Environment Agency scheme takes aim at private equity ESG failings

For trustees of pension schemes however, the tweet had an additional significance - the era of 'boring pensions' avoiding public scrutiny could come to a sudden end, with an army of armchair pundits newly examining their funds' exposures.

One danger for leading lights of the responsible investment community like the £3.5bn Environment Agency Pension Fund is that this pensions Match of the Day ignores more subtle nuances of discourse on environmental, social and governance risks.

The scheme's pivotal role in lobbying with oil major Shell and its steadily reducing exposure to fossil fuels, for example, still place it theoretically within the scope of the problem as identified by MMMM founder Tony Burdon.

We think our members are becoming increasingly aware that their pension fund is one of the most important tools to tackle climate change globally

Craig Martin, Environment Agency Pension Fund

Around £3tn is invested in UK pensions, and “the majority of pension funds are invested in fossil fuels, tobacco, weapons or gambling”, Mr Burdon said at the launch last week. “It’s about shifting [their money] into something that’s more sustainable and more in line with people’s values.”

As one of the first signatories to the MMMM campaign, the EAPF is therefore pressing on with efforts to improve the sustainability of its private equity mandates, and to communicate effectively with members about the risks it still runs.

A survey covering 16 of EAPF’s private equity fund managers, representing 75 per cent of its net asset value, was carried out on behalf of the fund by Robeco.

It found that despite huge annual improvements across eight of the nine categories, less than half of managers had an investment policy addressing climate risk. A majority of the 5.8m member-scheme's managers also failed other key metrics, such as using emissions data for decision-making or undertaking climate-related scenario analysis.

EAPF makes ‘significant progress’

Still, the results are a marked improvement for an indsutry in which the vast majority of mandates are not even expected to report against these metrics. 

EAPF chief pensions officer Craig Martin tells Pensions Expert that the results represent “significant progress” in its private equity managers’ ESG approach; progress attained by engaging not only with companies and fund managers, but with members as well — something that given Mr Burdon’s emphasis on members driving change will be expected to continue with the EAPF’s participation in MMMM.

“Engaging better with members is one of our three key responsible investment objectives set last October,” Mr Martin says.

“We think our members are becoming increasingly aware that their pension fund is one of the most important tools to tackle climate change globally. We thought it now time to step up our ambition and that has tallied nicely with the MMMM campaign.”

Throughout July, the EAPF will be running a series of focus groups with members “to delve down deeper into the issues to understand what members want their pension fund to be investing in”, he said, the results of which will “feed into our pension committees to help inform their decisions on our investment approach and look at ways to include members more in their pension fund”.

Whatever outcomes emerge from the focus group will probably have a bearing on the priorities of the EAPF’s private equity managers. For all their successes, as the chart above shows, the response in all but two of the categories remains at under 50 per cent.

More work clearly must be done, and Mr Martin says that the feedback received from private equity managers “is that there is a lot of potential to engage given the structure, timescale and type of investments in private markets”.

“We have a long history with our investment managers and of working closely with them,” he adds.

“In fact, in our recent manager monitoring meetings, it was stressed by some that the progress they have made in responsible investment is as a direct result of our fund increasing our demands on them,” he explains, noting that this improvement on the part of managers was over and above what was already “a strong responsible investment approach”.

Angus Whiteley, chief executive of Stafford Capital Partners — which recently acquired Robeco’s private equity business — tells Pensions Expert that in relation to EAPF, while it does not set explicit numerical goals, “our target is improvement over time across the ESG programme, which we aim to achieve through structured dialogue with the managers and persistence, as we stay with the mangers for 12-15 years and assess them every year”.

“Through engagement with the fund managers, we aim to get the numbers closer to 100 per cent,” he added.

‘Change takes time’

Should the MMMM campaign be successful in its goal of changing investment priorities by increasing member engagement, it will be vital that investment strategies and priorities are set out clearly by trustees if private equity managers are to make the right decisions, according to Sweta Chattopadhyay, director at Bfinance.

“There needs to be clear guidance in terms of what’s achievable and what’s not, or what you’re seeking to do,” she says.

“The more vague that is, the more difficult it is. You need a clear idea of what you’re trying to achieve.”

Private equity managers have long been keenly aware of ESG standards and requirements, and “there’s a deep understanding that all of these things ultimately feed into sustainability”, Ms Chattopadhyay says. 

“I’m not saying things can’t be improved — things like diversity and inclusion are very much on the agenda for a lot of PE funds — but we’ve moved forward a lot more today versus five or 10 years ago.”