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11 May 2008
Finacial Times: A pioneer in sustainable investing
Source: www.ft.com
By Brendan Maton
Published: May 11 2008 21:22 | Last updated: May 11 2008 21:22
These days, asset managers and asset owners are inundated with opportunities to win awards in recognition of their good work. The UK Environment Agency Pension Fund (EAPF) has been doing better than most, scooping a dozen “gongs” in the last three years from various specialist pensions and investment publications.
Almost all acknowledge the £1.6bn (€2bn, $3bn) Bristol-based plan’s pioneering work in sustainable investing. Within the last few years, the EAPF has turned itself into a leading government agency pension fund by using a unique environmental overlay strategy across all its investments.
Other innovations include developing its own template for investment manager agreements so as to better reflect the fund’s aims in the legal contract with asset managers. Then there is its annual benchmarking of the environmental footprint of its actively managed global equity portfolios against their MSCI benchmark index carried out by Trucost, the environmental research agency.
In a joint venture with Standard Life Investments, the Environment Agency has also produced a report on the carbon management and carbon off-setting efforts of the UK’s largest quoted companies.
Such interest in using and providing hard data on sustainable issues should come as no surprise. Howard Pearce, head of the pension fund, also has a separate function as head of environmental finance at the Environment Agency.
“With my environmental finance hat on, we monitor what listed companies are doing on financially material environmental risks and opportunities in their published reports. With my pension fund hat on, I try to see if this can help financially benefit our investment strategy and our fund managers’ thinking,” he says.
So where many debates on sustainable investing get bogged down in ethics and politics – for example, is it right to invest in global multinationals at all? – EAPF concentrates on extracting and using information about key financially material environmental risks and opportunities.
EAPF was relatively late to sustainable investing. Other public sector pension funds were awarded similar mandates more than a decade ago and Nottinghamshire County Council announced its retirement scheme would be going 100 per cent “green” six years before the Environment Agency – although the council has since modified its policy.
Mr Pearce feels, however, that there was more emphasis on ethical than sustainable investing back then. “We believe that factors such as population growth, natural resource depletion and climate change, have economic impacts on a company’s activities and can have a material effect on value and future prospects.”
He feels that companies’ traditional annual reports and financial accounts do not give sufficient quantitative information on these macro-issues and long-term drivers for investors and asset managers. Hence the need for initiatives like the carbon neutrality report of the FTSE All-Share with Standard Life Investments. “We are not ethical investors and do not believe in simply screening out sectors or companies.”
Mr Pearce thinks that some pension funds elevate ethical issues above sustainability within the world of green investing. “It’s probably understandable given the more intensive marketing of negatively screened ethical investment products,” he says.
He describes the fund’s own relationships with its commercial agents as a case of “push and pull”. The EAPF was one of the first funds to sign up to the United Nations Principles for Responsible Investing, which it saw as a timely, global association of like-minded funds.
The EAPF urged its asset managers and other service providers to do the same; all but two agreed. “We are just one client amongst a thousand to the biggest asset managers,” he says. “They have numerous issues and potential complications with so many different lines of business and activities in jurisdictions.”
At the same time, more and more asset managers are recognising the value of environmentally aware investors.
Or as Mr Pearce puts it, with only a hint of cynicism: “They can exploit different financial communities in different ways.” He remains phlegmatic about such commercialism because the link between sustainable business practices and corporate profits needs greater research leading to better investor information and reporting by business.
Pressure from pension funds alone is not going to achieve this. Asset managers have to see the need and want this information too – Mr Pearce feels some do – and he hopes others will see the financial advantage of taking account of environmental issues in investment decision-making.
After interviewing nearly 200 asset managers in the last five years, Mr Pearce has noted that specialist investment houses or larger firms that have a dedicated, boutique approach to clients seem to better understand the financial relevance of environmental issues.
Although EAPF is offering mandates in excess of £50m, in the world of segregated asset management, such sums are not unusual. When the fund looked for a private equity fund of funds manager three years ago, Mr Pearce got the sense from many of the biggest names that they did not adequately take into account financially relevant environmental risks and opportunities.
The house eventually chosen was Robeco Alternative Investments, part of Rabobank of the Netherlands.
Mr Pearce explains that the private equity team has a high degree of independence and insists that all the funds it invests in sign up to a set of Responsible Entrepreneurship guidelines. Not only did Robeco match EAPF’s investments with its own money, but Mr Pearce was invited to scrutiny meetings of some target investments.
No doubt more gongs are on their way for EAPF, but surely the best results are measured by membership and financial performance. British occupational pension plans are voluntary these days but this scheme has a 94 per cent take-up among Environment Agency staff. Results-wise, the fund was 0.8 per cent above benchmark in 2006 and 1.2 per cent above benchmark in 2007.
Since restructuring in 2004/05 the EAPF’s risk profile has almost halved, through diversification and better-formulated mandates and its solvency has increased 9 per cent to 103 per cent in 2007.
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Finacial Times: A pioneer in sustainable investing
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Sustainable Investment Research Platform
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