Asset managers rely on consultants to get their message to clients, and in the field of SRSI investment, things are no different. But do these independent advisers know enough about sustainable investment to spread the word and explain the issues?
Chris Clarke, director at ISIS Asset Management in the UK, says the degree of expertise that consultants have on the subject differs. “Knowledge varies to an extent depending on the size of the organisation,” he says.
The larger firms have manager research teams which specialise in SRSI in the same way that they do for other investment styles such as credit bonds or UK equities, he says. But the smaller consultancies tend to know little about the area.
Kate Charsley of Hewitt Bacon & Woodrow in Bristol says that most consultancy firms do have a team dedicated to the area of SRSI. These people would be aware of all the key issues. But firms have to be realistic. There is no point gearing up your staff for a field of investment which few clients are going to require.
“There is a balance between spending time building up that expertise and the demand for it,” she says. “To date we have not seen a huge demand for SRSI expertise from mainstream pension schemes in the UK.”
In order to have a real grasp of SRSI, there are key areas consultants must understand. They must be aware of the different approaches that exist toward SRSI investment, and they must know which managers are strong in this area and be familiar with their products, says Charsley. It is important to understand the potential risks involved in SRSI investment, and the fact that an SRSI investment can be very subjective – this means that different individuals will have different criteria for what should and shouldn't be included in an SRSI fund. They should also be familiar with current SRSI issues.
Paul Moody, head of business development (SRSI) at Morley Fund Management, agrees that the big consultants all have a special focus on SRSI and are very knowledgeable. Hymans Robertson, Watson Wyatt, Hewitt Bacon & Woodrow, for example, all have specialist SRSI people. “They have been useful in pushing this area forward,” he says.
But within the whole investment arena, it is still the minority of people who do have this level of awareness of SRSI and the reality of it. Among the majority, misconceptions abound, he says. They believe that SRSI is all about negative screening and underperformance – ideas which stem from the retail side of things. They do not see the links with good governance and the proof that this approach adds alpha.
When consultants become involved in implementing SRSI investments, this tends to be client driven, says Moody. “The consultants are responsive and reactive… very little is proactive.”
For asset managers who depend to a large extent on consultants to be their mouthpieces, this can be frustrating. Clients, they say, can be left with their outdated views. “We want people to consider this investment style alongside others,” says Moody. “They have a minority of people within the big firms who know what is going on, but that information doesn’t necessarily become spread.”
It is a Catch-22 situation where institutions don’t get involved in SRSI investments and so, are left with their old ways of thinking about it. Rather than being about screening and avoiding certain areas, sustainable investment can be about looking at anomalies in market prices, and, using specialist knowledge, making money out of these situations.
Citing the approach to SRSI of funds in the Netherlands, Moody says efforts by investors to promote better practice can have far more effect on a company than an investment boycott. For example, pointing out to a company that cutting its level of carbon dioxide emissions has a potential 5% downside but 20% upside has far more influence with a chief executive, he says.
“It is a much more powerful way to change corporate behaviour,” he says.
Clarke says that originally SRSI was all about screening, where certain corporate sectors were excluded. What has changed slightly is the shift towards engagement.
“Our SRSI teams spend quite a lot more time in engaging rather than screening out companies,” says Clarke. The asset manager talks to the companies it invests in, for example, pointing out certain risks – policies which might stunt shareholder value. The approach, says Clarke is consensual rather than adversarial, and this means companies are more open to listening.
But Moody says it is important engagement overlays are part of a holistic process of SRSI, otherwise they risk being little more than tokenism.
In the Netherlands, only a handful of investment consultants concern themselves with SRSI. “My impression is that only a few are actively involved with this subjects,” says Joos Grapperhaus, director of marketing and sales at SNS Asset Management. SNS markets sustainable investment products and has around E2bn under management in this area. Alongside this it also has around E8bn in traditional management.
But interest among investors is increasing, he says, even though it is not always apparent. Sometimes it is not possible to gauge, using the figures, the real extent that institutions are employing SRSI methods and practices. Much of their ‘responsible investment’ does not involve consultants directly. Some institutions are seeking out research on sustainability and then using that research to do their own in-house sustainability management.
“The figures don’t show it, but the total amount in sustainable investment is more, as more and more pension funds use sustainable universes, which they buy,” says Grapperhaus.
This practice – a kind of overlay -- is definitely growing, he says, as inhouse asset managers use them. “Sometimes they might use a consultant to find the right research company,” he says.
The big SRSI mandates do not tend to come via consultants, says Grapperhaus. However, some of the local ones do.
However, whether consultants have an in depth knowledge of this field of investment is largely a reflection of the level of investor interest. “In a sense, they have to react to what is occupying their clients’ minds,” says Clarke. “Although governance and SRSI is a growing topic, it is still quite a fair way down the agenda for pension fund trustees.”
Emma Whitaker, consultant on manager research at Mercer, confirms this. “Current interest remains fairly minimal,” she says. In the UK, Mercer has researched in the field of SRSI for around four years, she says. The last few years of poor performance in global markets generally have not necessarily dented investor interest in SRSI, she says. It remains at a similarly low level as before.
The consultancy, she says, pools its resources of expertise in the field when required by a client, while in research terms it maintains a watching brief. “We keep a watching brief for people offering things to the institutional marketplace,” she says.
Hewitt & Beckett in Dublin says it does not have much work in this area. What there is, is mostly restricted to a few charities, but this does not amount to much, says Evelyn Ryder at the consultancy.
For most trustees, SRSI, says Ryder, is not high up on their list of priorities. But looking to the future, it will be increasingly important for consultants to be expert in this field, given the direction the investment marketplace is likely to take. ”I believe this is a growing area and therefore there is a need for us all to increase our expertise,” says Charsley of Hewitt Bacon & Woodrow. “The demand from clients is likely to increase.”