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Impact Investing

IPE special report May 2018

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A deeper shade of green

This month's Off The Record survey looked at pension funds' integration of ESG.

The vast majority of respondents (77.5%) currently have an ESG policy in place or are about to integrate one, compared with 17.5% that do not. A Danish and a Finnish fund have not found it necessary yet but consider such a policy as the next step.

"The press in Denmark is very negative and is constantly trying to show that the pension funds are not taking ESG seriously," lamented one Danish scheme. "We have investments in more than 1,250 companies worldwide and, thus, it is too easy for journalists to find just one aspect in one of these companies as a basis for negative statements about pension funds with ESG policies."

Integration of ESG policies mainly happens via mandates and manager selection but their terminology varies. Fifteen respondents use the term responsible investing, compared with 11 that prefer SRI (socially responsible investing) and seven respondents that speak of ESG. Two pension funds each use the terms ethical or sustainable investing. A Portuguese pension fund opts for the term ethical and responsible investing, while a UK fund uses the phrase extra-financial.

The policies were predominantly first drafted in the last decade - however, two UK pension funds started in 1995 and 1999 respectively, while a third UK scheme stated that its first corporate governance policy was issued as far back as 1992.

Active voting appears to be the most popular ESG strategy. It was named by 59% of respondents, followed by 51.5% who use engagement. Around 44% of respondents apply negative screening, and over 28% each use positive screening or invest in themed or green funds. Close to 18% opt for ESG integration in their portfolios. Other strategies include seclusion, clean tech, class actions and ownership of SRI funds.

The latest ESG themes for the respondents overwhelmingly relate to climate change. Union rights, an SRI fund of hedge funds and an SRI fund for Asian equity were named by others.

"Governance monitoring is ongoing in the UK, US, Europe, Japan, Australia, Singapore and Hong Kong," explained a UK pension fund. "Some [of our] specific initiatives include the separation of chairman and chief executive shareholder proposal and a say on pay in the US, the independence of directors in Japan, adaptation as well as mitigation with regard to climate change and anti-corruption measures in emerging markets' extractive industries."

Another UK scheme said it most recently looked at responsible investment in alternative assets. "We follow the exclusion list of Norges Bank Investment Management," added a Dutch fund.

However, less than a quarter of respondents apply ESG criteria to their entire portfolio. The majority, around 48.5%, have an ESG strategy for only a part - between 2% and 95%.

Just over 51% of respondents said their country's investment law asked them to act in relation to ESG by reporting on such activities. But 57% believe ESG should not be legally integrated. "The aim should be to gain the best returns for the fund, not to box-tick legislation," argued one UK scheme.

Nevertheless, 70% of respondents believed it was trustees' fiduciary duty to include ESG in decision-making and manager selection. "Part of fiduciary duty is to evaluate all possible future risks," said a Dutch fund. "The position of all stakeholders can be seriously impaired if one does not include ESG factors."

"The so-called [McGerry] judgement has been superseded by modern legal opinion [such as the] Freshfields opinion for UNEP FI which suggests that it is a fiduciary duty to take ESG into account," added a UK fund.
 

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