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Signs are up for ESG

More than 70% of respondents to this month's Off The Record survey stated their fund had an ESG policy. A Dutch fund commented: "Our participants put a lot of attention on sustainability. We have a long-term view and believe sustainability is an important theme, [and] have included it in our asset management policy."

Pension funds used a number of different terminologies to label their policies. ‘SRI' and ‘ESG' were used by an equal number of respondents (28.5% each); ‘Responsible Investing' was the next most popular at 21.5%; followed by ‘Ethical Investing' (7%), ‘Sustainable Investing' (3.5%), and others such as ‘Corporate Social Responsibility' and ‘Stewardship' (10.5% in total).

The earliest of these policies was drawn up in 1995 by a Dutch fund, but only three other funds said that their policy dated as far back as the 1990s. About two-thirds were implemented within the past 10 years.

The most popular ESG strategies were engagement and active voting, which were both specified by 64.5% of respondents. This was closely followed by negative screening/exclusions (57%), integration (32%), and positive screening and themed or green funds (both 25%).

Equities were, by far, the most common asset class covered by ESG policies, and were identified by 96.3% of respondents. Fixed income and real estate were both reported as being covered in 55% of respondents' ESG policies. This was followed by private equity (44.5%), hedge funds (40.5%), commodities (33.5%) and cash (22%).

Around 30% of respondents confirmed that they were signatories/members of one or more initiatives, with six stating they had subscribed to the United Nations Principles for Responsible Investing (UN PRI). Four were signatories to the Carbon Disclosure Project (CDP), three respondents were members of the Institutional Investors Group on Climate Change (IIGCC), and two had joined the International Corporate Governance Network (ICGN). Just over half of respondents felt that they could benefit from these initiatives, while a further 32% believed they would only be partially beneficial.

Some 45% of respondents said that their country's laws required them to take some form of action in relation to ESG. "It obliges all large companies and institutional investors to explain if they work with CSR, and if [so], what their aims are and what they have achieved," said a Danish fund. A UK fund stated that it is required to provide an "annual statement by [the] trustees in annual reports and also in [the] Statement of Investment Principles, which has to be updated at least every three years".

Over 70% of respondents believed that it is trustees' fiduciary duty to include ESG in their decision-making process and during manager selection processes. "ESG represents both risks and opportunities, both of which may be material for company value," said one Danish fund. "Therefore ESG, in my opinion, will become an integrated part of manager selection and performance evaluation in the future, [although] it is not likely to be in the near future, unless more mainstream managers drive the process forward." A Dutch fund added: "Pension funds should take responsibility to avoid being connected to obvious negative ESG (ie, ‘negative screening'), [and to] give, as shareholder, some ESG guidance to companies."

The latest ESG areas respondents stated they had tried to incorporate into their funds included climate change and clean energy. "More exclusion plans for those businesses where we consider risk of poor ESG policies could be detrimental to return," said a UK fund. "Integration of ESG criteria into the investment process of the external managers, and into the asset allocation process," added a Dutch fund.
 

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