Strathclyde Pension Fund has become the latest scheme to hire an SRI overlay provider to reduce risk. Owen Walker looks at its selection process
Once the decision to hire an overlay provider had been made, an advertisement was placed in the Official Journal of the European Union;
This led to submissions from eight providers, each of whom had to fill out a pre-qualifying questionnaire;
The five top-scoring candidates were then issued with an invitation to tender;
Once the tender submissions were received, the three top-scoring candidates were invited to an interview;
The scores for the tender submissions and the interviews were combined, with a 70/30 weighting in favour of the submission;
Finally, a report was drawn up of the process and presented to the committee.
Strathclyde Pension Fund used a robust and transparent tendering process to whittle down a list of eight providers for a £100,000 socially responsible investment (SRI) overlay mandate.
The £10bn fund followed a trend of schemes, including the National Employment Savings Trust (Nest), in appointing a specialist provider to oversee its SRI strategy.
“We wanted more depth and visibility for our members and stakeholders,” said Richard Keery, investment manager at Strathclyde Pension Fund.
He said the fund used outsourced investment managers but did not feel they were sufficiently engaging with the investee companies.
Large schemes are increasingly making use of SRI overlay providers to avoid the reputational risk of investing in companies with poor governance practices.
Overlay providers pool the shareholdings from all their clients. They then engage with the investee companies speaking on behalf of their clients.
Many schemes feel they can get better long-term value from companies by improving the way they work through engagement. Using overlay providers means they have a bigger impact as their shareholdings are pooled with other schemes.
A number of other Scottish local authority schemes, led by the Lothian Pension Fund, currently have a tender out for a voting and engagement provider.
Last month Nest announced it had appointed responsible investment specialist Eiris to provide environmental, social and governance data services so it could have a better understanding of the “risks and opportunities contained within the assets it manages for its members”.
Nest has also announced it has hired Co-operative Asset Management and Manifest to help it engage with its investee companies.
Choosing the right provider
Many schemes – especially in the public sector – are required to disclose their tendering process in detail to show it is carried out in a competitive and partial manner.
Once the Strathclyde Pension Fund Committee had decided it required an SRI overlay service provider it put out an advertisement in the Official Journal of the European Union last June.
The trustees are very cautious on spending money, so you could say this is testing the water
This is in accordance with the EU procurement requirements for public bodies.
This led to submissions from eight providers, each of whom had to fill out a pre-qualifying questionnaire.
The five top-scoring candidates were then issued with an invitation to tender where they were asked to submit details of the services they could offer for £100,000.
"The trustees wanted to hire a provider based on what services they could offer for an agreed price," said Keery. "They did not put too many restrictions on this.
"They are very cautious on spending money, so you could say this is testing the water."
Once the tender submissions were received, the three top-scoring candidates were invited to an interview with the fund’s investment strategy working group in September.
The scores for the tender submissions and the interviews were combined, with a 70/30 weighting in favour of the submission. Swedish firm GES Investment Services won the mandate.
Finally, a report was drawn up of the process by the executive director of financial services for the Strathclyde Pension Fund and presented to the committee. After consideration, the committee approved the appointment.
Overlay providers vs DIY
There are two schools of thought when it comes to using SRI overlay providers.
Over the long term it is best for the investment managers to be engaging with companies
Some within the industry believe if an overlay provider is appointed it shows the fund managers are not doing their job properly, while others see it as an extra layer of governance.
Chris Hodge, head of corporate governance at the Financial Reporting Council, which oversees the UK Stewardship Code, is somewhere between the two.
“Using overlay providers is better than doing nothing, but it is not the optimum way of engaging with companies,” he said.
“Over the long term it is best for the investment managers to be doing it.”
Though Strathclyde plans to use GES to engage with its investee companies, it kept the shareholder voting rights with the investment managers.
But another local authority pension scheme of £1bn in size has taken a different strategy by hiring Manifest as corporate governance adviser earlier this month.
Manifest was hired to ensure the scheme’s policies of SRI were reflected in any votes it casted on shares it owns.
