Environment Agency Pension Fund shakes up investment monitoring

The report, titled 'Being a long term Investor', encapsulates the Environment Agency Pension Fund's approach to developing and monitoring investment mandates. It focuses on the inclusion of environmental, social and governance factors that are likely to be financially material in the future, but may have less of an impact in the short term.

Trustees should spend less time focusing on short-term underperformance, provided they remain confident that the manager is keeping to his long-term financial beliefs

Mark Nicoll, LCP

The fund monitors its managers’ engagement activity and the fundamental evaluation of prospective investments, and, the report says, “is more concerned about weaknesses in these areas than we are about a quarter of poor performance”.

It also shies away from using traditional benchmarks, as they can “have a disproportionate impact on managers, and can have issues of their own”, such as concentration on a few large stocks.

The report states: “A key test is whether the benchmark properly reflects an investable alternative, reflecting what we want from the mandate.”

It also outlines how the fund has changed its reporting to reflect its long-term ethos.

“Rather than basic monthly reporting and extensive quarterly reporting, we are moving to ad-hoc, core quarterly and extensive annual reporting,” it says.

Ad-hoc reporting focuses on updating the investor on significant events, such as changes to the asset manager’s team.

Working with managers

Mark Mansley, chief investment officer at the EAPF, said the approach was developed from a combination of practical experience, research and input from experts.

He gave the example of working with managers who are underperforming: “We’d work with [them]. We’ve had some experience where we’ve had to sit down and work with managers because we didn’t have the capacity to go out to tender.”

The report says the scheme now has a “clear commitment to work to repair mandates if possible rather than retender them”, focusing on communication and working to prevent style drift, which could compromise the strategy of the fund.

It also reduces the risk of poor timing inherent in any shift in manager, Mansley said.

He added that most of the EAPF’s investment managers were happy to comply with the different system.

“Generally most of our managers are quite willing and keen to work with us; we’re talking about a carefully selected group anyway.”

Focus on stewardship

The report highlighted the importance of assessing stewardship capabilities when selecting an investment manager as a way to ensure effective management of long-term risks.

Last year, the Unilever Pension Fund released data showing the issues it was engaging with companies on, with corporate governance topping the agenda.

However, Scott Thompson, director at sustainable investment asset manager Impax, said climate change has been climbing up the agenda in recent months.

“The Paris climate agreement has been a wake-up call to other asset owners to look at this,” he said. “We’re getting a lot of interest at the moment.”

Last week, asset manager BMO released its responsible investment annual report, outlining its engagement activity. It showed 39.5 per cent of its engagement activity in 2015 focused on environmental standards, followed by corporate governance at 29.1 per cent.

While the EAPF’s investment approach is flavoured by its emphasis on ESG, it was welcomed by more generalised investment experts.

Mark Nicoll, partner at consultancy LCP, said: “We strongly believe that trustees should spend less time focusing on short-term underperformance, provided they remain confident that the manager is keeping to his long-term financial beliefs.”

He added that it is important for pension fund trustees to be aware of these long-term themes, as they can have financial implications. Trustees should ensure that their managers are considering them when making investment decisions, he said.

“Taking position in respect of those long-term themes can affect short-term performance, so it seems right to be focused on the bigger picture and not unduly focused on next quarter’s performance results.”