Responsible Investment - cutting through the noise
20 Jun 2019 - Estimated reading time: 3 minutes
Responsible Investment is a topic that is rapidly attracting attention and gaining airtime, not only within the pensions world but very much in the wider-world too. Over the last few months, specifically in relation to climate change, we’ve seen teenagers protesting in schools, commuters gluing themselves to tube carriages and regular news reports on the future impact on our environment.
It’s clear that Responsible Investment and the issues relating to it are not just a fad that will disappear anytime soon. For our industry, Responsible Investment is here to stay.
This shift in attitudes has led to increased regulatory scrutiny on pension schemes’ approaches to investments, and asset managers developing new investments which explicitly address the key ingredients underlying Responsible Investment – Environment, Social and Governance (ESG) factors. Given this background, we dedicated a session to Responsible Investment at our ‘DC Comes of Age’ conference earlier this month.
According to the delegates who attended our conference, 50% of DC pension schemes are expected to change their default investment strategy to include ESG or sustainability factors over the next 12 months. When you consider that a further 35% are expected to make these changes in the next 5 years, it really does show the clear momentum behind Responsible Investment.
It was interesting to note that our audience identified the main barrier to implementing these strategies as being a lack of clarity over definitions (47%), rather than resistance from members, which is often quoted as a major obstacle.
Along with the increased focus on Responsible Investment, our Head of DC Investment, Raj Shah, explained how we’ve seen a surge in confusing terminology in this space. There is no standard set of ESG definitions across the industry with different managers using different phrases – exclusion, negative screening, impact investing, active ownership, green investing.... It can be a minefield! Keeping definitions and details vague might have allowed investors to infer their own expectations a decade ago, but the current level of investor attention requires clarity to allow confidence in the industry.
One of the other main barriers is better understanding of the impact of ESG factors. A decade ago, Responsible Investment was often considered as trading returns for “values”. There was limited data and insufficient analytical frameworks to make such considerations an investment advantage. Today, the story is very different.
Jason Mitchell, Co-Head of Responsible Investment at Man Group, also spoke at our conference and explained in his session how the growth in data processing capabilities and machine learning has allowed significant developments by data providers. Scepticism remains warranted about the quality of the data though, particularly historical data. Without industry-wide standards, it can be difficult to weave the data into a useful picture and the investment criteria can be cherry-picked to make certain stocks look good. I would argue that agreed definitions and guidelines would add more credibility to the data.
However, these concerns should not be a barrier for pension schemes to review their investment strategies. John Johnston, in his role as pension fund trustee, shared his experience of implementing a new strategy for the Bank of New York Pension Plan, and explained how the Trustees were able to overcome some of the practical implementation challenges along the way.
Responsible Investment has reached an inflection point. It has been embraced by many pension schemes and it may have entered the investment mainstream, but clear guidance and support is still needed to allow further development and embeddedness.
The onus is now on investment managers and consultants to help clients understand the data analytics and navigate through the sea of terminology. This will empower clients to have open conversations with unengaged DC members and more easily implement strategies that reflect their investment beliefs.