ESG Club
HOW ESG HAS BECOME THE WAY TO BETTER RISK- ADJUSTED RETURNS
The heightened public awareness around ESG issues and campaigns has filtered firmly through to the investor agenda. Even if company leadership teams do not recognise
the importance of ESG,
increasing engagement on the subject by asset managers and asset owners is forc- ing them to take it more seriously. Mean- while, regulatory pressure, especially around environmental sustainability, is making ESG a concept that businesses cannot ignore.
“ESG is now integrated in all investment decisions, certainly for the managers in which we invest,” says Adrian Mitchell, chief investment officer of Aon’s fiduciary management business in Europe. “Invest- ment strategies have evolved from purely looking at the ‘G’ of ESG to looking much more at the social and environmental fac- tors. We are also starting the gradual move towards fully sustainable products and we to accelerate due to net-zero commitments and regulatory pressure. “First and foremost, we are still focused on hitting the right financial returns for our clients, but we have also fully inte- grated ESG into our processes and make sure we manage the risks associated with the transition to a low-carbon world. There is now a growing interest and acceptance that as long as we can continue to hit the investment objectives that cli- ents set, then it is also important to build some non-financial goals, particularly around ESG, into investment portfolios.” Aon’s UK fiduciary business is a huge aggregator of pension scheme assets, working for more than 100 clients with a total in excess of £23bn of assets under management . This scale gives Aon more opportunity than a typical pension scheme to engage on ESG issues with the
underlying asset managers and, in turn, ensure they are engaging directly with companies to drive change. Aon’s holistic approach to building port- folios focuses on integration, incorporat- ing material ESG risk factors into invest- ment analysis and decision-making through its asset allocation and reporting tools, and investment manager rating process. Aon’s engagement with the underlying asset managers seeks to ensure that their ESG plans align with Aon’s and it monitors metrics, particularly around climate, to be proactive in devel- oping ESG solutions and funds. In September 2020, Aon launched the Global Impact Fund, its first fund with non-financial sustainable development goals as well as the objective of outper- forming the MSCI World Index. The fund, which invests in equities across the world, is up by more than 20% since its launch and has been an important dem- onstration for the market that funds can have non-financial goals without having to sacrifice financial performance. On the defined contribution (DC) side, in which scheme members are typically younger, the company has noticed a will- ingness from clients to engage on ESG, which is
particularly important given
members will be contributing to their pensions over multiple decades. “Providing transparency around how members’ savings are invested is impor- tant, as well as being upfront about some of the risks,” says Jo Sharples, chief investment officer for Aon’s DC solu- tions. “Environmental risk in particular does make a big difference to their invest- ments, so we share information with members and show the steps we are tak- ing. The willingness to engage from DC members is partly because they can relate to the things they see in the media and online, but more importantly the returns we generate directly impact on what their
PI Partnership – Aon
retirement will be like. “For DC pensions, a lot of the pension schemes have a young age profile. For someone entering the workforce now, aged 21, they are looking at possibly a 60-year investment time- frame, so these issues become really per- tinent. Younger members, who are also more likely to be socially aware, want to know their money is invested in the right way. We often hear that people are not engaged with their pension, but if you show what their money is doing to drive social and environmental impact, they will engage more and perhaps even save more. We will see more tools become available to help members understand in which companies their pension is invested and what is being done to man- age some of these risks.”
ESG will undoubtedly continue to shape the investment and asset management landscape in the years ahead, and Aon is dedicated to further building on its mar- ket-leading position in this area. That is likely to include evolving from its current focus on full integration toward a much more carbon neutral and sustainable port- folio, including impact strategies with non-financial goals. “We will see the focus on ESG spread from equities to non-equity asset classes, such as bonds,” Mitchell says. “Reflecting this, we have recently launched a Sustain- able Multi Asset Credit Fund. Additionally, as an aggregator of pension scheme assets with stewardship responsibility, Aon is in a better position than other asset owners to influence how the underlying asset managers integrate ESG into their pro- cesses and will continue to exercise our responsibilities in this area.”
i) The value of UK assets under management is £23.2 billion, as at 30 September 2021.
Copyright © 2022. Aon Solutions UK Limited. All rights reserved. Aon Solutions UK Limited Registered in England and Wales No. 4396810 Registered office: The Aon Centre, 122 Leadenhall Street, London, EC3V 4AN. Aon Solutions UK Limited is authorised and regulated by the Financial Conduct Authority. Aon Solutions UK Limited’s Delegated Consulting Services (DCS) in the UK are managed by Aon Investments Limited, a wholly owned subsidiary, which is authorised and regulated by the Financial Conduct Authority.
34 | portfolio institutional | March 2022 | issue 111
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