Environment Agency Pension Fund has detailed the five-point criteria it uses to assess managers for its responsible investments, as it awards £180m to a global sustainable equity mandate.
ESG is growing in importance among pension schemes, with some including details of their engagement activity in annual reports for the first time. However, consultants said many schemes are still not fully engaged or only superficially engaged with responsible investment.
Five key areas EAPF looks at when selecting managers
The people involved, their quality and any external resources used
Thought leadership and investment philosophy – how they think ESG adds value and how this is evidenced
An investment process that clearly integrates ESG
Evidence of the efficacy of the approach, demonstrated by challenging the fund manager and not the ESG specialist
Quantitative analysis of portfolio decision-making. The scheme used specialist investment consultant Prius Partners for analysis
EAPF gave £90m each to asset manager Ownership Capital and Union Investments. It also appointed Mirova, Natixis and Hermes Investment Management without immediate funding, to allow the scheme to be resilient if changes need to be made quickly.
Mark Mansley, chief investment officer at the EAPF, said: “We are keen to recognise the progress the industry has made and to help other asset owners consider action in this area. We are committed to accountability and transparency as a core principle, so on something as significant as this we felt it important to provide a proper summary to the market and our peers.”
He added the scheme aims to invest 100 per cent of its assets responsibly, meaning it takes account of ESG factors in the investment process, with 26.3 per cent invested sustainably, which the fund defines as investments that can actively work to solve sustainability challenges.
“For us,” said Mansley, “sustainable investment involves going further – taking a more strategic view of sustainability opportunities; looking for solutions to key sustainability challenges; actively considering the impact of the investment or using a long-term broad perspective of investments.”
Maria Johannessen, director at consultancy PwC, said there were two levels of engagement with ESG, with many schemes signing up to ESG frameworks but fewer going further.
“Many schemes have [signed up] but very few have actually embedded it,” she said. “There’s a lot of scepticism around the value of ESG… There’s a lot of good research but it hasn’t reached critical mass yet.”
However, Tim Currell, head of sustainable investment and corporate governance at consultancy Aon Hewitt, said that while there was “not a lot of stated appetite”, many schemes still considered ESG factors.
“This kind of thing can be a differentiator in the pitch and selection process,” he said. “I’ve seen situations where they use it as a [tiebreaker].”
Fiona Reynolds, managing director of the UN-backed Principles for Responsible Investment initiative, said it was “vital” schemes lay out key criteria and manager expectations.
She said: “Pension funds normally undertake an extensive due diligence process when employing new managers, with regular monitoring of the mandate once it’s in place. This latter point is extremely important to ensure that the wishes of the fund are aligned with what the manager is executing.”
