Swapping out fund managers can be a laborious process, but some pension funds are willing to consider it if asset managers will not step up to the mark on environmental, social and governance factors.
Deciding whether to engage with or swap a fund manager can depend on how receptive a fund manager is to conversations about ESG.
Experts across the industry agree that asset managers as a whole are becoming more receptive to discussing ESG, including sharing what role it plays in their investment processes and philosophy.
Alex Quant, senior investment consultant at XPS Pensions Group, says: “No manager worth their salt will turn down a conversation with an investor on ESG matters.”
No manager worth their salt will turn down a conversation with an investor on ESG matters
Alex Quant, XPS Pensions Group
This is because engagement has shifted over the past three to five years as ESG has developed, so that now the conversation is less about “whether to engage” and more about “what specifically to engage on”, Quant explains.
Greater engagement may be needed in cases where asset managers are still not communicating enough.
This is the reality being seen by Jessie Wilson, professional trustee at Dalriada Trustees, who points out that although asset managers are indeed open to ESG conversations, pension funds are often not seeing sufficient reporting to reflect this.
She argues that fund managers’ ESG rhetoric needs to be backed up by “clearly reported and easily accessible data”.
Tackling the data
The relatively new, and rapidly evolving, nature of ESG and the lack of relevant data is sometimes used as an argument against swapping out fund managers.
Although the understanding of data, metrics and regulations is continuously growing, some ESG-related areas such as carbon disclosures require more work, with fund managers still needing time to align their portfolios with these new standards.
These pressures are not unique to asset managers, however.
Wilson points out that pension trustees have time constraints themselves — “grappling with increasing regulatory pressures” such as the Task Force on Climate-related Financial Disclosures regulations, which came into force this year, and implementation statements.
She says: “We unfortunately do not have the benefit of time, and therefore managers who are unable to support asset owners with their regulatory reporting requirements cannot be given the benefit of time either.”
A proactive stance can make the difference for an asset manager.
Those that are making headway with ESG, such as by reporting data on their investments, developing their own proprietary research and analysis frameworks, and using new tools and solutions to meet ESG demands, are avoiding the risk of falling behind or being swapped out.
In fact, staying ahead in research and being upfront with ESG can put asset managers in a favourable position.
Collegia, a 100 per cent ESG pension provider, chose AllianceBernstein as a main investment partner, largely due to its willingness to discuss ESG matters.
This was backed up by a clear plan reinforced by thorough research, which is why it was chosen, explains chief executive and founder Eduardo Chazan.
“The fact that they brought sustainability, rather than as a tick-box exercise... they have a research team and they really work on this — that made the complete difference for us,” he says.
Making the decision
Although ESG is rapidly gaining importance, Wilson says it must be considered that ESG is just one investment consideration among several that pension funds have to factor in.
Fund manager stability, processes, philosophy and fees are also areas that must be considered. Furthermore, swapping out fund managers can be a lengthy and costly process, therefore being an unattractive option for pension funds.
Quant says that engagement with a fund manager should always start with a conversation about what needs to improve regarding ESG.
Then, once this has taken place, the trustees of the pension fund can decide to continue engaging or swap the fund manager out depending on the manager’s response to that conversation.
Quant explains: “If that conversation is handled badly by the fund manager or improvements don’t materialise, that is when swapping out a fund becomes an option.”
Others agree that swapping out a fund manager could, and should, be kept open as an option.
Dalriada Trustees prefers engagement, explains Wilson, who adds: “If a manager continues to fail to demonstrate their ESG credentials, be that through lack of disclosures or lack of improvements in key ESG data points, like carbon intensity, then a trustee board should make a decision to disinvest.”
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The decision can rest on the expectations of the scheme membership. Chazan argues that pension funds have a duty to their members to meet their ESG expectations.
“The moment you start seeing problems and the fund manager becomes unresponsive, you should change. I don’t believe you should wait a long time,” he says.
However, for pension funds that do choose to engage, Chazan says they should embrace that engagement as a process rather than dependent on any sole outcome, arguing that, in the end, neither fund managers nor pension funds have any “final answers” to the ESG issue.
