Impact investing – Roundtable
ants and your fund managers? How can you take an impact lens to your standard governance procedures? We have pub- lished a set of principles which are writ- ten by and for the pensions industry.
PI: Aaron, we have heard that investing to make an impact does not necessarily mean lower returns. Is that right? Pinnock: We see no difference between the performance of our impact or ESG invest- ments and our regular investments. One example is forestry. We see our for- estry as impactful because they are sus- tainably certified and managed, and con- tribute to a more circular economy. Forestry assets have performed well for a number of years, and possibly the realisa- tion of the future environmental benefits that forests can bring is helping this.
In private markets we have seen performance generally aligned with ‘non-impact’ funds. That is because we do thorough due dili- gence on all our funds, we do not go into impact blindly. Cusack: You do not go after a fund because it says it is impact investing. It is part of the analysis you go through when select- ing a manager to deliver your strategy. That process has not changed, it is just there are other factors to consider. One might trump the other because they are more impactful. That is the only way of doing it because the past is not a good guide to the future. I have referred some trustee boards to various papers that have been written.
They also ask how they can make an impact if they are too small to do direct investments. That goes back to doing appropriate due diligence of the manager.
In this area, do not let perfection get in the way of progress. Just one small step can make an impact, rather than trying to make your whole portfolio, all at once, the most impactful that it can be. You will never get there, so just start somewhere.
L’Estrange: There are lots of trustees and investment consultants who are quite risk averse. We still see that box ticking approach, but I aim to flip it around and say: “You have this pool of assets, whatever size it is, how exciting is the opportunity to make a difference with whatever cash you have.” Everything we do is trying to turn that around, trying to leverage as much as we can.
There has been a vicious circle around everyone being scared to move first. It is trying to flip that around to encourage everyone to see what a fantastic opportu- nity this is to do more and help secure the planet that all our members’ children and grandchildren will live on. Cusack: One of the problems is having the funds available to do this and not being
Tim Manuel Head of responsible investment Aon
one of the first investors. A lot of people do not want to be the one who takes a risk on the fund and finds that it flops. That is quite difficult. It is not an excuse, it is a recognition that this is the world we are operating in. It will get better. L’Estrange: This is why we are challenging consultants to challenge fund managers to look at the whole of their portfolio. Not just where they are advising us, but on everything they do to ask how they are monitoring their impact? Are they moni- toring their carbon footprint? These ques- tions will encourage them to push fund managers to put the right funds in front of their clients.
PI: Is making an impact limited to equities?
Anna Rudgard: Fixed income is an asset class that is benefitting from a multitude of innovative strategies coming to market. The most obvious in the impact space are green bonds, which is a growing part of the market. That is widening out with
social bonds, blue bonds and, more recently, sustainability-linked bonds. These combined with the greater variety of issuer in bond markets, such as munic- ipal or local government bonds, offer a huge opportunity for fixed income inves- tors looking to make an impact.
PI: Are you challenging asset managers to make sure there is enough opportunity? Rudgard: Absolutely, and within corporate credit there has been a growth of sustain- able titled products coming to market, where I am also interested is beyond cor- porate credit in other fixed income sub-as- set classes.
I saw a presentation recently that said asset-backed securities are the most ESG friendly asset class given the look through you get to the end borrower. If one believes this, then you can certainly con- struct your own impact portfolio from them. It is the idea that impact investing is a lens, a philosophy and once you have adopted that approach the investments that you can make from that point are varied.
PI: How is Aon helping its clients in this area? Manuel: We work with several schemes which are quite well progressed in this space. There is one client in particular that has influenced me in the way I think about this. They are the longest-term investor we work with. All their equity mandates have absolute benchmarks and 10-year investment cycles. They believe that the way they will deliver their return objectives is by investing in impactful investments. Those are the investments that will be most successful over the long term. For them, the conversation has completely flipped.
There is some complexity and fragmenta- tion in the way that impact investing is defined, we currently have different groups working on different things, and we don’t have a consensus. This client has put that noise to one side and they just
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