Interview – Mark Fawcett
classes. There is a lot of focus on cost so unless you have the scale it is hard to move away from just passive equities. Some schemes, especially the larger DC schemes, absolutely can but smaller schemes are going to struggle to do that.
Why has Nest expanded its allocation to private credit in the past year? We have a long-term investment horizon. Our youngest member is 16 years old and we are going to be investing for her for maybe 40 to 50 years. There is certainly a lot of appetite for liquidity risk given that we are so cash-flow positive. The biggest challenges with illiquid assets are getting the money in at a sensible illiquidity pre- mium and the cost aspect. Private credit is the lowest cost of the illiquid asset classes, which is one of the reasons why we started there. On top of that, public credit spreads have been so compressed by low interest rates and QE that we felt our credit portfolio needed an extra boost. There are some more defensive elements available as well. Infrastructure debt, for example, offers steady cash-flows, credit worthy projects and you get a premium to public market debt. It is relatively safe debt because it is secured against assets which is hard to get in the public credit market. From a volatility and defensive- ness perspective, there is some attraction. Because we can take a long-term view, we welcome the illiquidity risk. It is some- thing we are getting paid for and are happy to have. Now, the next move as you are aware is that we have launched a search for an infrastructure manager. It is a similar investment case. There are also attrac- tions to it when we think about managing climate risk. In infrastructure we are looking for three different mandates. One global, one renewables and one UK infrastructure.
So the renewable mandate is part of your Climate Aware Fund?
The aim of the whole portfolio, not just 20 | portfolio institutional February 2020 | issue 90
the equities, is to transition to a low car- bon economy. That is one of the key initi- atives in the coming years.
Are you directly engaging with companies or is this something you have outsourced? It is a combination. We have a small investment team so we can’t do too much engagement ourselves. We still discuss with our fund managers how that engage- ment is going to take place and who they have been engaging with. We help steer those conversations.
UBS are our biggest manager. They were highly rated recently for how they vote in shareholder resolutions on climate change. Our engagement for the Climate Aware Fund focusses on some of the big- gest carbon emitters in the world. That is quite a powerful story and collaborative engagement with other pension funds and asset managers is important. We were encouraged to see BlackRock also sign up to Climate Action 100, so there is a real sense of stated purpose emerging on how companies should respond to cli- mate change.
One of our private credit managers is BNP Paribas. It has excluded lending to coal and tobacco companies. When we chose our managers – which include Amundi, BNP Paribas and BlackRock – we selected firms with strong ESG credentials. Across all asset classes, the aim is to think about how we integrate climate aware investing. In our commodities fund we exclude investments in thermal coal, there are certain companies in that port- folio which are excluded, such as Glen- core, for example. We now need to think about bonds, and emerging market bonds in particular, and how we can integrate them for the man- agement of climate change risks. We are just trying to push that right through the portfolio.
That will be a project over several years. The climate aware portfolio is the heart of our climate change risk management but
that can’t be the whole of the story.
Looking at the largest equity holdings in the Ethical Fund, they include Apple and Microsoft, which many members might not see as that ethical? The Ethical Fund excludes specific sec- tors, either through hard or soft exclu- sions. The hard exclusions include tobacco, arms, adult entertainment, while the soft exclusions tend to not be in extractive industries. We are also increas- ingly concerned about stranded assets and announced last year that we were going to be tobacco-free across all our portfolios. The default fund makes invest- ment decisions purely based on invest- ment risk and return, the Ethical Fund does too, but makes additional decisions based on values. In the Ethical Fund you will not find an arms manufacturer, but in the default fund you might because not everyone is opposed to arms.
You have to make assumptions about peo- ple’s values, but would you engage with Apple on their labour standards? Yes, we push our managers to do that. Engagement is important, that is why the Ethical Fund excluded Amazon when the engagement
failed and the company
didn’t meet their ethical criteria, but it can’t exclude all companies.
What will be the biggest challenges for Nest in the next 10 years? To keep the money performing well is always the challenge. We need to seek out good opportunities. My sense is that global growth is probably going to be slower than it has been during the past 20 years, partly because China can’t carry on growing at 10% per year, and similarly India. But also, as the world transitions to a low carbon economy, there may well be a break on growth in certain areas. We just need to seek out the opportunities that can benefit from that transition, doing that at a low cost will be challeng- ing but that’s what I am paid to do.
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