Since the 2008 financial crisis, the tag “too big to fail” has become a familiar phrase. It reflects the reality that in most countries the economy rests on the shoulders of a handful of big banks.
Much less attention is paid to the other crucially important financial institutions: pension and sovereign wealth funds. If the economy of today rests on the banks, the prosperity of tomorrow lies with these funds. When grouped with large endowments, these organizations control $25 trillion of assets, most of which are invested for the long term.
Their enormous portfolios are diversified across economic sectors and spread throughout the world. For these organizations, being too big to fail isn’t the concern – but being too big to hide is. When trouble flares anywhere, it’s almost inevitable the sparks will eventually hit something owned by one of these funds.
These funds are so big they don’t have to accept the world as they find it
Analysts at Bretton Woods II, a program run by the New America think tank, see this as a compelling reason for these funds to move into impact investing: if you can’t hide from a problem, it’s best to prevent it happening in the first place. Founded by Dr. Tomicah Tillemann, a former senior advisor to Secretaries of State Hillary Clinton and John Kerry at the U.S. State Department, Bretton Woods II is working to prove that investing in social programs and sustainable development pays dividends over the long term through increased market stability and reduced risk overall.
“These funds are so big they don’t have to accept the world as they find it,” says Dr. Tillemann. “They have the resources to bring about meaningful change.”
Bretton Woods II aims to persuade large funds to put a portion of their assets into impact investments that tackle social problems, strengthen civil society or promote development. In September, it launched the Trillion Dollar Challenge to encourage investment in projects that further the UN’s Sustainable Development Goals.
According to Dr. Tillemann, Canada is well placed to take a lead. Pension funds like the Ontario Teachers’ Pension Plan or OMERS are large and active investors and already have responsible investment policies in place. Dr. Tillemann believes moving into impact investing is a logical next step – and his team are producing data to back this up.
Bretton Woods II is working with big data analysts in Silicon Valley to model the effects of market instability on these funds’ performance over time horizons of up to 50 years. They have found that in some scenarios, market turbulence could wipe half the value off these funds’ returns.
“The vision we have is the next stage of responsible investing. It’s moving from ‘do no harm’ to asking how we can bring about positive change with investments,” says Dr. Tillemann. “We’re working with leaders in the sector to give them the information they need to make that vision a reality.”
Find out more about Bretton Woods II’s pioneering work when Dr. Tillemann delivers a keynote address at the Social Finance Forum on Oct. 28.