Particularly where we are seeing an increase in the use of passive management, is important that investors select the right index. So this will be quite helpful to the market as a whole. Barrie: It is important that the passive index options investors pur- sue have a link to active ownership. Being a passive investor should not mean that you are passive on stewardship. We have been working with FTSE Russell to develop an index that would avoid the black box nature of some of the index tilting and weightings. The FTSE-TPI Climate Transition Index has been based in part around the Transition Pathway Initiative’s analysis of management quality and carbon performance, which feeds into the tilts and rules the index applies. It has a link to credible aca- demic data based on public corporate disclosures. So, if a company is assessed by the Transition Pathway Initiative on its carbon per- formance but does not disclose sufficient information it will be weighted in our index at zero. It will be an effective exclusion, but it will remain eligible; if that company demonstrates that it is aligned to a two-degree scenario it will be admitted, and potentially over-weighted by up to 200% on the strength of their carbon per- formance assessment.
The time for tinkering around the edges on passive indices is over. There needs to be a consideration of tracking error, but what is the point of tracking an index that is going for a four or five-degree world. That is catastrophic. We wanted it to have clear and specific rules so that we could engage with corporations. We have a clear message that if you pub- lish the right kinds of targets and alignment to the transition your position in the index could swing from being 0% to 200% over-weighted.
We have committed to transfer all our passive investments into tracking this index.
PI: Are ESG factors having an impact on asset prices? Bhatia: We are not making direct investments from the endow- ment; we make fund investments. Our approach is not driven by what we see in asset prices. We are top down driven in the sense that we started with our values and our mission then working those values into our investment strategy.
There is sufficient academic and scientific evidence that shows ESG factors can have and do have an impact on asset prices in the long term.
Our expectation is that if we are investing in a responsible way. Taking ESG factors into consideration, we will be able to achieve higher risk-adjusted returns in the long term compared to a port- folio which does not have those considerations. Peacock: We are seeing quite a few companies set 2050 net-zero targets, which is welcome, but a lot of these targets do not include much detail into the next 10 years, despite scientists saying that in climate change the next 10 years are crucial.
Stewardship is an important part of it and it needs to be more robust and more forceful. There is still a little bit of tinkering and a gentle conversation.
PI: Does ESG-led investing enhance returns over the long term or is just about protecting the downside? Czupryna: There is a link between ESG quality and investment performance. We ran a study a year ago on emerging market equities, which is a
The social objective is a priority for us. Jonathan Levy, Joseph Rowntree Foundation
May 2020 portfolio institutional roundtable: ESG
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