Some of Europe’s largest pension funds are investing billions of euros in volatile commodity markets, jeopardizing the hard-earned incomes of millions of workers while fueling a global hunger crisis caused in part by such investments, according to a new survey.
The findings also raise questions about whether the European Union’s continued drive to deregulate its financial markets will make matters worse in the future. The rules governing the bloc’s capital markets are currently being revised.
Soaring prices for basic commodities such as food and energy have triggered a cost of living crisis around the world, including in Europe. The United Nations said the increases may also have pushed around 71 million people in developing countries into poverty.
Lighthouse Reports, a non-profit European newsroom, analyzed the accounts of more than 70 major pension funds in Spain, Italy, Germany, the Netherlands, Germany, the United Kingdom, Finland and in Denmark.
While some funds explicitly prohibit speculation in commodities, particularly in food, 15 currently invest in them, with the three biggest buyers, the Netherlands, the UK and Denmark, holding a total of 32, 5 billion euros.
According to Jayati Ghosh, an economics professor at the University of Massachusetts Amherst, the findings show that pension funds are among the financial institutions that have compounded the problem of investor speculation on food prices.
This is “particularly egregious” because these funds are financed by workers and yet they “engage in actions that destroy the standard of living of these workers”, she said.
Most funds don’t break down between hard commodities, such as gold and oil, and commodities such as agriculture and livestock, but experts say the ultimate impact – rising prices raw materials – will probably be the same.
“Whether it is food or energy, both are equally terrible from the perspective of workers and developing countries, because a rise in the price of fuel means a rise in the price of everything else. price,” says Ghosh.
In addition, investing in commodity markets is risky, said Ann Pettiforone of the few economists to predict the global financial crisis of 2007-2008.
“I don’t want my pension fund nearing anything as volatile as a commodity market, basically, especially energy and food,” she said. declared.
To invest or not to invest?
The funds, however, have defended their actions as unrelated to soaring food prices.
“Commodity futures trading has no upward effect on prices, not even in the agricultural commodity market. This view is supported by academic research,” said ABP, the Dutch trading giant. pension funds and by far the largest investor in commodity derivatives among pension funds. to analyse.
Its investments in 2021 amounted to 32.5 billion euros, of which around 30% in food products. Rising commodity prices last year caused ABP’s investment to increase by €8 billion, despite net sales.
BpfBOUW, the fourth-largest pension fund in the Netherlands, which has invested 150 million euros in agricultural commodities, echoed that view, saying it is “virtually impossible” for the market to term drives up prices in the physical market.
Yet others have taken an unequivocal stance against such speculation.
Pensioenfonds Vervoer, a fund for the Dutch transport sector, said one of the reasons it does not invest in commodities is that it can drive up prices.
KBC, Belgium’s largest pension fund, also said its group entities “will not be involved in ‘food speculation’ or organize speculative commodity trading” and will only do so for customers directly involved in the food and agricultural sector.
Dave Whitcomb, founder of Peak Trading and former commodities trader for Cargill, one of the world’s largest grain traders, also takes issue with the positions taken by ABP and BpfBOUW.
“I would say that would be a very exceptional market where buying doesn’t determine prices,” he said.
Yaneer Bar-Yam, a professor and founding president of the New England Complex Systems Institute, whose seminal 2011 paper showed that speculation was the main cause of rising food prices, also rejected that defense.
“Science is very clear that trade has upward effects on prices,” and assertions to the contrary, “are contrary to the apparent role of buying and selling in price-setting markets. raw materials and predictions validated using quantitative models”.
He said pension fund investments in food “undermine their mission as advocates for the public good”.
A “money wall”
Lighthouse’s analysis found that the University Superannuation Scheme, a public fund for UK university employees, holds £1.5 billion (€1.7 billion) in commodity derivatives.
The UK government-backed National Employment and Savings Trust (NEST) has increased the amount invested in commodities by £275m [€314m] in December 2019 to £657 million in December 2021, of which approximately 25% in agricultural derivatives.
Sampension, Denmark’s third-largest pension manager, and Lægernes, the fund for Danish doctors, have invested €280 million and €300 million respectively in commodity futures.
In many cases, the annual reports contained only general information on derivatives and rarely discussed commodity derivatives. In Finland, a country known for its progressive policies, the seven major funds gave vague answers, refused to specify or how much they invested.
The futures market – allowing commodities to be bought and sold at an agreed price in the present – is supposed to work to enable traders to hedge their risk. But Pettifor said the financialization of commodities has made price spikes inevitable.
“Take an asset that is finite – be it grain, property or energy: when a wall of money targets that finite asset, the wall of money inflates the price,” he said. she declared.
War… or speculation?
Headlines blamed the runaway inflation on Russia’s invasion of Ukraine, but the United Nations Conference on Trade and Development (UNCTAD) said that while the war “has contributed to this situation,” “insufficient attention has been paid to the role of speculators and betting sprees on futures, commodity exchanges and exchange-traded funds.”
He called on governments “to include tighter regulation of commodity markets in their policy mix to curb the price spikes that are hitting consumers in developing countries hard.”
Yet Europe seems determined to further deregulate financial markets, according to Finnish MEP Sirpa Pietikäinen from the center-right European People’s Party, who sits on the Economic and Monetary Affairs Committee.
The Markets in Financial Instruments Directive (MiFID) was put in place following the 2007-2008 crisis to curb excessive speculation in commodities, but over the years financial institutions have managed to ‘weaken.
Last year’s amendments to the updated framework, MiFID II, further relaxed the rules.
A review of MiFID II is currently underway. A draft text was tabled at the Economy Committee meeting on Monday (October 11) and deadlines for amendments are Wednesday (October 13) – but MEPs say political discussions are likely to take place later this year or early 2023.
“You’ve probably heard this talk of deregulation coming from industry representatives. Now the news is that we’re in a wartime economy, and our businesses can’t tolerate all the administrative burden. So now you have to deregulate” , said Pietikäinen.
She herself is adept at regulation “because (it’s) the basis of a civil way of life”. “With ‘no rules’ it’s always ‘rules of the fittest’, and that I don’t want,” she added.
Pietikäinen also said the European Parliament’s current emphasis on removing environmental restrictions on the use of fertilizers and pesticides to prevent food shortages is misguided.
“There will be no food shortages in Europe. The question is food prices”, and the fight against this would be best served by regulating speculative markets, according to Pietikäinen.