The UK’s £2.2bn (€2.6bn) Environment Agency Active Pension Fund (EAPF) is looking for the sustainable equities “mandate of the future”.
EAPF CIO Mark Mansley told IPE: “We have had an allocation to sustainable equities for eight years. The time has come to renew this allocation by reflecting the best industry practice, which is why we are surveying the market to identify opportunities. We want to have a dialogue with the various managers before going to a formal tender.”
The preference is for global equities, which may or may not include emerging markets, and the focus of the fund is likely to be on well-managed companies able to contribute positively – in the broadest sense – to environmental and social challenges over the long term.
Mansley said: “Essentially, they should have superior long-term growth prospects and lower risks. Simple screening or engagement-only products are not of interest.”
However, given the fund’s efforts to address climate change and carbon risk, Mansley said, companies in the coal and oil sector are unlikely to fit into the EAPF’s definition of a sustainable equity portfolio.
He said: “Essentially, we are looking for people who understand the whole sustainability space and the risks. In the energy and resources sectors, we expect managers to be very selective at best when it comes to creating this portfolio.”
The allocation is likely to be around £100m.
The EAPF would like to see the following three questions answered by asset managers – referring to learning, the scope of sustainable investment and integration with financial analysis:
Firstly, what lessons have you learned from key events of the recent past and how has your investment process evolved?
Three key events stand out, but asset managers may wish to consider others:
- The Financial Crisis itself (many sustainable investors did not really appreciate the risks of the unsustainable growth in lending pre-crash)
- The Renewables Crash (growth has been there, but not profits or share-price performance)
- BP and the Macondo oil spill (the importance of reporting the right metrics)
Secondly, what should the scope of sustainable investment be in this new world?
- How can we consider issues such as local economic growth, income inequality, tax avoidance, etc, as well as the established sustainability issues, such as environmental impact, climate change, labour standards and good governance? And what is the evidence that such a broader approach will deliver enhanced investment returns?
Finally, on integrating sustainability with financial analysis, can you demonstrate its impact on the portfolio and the performance?
- Is it important to have a consistent process and underlying philosophy – across financial and non-financial criteria? Is it sensible to be somewhat pragmatic with ESG issues – moreso than with financial criteria? We have noted that ESG integration seems to have fared best when combined with a quality style bias – companies with good returns on assets/equity, low debt and strong cash flow. While a quality bias is better than many, is this inevitable or desirable? Can sustainability be successfully integrated with, for example, a value style, perhaps to identify value traps?
More broadly, the EAPF is interested in understanding the process of learning itself – a key component of the best managers. How do they refresh their ideas and evolve their process more broadly? In particular, how do they avoid the perils of framing – believing the world must be the way your models say?
The EAPF would welcome responses to any of these questions.
In addition, managers that have interesting products/strategies are invited to send summary details of them to eapf@environment-agency.gov.uk.
The EAPF has so far had 12-15 responses.
The formal tender is expected to take place at the end of this year or early next year.
The pension fund also has a strong sustainable component in its real asset portfolio, which includes property, infrastructure, forestry and agriculture, and is analysing the integration of sustainability in its bond space.
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