Anita Bhatia: We have integrated ESG into our due diligence process and ask our managers questions around diversity, inclusion and the level of engagement that they have with their portfolio companies. We are also impact investors. Last year, we carved out 5% of the endowment to invest with a two-fold objective to achieve commercial risk-adjusted returns and make an impact on peoples’ health.
PI: Is this interest in responsible investing what asset managers are finding when talking to clients?
Peter van der Werf: It depends on which part of the globe you are speaking to an asset owner in. We see a lot of interest for sustainable investing in Europe and it is growing in other regions. Active ownership is crucial for many asset owners and the expectations they have of their managers to conduct these activities are high. Caroline Ramscar: We are being more explicit in how we incorporate ESG across our entire investment process as we find clients expect it. There is still a journey for trustees to make, particularly considering regulatory changes in the UK, and it is not always clear what they need to do. We want to take clients on that journey and show them that there is a difference between asset manag- ers and make sure that they know what they should be looking for. For example, helping them to lift the bonnet to see how their managers are voting. Tim Manuel: The question is, what’s motivating trustees to embrace this. The variation in views can be wide, even within individual trustee boards, where some recognise the financial relevance of taking this into account while others see it as their duty as an institutional investor to think about the impact they have on society. On the other side of this question are the members. Some defined benefit (DB) trustees are concerned about what their members might tell them if they start asking the question and what it might mean for their decisions. It is a different story in defined contribution (DC) because the connection to the member is stronger. They are more impacted by outcomes and there is the opportunity for trustees to engage with their members. Ramscar: LGIM’s latest master trust survey found that 53% of members would engage more with their pensions if the investments incorporated ESG. So responsible investing is a way to increase member engagement and contributions. Bhatia: Let’s take a few steps back. There is a per- ception, and it’s valid, that responsible investing should be more about negative screening. There is also a case for integrating it into the DNA of how we look at risk-adjusted returns. What we should be doing as investors is think about this being an inherent component of the risk-return piece. Investors should be asked whether they want to maximise returns at any cost or achieve competitive returns without causing damage to society and the environment. Mason: We seek to use our position as an asset owner to have a positive influence on the asset man- agers that we select. We rate managers on ESG and are prepared to go on a journey with them. We expect them to engage with ESG criteria and decide how it’s financially material for their strategy. That is an important role for asset owners to play. David Czupryna: If you talk about ESG as a whole some trustees may find it a difficult concept to grasp.
November 2019 portfolio institutional roundtable: Responsible investing 7
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