson cited are core discussions in the course Professor Lukomnik co-teaches with Adjunct Professor and Brandmeyer Fellow William Burckart, himself the co-author of '21st Century Investing', another seminal book on system-level investing. Their course, “Sustainable Investing II: System-level Investing,” is a keystone of SIRI’s curriculum and its focus on blended finance and system-level investing.

Professors Lukomnik and Burckart have just finished editing a new book, 'The Handbook of System-level Investing', featuring chapters from institutional investors with more than $5.5 trillion in collective assets under management. A. Barton Hepburn Professor of Economics, Caroline Flammer wrote the introduction. 'The Handbook of System-level Investing' is due to be published in April. SIRI will hold a book launch event.

“I’m very grateful to Lord Pitt-Watson for his lifelong work to improve retirement security and to improve the relationship between the financial system and the wider world,” said Lukomnik. “To quote the conclusion of his speech in the House of Lords, ‘with a systemic view of where we want to get the finance and pensions industries to, we could go further and maybe better.’ That’s a thought that echoes in each of the classes Bill and I teach, and throughout SIRI.”