There is a lot more questioning, probing and attempts to get to grips with the underlying issues by clients, investment consultants and fund managers. This is an evolving journey for most pension schemes and their managers. Lloyd McAllister: ESG integration is now standard; it’s almost negligent if you don’t do it. Some clients want traditional exclusion-based ESG, while others want ESG integration and to use the information set to improve shareholder performance. But the area where interest is growing for us is clients wanting sustainable funds to deal with negative externalities, such as market failures.


PI: Is the upcoming Department of Work and Pensions’ (DWP) rule on ESG disclosure behind this growing interest? Anne-Marie Williams: We have seen a lot more interest from pension fund trustees wanting to under- stand their new duties. It has been on their horizon but they now realise that they need a proper invest- ment policy for it. Then, of course, they will soon have to explain how they are implementing it and what they are doing on engagement. All of those issues have meant that there is pressure to have something concrete rather than it being something they have been considering but not pinned down to a policy. What we have seen is that if asset owners are not clear on their policies to their managers then ESG can get pushed down the agenda, particularly when trustees have so many priorities. So this is about pushing it to the top of the agenda.


PI: So regulators are playing a role in driving interest in ESG? Williams: Yes, especially for smaller pension funds. HSBC has been looking at this for a long time and has a lot of knowledge and expertise, but for the ones that don’t regulation has made it clear that they have to develop a policy for it. Ward: It has resolved the long-standing issue of whether investors, particularly trustees, are allowed to think about these things. “It is logical, but am I allowed?” What the DWP has done, along with the guidance that’s come from the regulator, is to remove that ambiguity and make it clear that it is your fiduciary duty to consider such issues. Chris Varco: It is amazing how rapidly the fiduciary definition has gone from: “Could we?” To, “should we?” To, “we must.” Williams: It is the clarification that they can look outside of purely financial returns. When I started working at ShareAction four years ago I would often hear, particularly from smaller pension funds, that we cannot look at ESG because we have to concentrate on financial returns. There was no understanding of that if you take ESG risks and opportunities into account then you are going to improve your financial returns as well. Ward: It’s a false dichotomy. There is a general recognition now that it is not an either/or trade-off. We have had so many corporate blow-ups, one after the other, in different shades, which have clarified that. Varco: What has been positive is the step change from excluding bad things from portfolios to creating good things through impacting investing. As we move to the materiality of so many sustainability factors, it’s the positive inputs to building a port- folio that will resonate. You cannot just be reactive to client needs and demands; you need to be more proactive. That is the real change I have seen. O’Hara: If an issue is material and you are not giving it adequate attention in your investment process then it could be argued that you are not fulfilling your fiduciary responsibilities. We also consider risks that are difficult to quantify financially over the short term that may impact the reputation of a business. We know child labour and modern slavery are not acceptable; we don’t need to demonstrate a financial downside. We see these issues as part of our stewardship responsibilities and integral to being responsible owners. Thompson: The stewardship point is important. The whole investment chain has to work better. The DWP is making asset owners more aware of what they need to be doing, but they should get their fund managers to put pressure on the issuers of equity and debt to consider these things. Everybody along the chain has a responsibility to make it work.


May–June 2019 portfolio institutional roundtable: ESG 7


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