Yes, there is a transition risk but there are also


huge opportunities. Christine Farquhar, Cambridge Associates


them so much. This could also help us engage with the saver. If savers know that they helped fund the new tram link in their city or the building they pass on their way to work, it could help drive greater engagement in the pension plan. One of the roles a trustee has is getting people interested, to get them to look beyond simply how much they could have at retirement. Frith: That is the flip side of not wanting to invest in Shell or Exxon. We are being told what they want us to invest in and moral judgements are coming into it. We had a call this morning with a water company we invest in because our members want to know about sewage outflows into rivers in the UK. It is topical, it is in the media. Farquhar: If a company pollutes the water system, they get fined. Someone willing to work with such companies could alter their behaviour and help them fund the pipe-works to avoid polluting rivers.


The government could do more to incentivise water companies to invest in technology, to make a difference and get paid by the investment rather than fined when they don’t. Frith: They do get rewards from the regulator if they achieve, ahead of target, transformation in certain environmental projects. Sumpster: As an equity investor and a shareholder, voting to change the behaviour of senior management in companies can be a powerful tool. On the credit side, are investors willing to take a lower economic return for improved ESG behaviour? Absolutely. We have seen this in investments made where there are reduc- tions in credit spread for meeting or exceeding certain ESG metrics. The credit argument being that you are futureproof- ing the investment. If a company is not moving with investor sentiment its value could potentially deteriorate.


that inflation will always rise, but we have replaced it with an expectation that asset prices will always rise. With interest rates so low you are never going to get away from it. Rhodes: Also, with DC savers it is what you save and how much return you get. For a mature defined benefit scheme 3% may cover their members’ needs, but DC members are locking up their cash for a long period and 3% is not what they expect. Frith: There is no legal obligation to pay a minimum pension in the DC world, but it needs to be attractive enough for people to put their capital in. Rhodes: There is research that says some people will accept a lower return of up to 1% for a greener or more socially benefi- cial investment. There is a space for some plans to take out some of the volatility because it scares savers. They do not want to ride things out, even though, if they do, it will not harm


Has the nature of engagement changed? Halfon: The financial sector has always engaged with institu- tional investors, but this engagement is no longer driven only by the fact that the investors have money. Other considerations such as protecting the money and not doing anything with it that will make you blush are taken into account. In the past, engagement was about getting a 15% return what- ever the consequences. Now it is making sure we earn the 3% we need in a way that will not embarrass us. We all have mandates to protect the money before everything else. However, protection now goes with not just telling your clients you have made an 8% higher return than expected but telling them that you have done so without polluting the Thames.


The mandates have changed in the past two to three years, more so since Covid. Pension schemes talk about different things today when speaking to asset managers.


Dec-Jan 2022 portfolio institutional roundtable: Build Back Better 15


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