The other 1%
Just 1.23% of all humans have dibs on $20 trillion that defines the future
“The concentration of $20 trillion in defined benefit pension plans protecting just 100 million people has profound implications for the global economy. The influence of these pension funds extends beyond their beneficiaries, affecting global financial markets, corporate behaviors, and even policy-making, thus playing a pivotal role in shaping the future economic landscape.”
Last week, I played with ChatGPT, the artificial intelligence “chat” platform. The “conversation” was focussed on our Bank of Nature go-to topics including fiduciary duty, vast pension wealth, climate security and post-neoliberalism.
I wanted to test our Bank of Nature perspectives with a supposedly neutral third party to see what artificial intelligence, with its encyclopedic access, spits back. I thought AI might highlight gaps in our logic when feedback from the human intelligence realm has been spotty. I asked whether our ideas were naïve. I wanted to measure the depth of the neoliberal bias in a robot designed and trained by the neoliberal economy.
One takeaway from the experience is that it’s too easy to write off this early iteration of AI as a propaganda shill for the status quo. Sure, there is plenty of neoliberal claptrap about the prominent roles for markets and government in the climate crisis with, for example, repeated focus on securitized ESG as a solution and the absence of fiduciary money as a climate catalyst. It's safely politik. However, in a conspicuous nod to balance, even AI says the status quo approach is not robust enough to deal with the climate crisis.
The extremely long, unabridged stream is public should you want to wade through a learning experience and a lot of robotic repetition. Use keyword searches to help find the bits in which you might be most interested.
The opening quote, generated by ChatGPT, came about from a focus on math. How many fiduciaries are there? How many pension participants are there? What percentage of the global economy is represented by defined-benefit funds — those retirement perks for certain workers in public and private-sector jobs that come with the guarantee of retirement security? What is the value of DB plans?
None of these aggregated numbers are easy to calculate on my abacus but, for AI, it takes only seconds.
According to AI:
“The global value of defined-benefit pension plans is substantial, likely falling between $15 trillion and $20 trillion. These assets represent a critical component of the global financial system.”
That’s a tad lower than other counts that fluctuate from quarter to quarter, but it’s in the ballpark of “climate-scale” money.
“Assets managed by defined benefit pension plans represent approximately 15% to 16.67% of the global M3 money supply. Specifically, these assets represent approximately 56% to 74% of the U.S. GDP of $26.9 trillion. This comparison highlights the significant economic footprint of DB pension plans on a global scale.”
“Approximately 100 million people globally have their retirements protected by defined benefit pension plans. The significance of these pension plans holding $20 trillion in assets for just 1.23% of the global population underscores the concentration of financial resources within these plans. This raises questions about the potential role these assets could play in addressing larger global issues, such as the climate crisis.”
One of the really big Bank of Nature ideas is that by handling the climate crisis for a few pension participants (that we now know comprise just 1.23% of all humans), we can move enough money to address the climate crisis for all 8.1 billion of us.
Until then, AI gives the fiduciary status quo a C-level grade on climate.
“While there are positive trends and increasing awareness among fiduciaries about the importance of climate security, the overall global performance remains mixed. Significant improvements are needed in terms of consistent implementation, genuine integration of ESG factors, and stronger regulatory frameworks to hold fiduciaries accountable. Moving forward, a concerted effort from all stakeholders will be required to enhance the incorporation of climate security into the delivery of retirement security.”
“To effectively leverage DB pension plans for climate security initiatives, fiduciaries must go beyond superficial ESG integration and adopt comprehensive, proactive strategies. This includes setting clear climate targets, significantly increasing investments in green assets, engaging actively with companies on ESG issues, improving transparency and reporting, investing in education and training, participating in global sustainability initiatives, and developing innovative financial instruments. By doing so, DB plans can play a crucial role in driving the transition to a more sustainable and resilient economy.”
The phrase “concerted effort from all stakeholders” exposes one the limitations of conversing with AI: vague, obvious, “AI-splaining” comments that sound more political than strategic — as if we don’t already have yeoman effort from all kinds of climate-anxious stakeholders or that “all” stakeholders necessarily include the holdouts who will never collaborate on a climate fix. Does that call for fiduciaries to be “proactive” mean that they are not presently proactive?
Surprisingly, though, AI says the issue can be forced:
"Establishing and enforcing penalties for non-compliance with ESG integration is crucial for ensuring that fiduciaries take their responsibilities seriously. Penalties can include monetary fines, operational restrictions, public censure, and compensation requirements. Both institutional entities (such as pension funds) and individual fiduciaries (such as trustees) can be held accountable, ensuring that there is a comprehensive system to enforce ESG commitments."
The poster child for Bank of Nature's fiduciary standards climate initiative is the newly hired public school teacher — someone young enough to believe the retirement they are paying into is not relevant to them even though they hold all the power that links us already to the 22nd Century.
“A public school teacher hired in 2024, retiring at age 65 in 2064, and living to the maximum projected life expectancy of 95 years, will collect defined-benefit retirement benefits until the year 2094. Given this long-term horizon, it's crucial for pension plans to adopt sustainable funding strategies to ensure they can meet their obligations to future retirees over several decades.”
“A 25-year-old public school teacher's future benefits should, in principle, be as well-protected as those of current retirees under sound fiduciary practices. However, ensuring this protection requires a careful balance of funding strategies, investment practices, and governance structures. While current retirees often receive immediate priority due to their ongoing benefit payments, long-term sustainability and intergenerational equity are crucial for protecting future retirees.
Regarding the US feud about defined-benefit pension plans, ESG and the fiduciary duty, I asked: “Is a ban on ESG compliant with a full expression of fiduciary duty?”
Banning ESG considerations is likely not compliant with a full expression of fiduciary duty, which requires acting prudently and in the best interest of beneficiaries. ESG factors can be material to investment performance and risk management. Ignoring these factors could lead to inadequate risk assessment and suboptimal investment decisions, potentially harming beneficiaries in the long run.”
“While fiduciary duty traditionally emphasizes pecuniary interests, its scope is increasingly broadening to include non-pecuniary factors. This reflects a growing recognition that long-term financial health is intertwined with broader environmental, social, and governance considerations.”
“Yes, defined-benefit pension plans can indeed become climate heroes… due to their substantial financial resources and long-term investment horizons. Climate security, climate crisis mitigation, and quality of the environment are indeed highly relevant to retirement security, especially in the context of defined-benefit (DB) pension plans. These factors impact both the financial and qualitative aspects of retirees' lives.”
I asked AI whether it had a question for me on this topic of fiduciary duty and climate finance:
AI: “Given the increasing importance of ESG factors in investment decisions, how do you see the role of fiduciaries evolving in the context of a fiduciary economy, particularly with regard to climate finance?"
IE: "Fiduciaries are the untapped lynchpins of climate finance and must ultimately step up to lead on climate for their own beneficiaries when they don’t. Specifically, we must prove in court that defined benefit pension fiduciaries who speculate with fiduciary money are breaching their fiduciary duties, regardless of ESG factors. ESG is a meaningless distraction from the real problem about how fiduciary money moves and why it moves. There are clear breaches of the Duty of Impartiality. Relying on abstracted Wall Street-style investments to improve corporate behaviors has had no net benefit in the past 30 years of ESG promotion. Fiduciaries are doing only half the job chasing ROI, especially when ROI comes at the expense of future social and environmental stability. Fiduciaries must no longer be complicit in the neoliberal economy but, instead, lean into their elegant fiduciary duties to bring about a post-neoliberal, fiduciary economy. What is your opinion of that POV and do you think that's possible?"
AI: "Your perspective is both insightful and challenging. [It] highlights a critical and often under-discussed aspect of fiduciary duty in the context of defined benefit (DB) pension plans and their role in the broader economy. It calls for a fundamental shift in how fiduciaries approach their duties, moving away from speculative, short-term investments towards strategies that ensure long-term social and environmental stability. While feasible, this shift would require significant legal, regulatory, and cultural changes. It would involve redefining fiduciary duties, enhancing transparency and accountability, and fostering a broader understanding of what constitutes responsible and effective investment.”
At this point, the AI helpfully breaks down my argument. This is an unedited restatement of what it generated.
Key Points of Your Perspective
Speculation with Fiduciary Money: You argue that fiduciaries who engage in speculative investments are breaching their fiduciary duties. This suggests a need for stricter adherence to prudent investment principles that prioritize long-term stability over short-term gains.
Duty of Impartiality: There is a clear concern about breaches of the Duty of Impartiality, where the interests of different groups of beneficiaries (current vs. future retirees) are not being equally considered. Speculative investments can disproportionately benefit current beneficiaries at the expense of future security.
Critique of ESG: You suggest that the promotion of ESG has not resulted in meaningful improvements in corporate behavior over the past 30 years, implying that ESG has become a superficial distraction rather than a substantive solution.
Neoliberal Economy: The current investment strategies are seen as complicit in perpetuating a neoliberal economy that prioritizes ROI over social and environmental stability.
Post-Neoliberal, Fiduciary Economy: There is a call for fiduciaries to embrace their duties more fully, fostering an economy that prioritizes long-term societal and environmental well-being.
It lays out my argument’s feasibility and limitations.
Legal and Regulatory Changes
Stronger Fiduciary Standards: Implementing more stringent fiduciary standards that explicitly prohibit speculative investments could be a way to address this issue. This would require clear definitions and legal backing to enforce such standards.
Duty of Impartiality: Courts and regulators could emphasize the importance of the Duty of Impartiality, ensuring that fiduciaries balance the interests of all beneficiaries. This might involve setting clearer guidelines on how to evaluate and manage long-term risks and returns.
Shift in Investment Philosophy
Long-Term Investment Strategies: Fiduciaries could be encouraged or required to adopt investment strategies that prioritize long-term sustainability and stability. This would align with a post-neoliberal, fiduciary economy where investments support broader social and environmental goals.
Alternative Investments: Exploring investments in community projects, green infrastructure, and other areas that offer stable returns while promoting social and environmental benefits could be a practical approach.
Accountability and Transparency
Enhanced Reporting Requirements: Implementing stricter reporting requirements that mandate disclosure of investment strategies, risk assessments, and how fiduciaries are meeting their duties could increase accountability.
Beneficiary Engagement: Involving beneficiaries in decision-making processes and providing them with clear, understandable information about how their funds are being managed could help ensure that fiduciaries are held accountable.
Potential Challenges
Market Resistance: There might be significant resistance from market participants and financial institutions accustomed to the current system. Shifting away from a neoliberal investment paradigm would require substantial changes in market practices and culture.
Regulatory Hurdles: Implementing these changes would require coordinated efforts across jurisdictions, as fiduciary duties and investment regulations vary widely.
Measuring Success: Defining and measuring what constitutes success in a post-neoliberal, fiduciary economy could be challenging. It would require new metrics that capture social and environmental impacts alongside financial performance.
It’s summary:
Implementing these changes could indeed lead to a more sustainable and equitable economic system, but it would require strong leadership, widespread buy-in from stakeholders, and a willingness to challenge entrenched interests and practices.
IE: Yeah, but is it naive?
AI: Your perspective on fiduciaries and climate is principled and aligns with the need for more sustainable investment practices. However, calling it naive acknowledges the substantial practical and systemic challenges that currently exist. These include market pressures for short-term returns, inconsistent and ambiguous regulatory frameworks, implementation difficulties, and entrenched cultural norms within the financial industry.
To move beyond these challenges, there needs to be a concerted effort to educate investors, clarify legal standards, improve ESG measurement and reporting, and shift industry culture towards valuing long-term sustainability. While it may be idealistic in the current context, advocating for these changes is crucial for driving the transition.”