Interview – NOW: Pensions
consequently decided to make a Shariah- compliant fund available.
How are you integrating ESG into your default strategy?
ESG is considered in every investment decision we make. This approach includes explicit responsible investment integra- tion, which is becoming more visible. We have held green bonds in the portfolio for many years as part of NOW: Pensions’ support for financing cleaner energies. These investments are part of our Interest Rate Investment Group.
As part of our investment review, we looked to broaden the eligible bonds beyond green bonds to include social and sustainable debt.
When we first introduced green bonds to the portfolio there was not the scale in the market for the concept of social and sus- tainable debt. But we feel strongly that the topics we are championing, such as gen- der equality, should be aligned with our investment strategy. So when it came to evolving the invest- ment strategy last year, we considered three core objectives: risk, return and responsible investments. We look to invest all assets responsibly and investing explicitly so members could see how we are making an impact, for example, through climate tilting or green bonds. At the time we also publicly com- mitted to a net-zero target. Cardano Risk Management, of which NOW: Pensions is part of, has already pledged to reach net- zero greenhouse gas emissions in its investments by 2050, with a 50% emis- sions reduction by 2030.
You also set a target that half of your port- folio would be invested responsibly by the end of 2021. How did that go? That target was met shortly
It is probably shocking to most that women need to start saving from the age of four to have a pension that is worth the same as the average man at retirement.
by Cardano, our investment manager, using third-party asset managers to exe- cute it. We have talked about green bonds and that we now also invest in social and sustaina- ble bonds. We have made a couple of other tweaks to this. For example, we now invest in a liquid environmental fund and are no longer directly exposed to fossil fuels. Another area we have been working on for some time is the Task Force on Cli- mate-Related Financial Disclosures (TCFD). TCFD will make the largest pen- sion schemes set out crystal clear, in black and white, where their emissions are and what they are going to do about them. Some requirements do not apply this year, which will make 2023 particularly interesting when schemes start measur- ing their progress against their objectives.
after the
revised investment strategy was imple- mented, in June 2021. For example, within equities we added a global ESG fund that tilt exposures to companies with positive ESG credentials. This was implemented
16 | portfolio institutional | July–August 2022 | issue 115
Another result of your investment review is that you have dropped your cautious approach and are increasing your alloca- tion to equities whilst reducing your bond exposures. Why is that?
We used to have a return target of cash plus 3% per annum. When we worked with the trustees on the investment strat- egy, it was felt we should take more risk in expectation of achieving better outcomes for our members. So we are targeting a higher risk now and as a consequence, a higher return [Consumer Price Index (CPI) plus 4%].
Is the decision to take more risk also driven by rising inflation?
Inflation was not a factor in changing the benchmark. If anything, it has become harder for us because we changed our tar- get from cash plus to CPI plus ahead of a period of high inflation. The motivation to move to an inflation- linked benchmark comes back to mem- ber returns and the purchasing power their pension pot will have when they retire. If we had to put their money in the bank, the likelihood is that their purchas- ing power will decrease, and we want it to increase.
Will you also change your allocation within the equity strategy? We structure our equity allocation more passively than looking to time factor rotation or stock selection. You could also look at it as a top down approach. We also look to ensure that we have good distribution across global economic markets.
To what extent is your equity strategy managed internally? Cardano is our investment manager. It manages part of the equity investment group in house, using third-party asset managers for the rest. This is consistent with our liquidity fund where we appoint asset managers. The sustainable bonds portfolio, however, is managed by Cardano itself.
What assets are you using to hedge your inflation risk? Notable inflation allocations feature in
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