are struggling with this, and those who have, are still facing chal- lenges to evidence it in a structured and consistent way. Reporting on high level ESG metrics is relevant, but is only the tip of the ice- berg in terms of what you want to see from your managers.


Reporting on high level ESG metrics is relevant, but is only the tip of the iceberg in terms of what you want to see from


your managers. Kilian Thevissen, National Grid UK Pension Scheme


PI: So, how do you want ESG integrated into your portfolios? Thevissen: Climate change is a key systematic risk that needs to be addressed. We have a strategy which will see us divest from coal- related assets by 2022. Beyond this, we are engaging with our managers across the various asset classes to integrate relevant ESG factors into their ongoing investment processes. While with regards to coal we chose divestment, we generally pre- fer an engagement route that results in firms changing their long- term strategy to address climate change risks and opportunities. However, that ambition will not succeed with every investment we hold, so divestments might happen over time. MacRae: Reporting is currently patchy and, in my view, easy to misinterpret. It is also backward looking, so the concept of making decisions based on this reporting does not make sense. The idea of whether to divest or engage based on reporting is important. As the reporting does not reflect how companies are developing their future strategy, we generally prefer engagement. We want to get to a position where our managers make sensible decisions based on the fundamental comparison of the price and the resilience of our bonds incorporating the ESG considerations.


PI: Alan, most of your DB schemes are on the path to their endgame. Is ESG important if you are going to exit in this decade? Pickering: ESG is important whether I am in DB land or DC land. When it was called ethical investment or socially responsible investment, I was a sceptic. I am, however, a fan of ESG, provided we give equal weight to each of those initials.


In looking for a new bond manager it is about how they manage that process, what lessons they have learnt and how it makes them stronger going forward. MacRae: In our CDI portfolio, we need to think about a bond manag- er’s analytical skills as we look to hold credits ideally until they mature.


It is a huge universe and we are not only looking at investment grade, so market access is critical. We need managers who under- stand the environment in which they are investing. We use a fidu- ciary to select managers to meet our goals, which means we need to be careful about the philosophy we expect our managers to fol- low and that this is clearly communicated. Thevissen: Do not just provide 10 slides on ESG, show me evidence of how it has made an impact on the portfolio. That is the key chal- lenge we ask our candidates to solve these days. The world has moved on, we have all progressed and are more ambitious than ever to integrate relevant ESG factors into the investment processes that drive our portfolios. A lot of managers


I see a world soon where there will not be ESG investors and non- ESG investors. ESG should be embodied in everything we do. What worries me as a trustee is that I am on the receiving end of a bureaucratic paper chase. From all quarters, I am being asked to comply with this target and that target by a particular date. It is so overwhelming that if we are not careful, ESG will become a box ticking affair rather than a brain box consideration.


PI: Jim, are you seeing rising demand from asset owners to factor ESG into their fixed income portfolios? Cielinski: We do not have a conversation with a client without ESG coming up. There are different styles and some clients want a dif- ferent approach. Like active management, this is a sector where there are different ways to do it.


That said, they want to see an impact on portfolios. The green- washing element has come to the fore and people want to know that you are practising something that will make a difference. Engagement is usually the way to make that happen.


May 2021 portfolio institutional roundtable: Fixed income 13


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