EUROPE - Pension fund officials are being encouraged to "explore their sustainable investment beliefs" in a bid to prevent uncertainty about the potential performance of their portfolios.

A briefing note issued by Watson Wyatt, entitled Investing for the future, suggests the uncertainty of how companies' returns and long-term growth will be affected by, for example, the arrival of regulations tracking their impact on the environment, means pension funds "should seek to understand which companies are best placed to minimise costs, increase efficiency and exploit value opportunities" as it will "become impossible to take a long-term investment view without considering the impact of sustainability issues on investments".

Jane Goodland, author of the report and part of of sustainable investment research team at Watson Wyatt, told IPE the overriding issue for pension funds should of course be to consider environmental, social and governance (ESG) matters as creating value and managing risk, as their fiduciary responsibility is to deliver the best possible returns for the benefit of members.

Complicating matters further, however, there is no set formula as yet for establishing the needs of pension funds concerning ESG, stresses Goodland, so creating a suitable strategy is being done on a case-by-case basis and "sustainable investment beliefs must fit with [the investor's] core investment beliefs".

"We're starting to do more work in sustainability and recognise there is no silver bullet in this regard. It is very much a case of bespoke solutions for individual funds, perhaps built on their particular investment beliefs and other factors. It can be an influencing factor but is a complex and still-evolving area, so we are working with clients on an individual approach.

Goodland notes in her briefing paper governments are becoming increasingly supportive of sustainable investment and policies are being implemented, the UK in particular singled out for its work on the Companies Act 2006 while could mandate institutional investors to disclose how they exercise their shareholder rights if it is felt they do not do so sufficiently.

Similarly, Watson Wyatt acknowledges the opinion of ESG and sustainability has shifted from its earlier ‘green' credentials which tended to hang on negative, rather than positive, screening, and research now indicates incorporating ESG factors into indices tends to at least exhibit the same risk-adjusted returns as conventional benchmarks, so ESG can be seen as focusing on value creation.

In order to develop a sustainable investment strategy, "fiduciaries should explore their sustainable investment beliefs", said the consultancy firm in its paper, to ascertain the "materiality" of sustainability issues for companies, the impact of these issues of their investment performance, the scheme's view of the value of shareholder engagement and the extent to which sustainability will influence the investment industry "given imperfect information and a degree of future uncertainty".

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