Magazine Issues » March 2019

ESG: The changing climate of investment advice

IcebergFor ESG to spread across the pensions industry, schemes must be led by their investment consultants, campaigners say. Nick Fitzpatrick gauges how seriously advice firms take the topic.

One of the UK’s largest pensions and investment consulting firms, Aon Consulting, is thinking of making it mandatory for consultants to be trained in responsible investment topics.

As UK head of responsible investment Tim Manuel told Funds Europe, Aon currently holds “regular but not compulsory” training for its new and existing personnel on environmental, social and governance (ESG) issues.

Now it is looking to extend its ESG training, at a time when investment consultants in the UK are under greater pressure to strengthen their ESG focus. This includes expanding ESG training to advisers who are not in a consultancy practice’s dedicated responsible investment teams.

The pressure stems indirectly from pension fund clients, who face greater regulatory pressure to act proactively as investors on climate change.

At a Funds Europe roundtable last year that discussed climate change risk for institutional investors, Diandra Soobiah, head of responsible investment at Nest Corporation, said investment consultants should be offering ESG advice as part of their core services.

Redington_survey_highlights“At the moment, I don’t think it is. Many still try and pitch ESG as a separate piece of advice that clients ought to pay separately for,” she said.

In tune with Soobiah’s sentiment is pressure from the Association of Member Nominated Trustees (AMNT) and the UK Sustainable Investment and Finance Association (UKSIF), who together have called for trustees to hold investment consultants to account on ESG issues.

The two organisations drew up a minimum level of service that pension funds, in their view, should expect from consultants, given the increasing expectations of regulators in the UK for pension schemes to be proactive climate investors.

The requirement to make ESG training compulsory for all relevant staff, not just those in ESG-specific teams, is included in these minimum requirements, as is the requirement that consultancies should rate fund management firms on ESG criteria to help pension fund trustees with fund manager selection.

Responsibility – and accountability
Funds Europe has surveyed some of the UK’s largest investment consulting firms in an effort to ascertain the extent to which they are meeting these requirements.

For example, all five firms that responded (out of a UK market of about 16) said they provided ESG ratings for pension schemes to use in investment manager selection.

One of the consultancies that was surveyed, Redington, said ESG ratings were integrated into manager ratings across all the asset classes it covers. Another, Hymans Robertson, said it had a ratings framework for active equity managers and was extending this across other asset classes.

Mercer_survey_higlighsMercer said ESG ratings were included in all regular periodical reporting to all clients, and Willis Towers Watson said sustainable investment reports were fully integrated into the overall investment due diligence process and captured within the overall strategy rating.

Adam Gillett, head of sustainable investments at Willis Towers Watson, said: “Creating separate ratings – one for ESG and one for the overall product – we strongly believe to be the wrong approach as it means that ESG is not fully integrated into the research and ratings process, but is a separate part.”

Consultancies also said they were helping pension fund trustees establish ESG policies. This was a big focus for Willis Towers Watson clients, said Gillett, partly because of the regulatory pressure pension clients were under.

Simon Jones, head of responsible investment at Hymans Robertson, said the firm has developed a framework to help clients “understand what sort of responsible investor they want to be”.

Meanwhile, Redington has a framework-based approach for helping trustees develop their beliefs about ESG and develop a policy based on them.

Questions to do with the availability of ESG ratings and of ESG policy guidance for trustees can be collectively termed ‘client outreach’. They concern the extent to which consultants proactively place ESG issues into pension scheme trustee’s lives rather than just reacting when asked. For the AMNT and UKSIF, client outreach is considered important for the spread of ESG among pension schemes, particularly smaller ones with fewer resources to create their own initiatives. Outreach is about consultants, with their vast influence over pension scheme assets, embedding ESG in the culture of various occupational pension schemes.

But arguably, it is more important to see that ESG is embedded in a consultancy firm’s own culture first.

How deep is your love?
This sentiment formed the basis of the next half of our survey, headed ‘Internal governance’. We sought to see how deeply ESG is planted into a consultancy’s business and to do this, we asked if firms embedded ESG objectives into staff performance evaluations. This is something that AMNT and UKSIF believe must happen, including at a senior level.

Redington said ESG is included in staff objectives, including those of senior members of the business.

Hymans_Robertson_survey_highlightsHymans Robertson said its responsible investment team has specific individual objectives related to ESG issues. Similarly, Mercer said ESG objectives featured in the performance evaluations of the relevant responsible investment staff.
Aon said there were no explicit ESG objectives.

Willis Towers Watson said staff had objectives around ESG “where appropriate”. These were “often the most senior staff responsible for areas of the business” with objectives around ensuring ESG and sustainable investing were fully embedded throughout their team and processes.

Willis Towers Watson’s Gillett said: “Many staff are sustainability champions or specialists within their areas and will also have specific objectives tailored to that. We hold an annual sustainable investment strategy day with the most senior people across the investment business to set out our SI [sustainable investment] objectives, and this is used as a basis for performance goals, as well as detailed ongoing project management through the year.”

The only other question in our survey’s ‘internal governance’ section was about staff training in ESG. Was it regular? Was it compulsory?

Again, Gillett said ESG was part of a wider compulsory training programme at Willis Towers Watson that reached from the intern level to the most senior members of staff. The training was tailored to business areas, which included advisory consultants and manager researchers.

Willis_Tower_WatsonTomi Nummela, senior associate in Mercer’s responsible investment and sustainability group, said the company trained all its employees on ESG issues. Meanwhile, the responsible investment team has a formal objective to achieve the widest possible integration of ESG in the global Mercer operation.

Jones at Hymans Robertson said it has a quarterly training session on responsible investment for all investment staff, plus ad-hoc training. The firm also covers responsible investment in induction programmes for new staff and graduates.

After viewing some of our findings, Mike Clark, who took part in the Funds Europe climate investing roundtable last year and is the founder of responsible investment advice firm Ario Advisory, said: “Progress on consultant evaluation of investment manager ESG integration is welcome. However, greater visibility would be welcome on the traction of investment consultancies’ strategic advice on, for example, the direct management of climate financial risk by their clients.

“This is not an ESG risk that can simply be delegated to investment managers. The results of last year’s parliamentary Environmental Audit Committee inquiry into green finance evidenced some strategic progress by some of the UK’s largest pension funds. But it is clear that much more needs to be done.”

Aon_survey_highlightsIn 2018, the Intergovernmental Panel on Climate Change called for unprecedented action over the next 12 (now 11) years to limit temperature rises to 1.5 degrees. Investment consultants “must play their part in rising to this challenge”, said Clark.

This is also where the AMNT and UKSIF see consultancy going. They call it “advanced advice”. Leanne Clements, a campaign manager at AMNT, said it involves climate change modelling and stress testing to gauge climate change risk from a strategic asset allocation perspective.

Clements added that she would not necessarily expect all consultants to be at this level now, especially when the tools are very much in their infancy in terms of product development. But asset owners should hold consultants to account for how they are evolving in this area over time.

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