How do you integrate ESG in your portfolio?

Henrik Larsen

• Danish common management company for three pension funds
• Invested assets: DKK125bn (€16.8bn)
• Participants/members: 289,000
• Defined benefit
• Date established: 1945

Sampension’s environmental, social, governance (ESG) policy - which was implemented in 1999 - is a result of discussions within the pension fund community and its board. The idea behind it was to deal with investments that were in breach of international conventions Denmark has signed up to such as UN and International Labour Organisation (ILO) conventions.

Our ESG policy is based on negative screening. Therefore unless the investments comply with the requirements of international conventions on human rights, workers’ rights, child labour and environmental agreements we cannot undertake them. We also do not invest in weapon manufacturers.

The screening of Sampension’s shares is outsourced. Strategic value adviser Innovest screens the listed equity universe according to our criteria. On the private equity side we inform the respective managers before we enter any portfolios. We do not believe that negative screening has any material effect on our investment returns.

We have not allocated any parts of our portfolio to pursue any particular social or environmental investments. These only come out of our general portfolio construction considerations.

Because our ESG policies primarily focus on negative screening rather than proactive investing in ethical funds or similar investment vehicles we use the term socially responsible investment (SRI).

Until we signed up to the UN Principles for Responsible Investment (PRI) 18 months ago we only had a comply-or-sell policy in place. But because one of the principles requires signatories to gain influence by engaging with companies, we have started to engage as well. In a few cases we have done this through Innovest but in one particular case with an oil company we contacted the firm directly. However, being a long-term process it is too early to judge the effects of our engagement just yet, although we are confident that it will be influential, particularly as - like us - the majority of our peers have joined the PRI and the Danish sustainable investment forum DANSIF, which allows pension funds to exchange their views and experiences and coordinate engagement activities.
Danish law also requires its pension funds to report their ESG activities annually.

While climate change may be included in our general environmental policies, the topic is still a new issue for us. We have not yet formulated a separate policy on this but we are currently preparing a discussion about what kind of climate change investment policy we should have, if any, and which will take place at a board conference later this year.

Nada Villermain-Lécolier
Head of responsible investment
Fonds de Réserve pour les Retraites (FRR),

• French buffer fund with the first outflows expected from 2020 onwards
• Invested assets: €30bn
• Date established: 2001

Taking into account ESG issues or responsible investment (RI) as we also call it is part of the fund’s identity. Although there is no explicit reference to responsible investment in French law besides reporting obligations, FRR’s supervisory board stated in 2003 that the fund had to comply with a number of universal values, which promote balanced economic, social and environmental development.

As a long-term investor and universal owner of more than 2,000 companies, questions of externality matter to us and will become more so in future. We also care about our reputation.

As FRR outsources its entire portfolio management, ESG integration is in the hands of its asset managers. Therefore the key issue is to select the appropriate managers, ask them to make a number of commitments and work very closely with them to make sure that the contract is respected and interests are aligned. In every RFP we ask the candidates to undertake ESG research and to try to improve their management process, if there is room for improvement. We also ask them to be transparent and disclose the way ESG issues are integrated.

In-house we analyse the extra-financial risks of our portfolio as an overlay activity. Ethical research provider EIRIS helps us analyse the portfolio according to the 10 principles of the UN Global Compact and conventions which prohibit controversial armaments, such as the Ottawa and the Oslo Conventions. Companies in regular and serious breach of these instruments will need to take corrective measures, otherwise they may, in certain cases, be excluded. As part of its RI strategy, the fund will soon directly engage in a dialogue with a limited number of companies and already participates in international initiatives. Apart from being one of the founders and active members of the UN PRI, FRR has recently signed up to the Extractive Industries Transparency Initiative (EITI).

We are also supporters of the 2009 Investor Statement on the Urgent Need for a Global Agreement on Climate Change and are working on a study about how climate change affects the long-term strategic asset allocation of FRR.

Voting is another important activity for us. Our managers vote on our behalf in the best interests of the fund. We felt that the exercise was particularly important during the crisis and especially on issues such as remuneration where they vote according to AFEP-MEDEF guidelines.

In the long term, we strongly believe that RI should foster higher performance even if this conviction is still difficult to prove.

Howard Pearce
Head of environmental finance and pension fund management
Environment Agency Pension Fund
• Invested assets: £1.4bn (€1.6bn)
• Participants/members: 22,000
• Funding level: 70% (September 2009)
• Final salary defined benefit scheme
• Date established: 1989

ESG is very important to our pension fund because we think that environmental issues in particular are financially material. We want to take into account financial material risks like climate change and take advantage of opportunities like green technology.

The UK Pensions Act states that there is a requirement for trustees to take into account of ESG issues. But we go further than that because we are very transparent and disclose a lot of what we do in the area, both in hard copy and on our website.

The UN’s 2005 and 2009 Freshfields Reports clearly state that ESG is part of trustees’ fiduciary duty and our investment principles reflect this requirement. We first integrated ESG into our strategy in 2002 but have been doing it more intensively and rigorously since 2005.

We implement ESG through our manager selection process and our mandates - it spans 100% of our fund and all the asset classes we invest in. Our approach to screening is positive, best-in-class, because we believe that negative screening limits your investment universe. We also feel that a good way to improve companies’ environmental performance is through engagement.

However, this has not stopped our managers from disinvesting where they feel on-going failure to address environmental issues impairs financial performance. Over the last five years, our best performing managers with regard to returns have been the ones such as Sarasin Partners that have had the strongest approaches to sustainable investing, which reassured us that we are on the right strategy.

In addition to the screening and active engagement, our ESG policy also includes proxy voting on green resolutions and environmental foot-printing.

We are a member of the UN PRI, the Institutional Investors Group on Climate Change (IIGCC), the Carbon Disclosure Project (CDP) and the Forest Footprint Disclosure Project (FFD) and are doing collaborative work with UKSIF and EUROSIF.

We also recently became the first pension fund in the EU to publish a comprehensive responsible investment report on compliance with the PRI.

The financial crisis has actually been a boost to responsible investment and corporate governance. Obviously it was not good on our overall fund value but it highlighted the importance of corporate governance even more.



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