Environment Agency fund in surplus with ESG

Despite widespread acceptance of the economic logic behind improving corporate practices and avoiding stranded asset risk, take-up of ESG strategies has remained low among smaller UK pension schemes.

The fund recorded gains of 19.6 per cent in the year to March 2017, contributing to a five-year investment return of 11.6 per cent. The 2016 actuarial valuation revealed the scheme to be 103 per cent funded, up from 90 per cent in 2013.

The long-term interest of pension savers is not to have a climate that’s completely unlivable

Danielle Paffard, Fossil Free

The EAAPF will seek to share its responsible investment expertise with the nine other members of the £25bn Brunel Pension Partnership, and to embed its philosophy within the allocations made by the pool.

Challenge to the industry

Emma Howard Boyd, chair of the Environment Agency, said the scheme’s adoption of ESG when making allocation choices was partly responsible for its improving financial situation.

“We’d say right from the outset that’s because we’re embedding responsible investment and a sustainable investment strategy into the way we think, and this is something that we’ve been doing for well over a decade,” she said.

While the scheme’s strategic asset allocation for 2017 remains broadly similar to the previous year, Howard Boyd said the EAAPF is implementing a gradual shift from active to passive management, and could update its passive mandates.

“We’re at the moment reviewing some proposals, which won’t be announced until the autumn, for an enhanced sustainable equities passive portfolio,” she said, adding that this would involve “going out to the market to see what the latest thinking there is from a range of fund managers”.

“I think you can always see more innovation,” she continued, arguing that schemes and managers are responsible for making sure recent advances are both available to and implemented by the wider market as a default position.

Take-up still low

Anecdotal evidence suggests this is some way from becoming reality.

“There’s just not a huge pick-up, a huge desire to do it,” said Simon Cohen, chief investment officer at Dalriada Trustees.

Cohen said some boards still hold the view that responsible investment will impact their returns, and that concerns remain over how to measure product performance.

“The one issue I struggle with is around how you benchmark these funds,” he said. “If you restrict the manager… it’s very difficult to know what to compare them against.”

John Belgrove, senior partner at consultancy Aon Hewitt, said that while both standard and ESG strategies have seen strong returns in recent market conditions, investors should still be aware of the financial impact of ESG risks.

“These so-called non-financial factors are very important and are risks that need to be understood, and will have a bearing on future financial outcomes,” he said.

He added that consultants building ESG into their buy ratings, alongside an increased focus from the Pensions Regulator, should mean that sustainability comes to the attention of more trustees in the future.

Divestment debate rages on

The EAPF strategy relies on engagement with corporates, amplifying its voice through participation in groups such as the £4tn Transition Pathway Initiative, which it helped found.

However, engagement has been less successful with some fossil fuel companies. The TPI announced on Wednesday that specialist coal mining companies are still failing to adapt.

For Danielle Paffard, UK divestment campaigner at Fossil Free, such obstinacy pointed to the limitations of engagement as a means of effecting change.

“It’s really clear that the fossil fuel industry has got no intention of changing its stripes,” she said.

“In that context it’s really important that investors with moral standing or long-term interests call them out,” she continued. “The long-term interest of pension savers is not to have a climate that’s completely unlivable.”