By Eduardo Chazan, CEO, Collegia, Michelle Inskip, Managing Director, UK Institutional Client Group, AllianceBernstein
It is no longer acceptable for pension providers and investment managers to offer environmental, social and governance (ESG) funds as an add-on to their Defined Contribution (DC) default investment strategy.
Providers must view their ESG responsibility as an active and dynamic pursuit that unites all parts of the firm; from the way it works and operates within its communities, to the manner in which it assesses and engages with portfolio companies, as well as the investment solutions it provides to its clients.
Critically, and fuelled by greater awareness of responsible investing, consumers, and the platforms that they are using are driving change in the market. One of these new businesses is Collegia, the UK’s only APP based Auto-Enrolment pension provider that also offers the flexibility of a personal pension. Collegia has embedded in its offering a market-leading investment solution that goes way beyond the expectations of today’s consumers when it comes to ESG.
In common with many innovative new market entrants, Collegia, targets like-minded companies, employers and individuals who share their vision for a better retirement for individuals and one that invests with an explicit objective to benefit society and the environment in the long run.
The new world is changing rapidly
Increasingly, those companies who are looking to win favour with customers and investors no longer regard an ESG philosophy as a marketing ploy or brand attribute, but as a critical factor in attracting customers.
Similarly, an investment manager who claims to have ESG credentials must now demonstrate an approach that goes beyond fund performance and clearly evidences its corporate commitment to ESG. They must show that they are both a responsible investor and a trustworthy corporate citizen, upholding the same standards that they expect of the companies they invest in
To work, this collective responsibility must relate not only to environmental stewardship and efforts to improve one’s own environmental impact, but also to the inclusive and diverse social culture that it fosters within a firm, and the fiduciary duties it owes to its clients and local communities.
Responsibility Is Central to Investing
Achieving, and evidencing ESG responsibility, must be shown in deed as well as word by pension providers and investment firms. ESG has to form one of the pillars of its investing activities and become not just a reflex to social trends, but a responsibility to oneself.
It is best regarded as a philosophy, which in AllianceBernstein’s (AB) experience also has a direct correlation to the profitability of the companies it invests in. How those companies respond to material issues can impact their future profitability. Analysis of ESG considerations can reveal valuable insights into a business’s management, culture, and risk profile. Understanding ESG risks and opportunities, therefore, is essential both as a social obligation and as a value creator for clients.
That’s why ESG is a key consideration in AB’s investment decision-making processes. Integrating ESG analysis in fundamental research has become central to its investment strategy across asset classes. Its insights guide conversations with company management that may drive positive change from within their portfolios.
With pensions, technology will be both a facilitator and a regulator. Users of platforms pension platforms such as Collegia will be quickly able to identify the difference between ESG stock pickers and companies for whom their business and their investment strategy is interconnected.
How Can ESG Add Value to your clients?
The ESG landscape is complex and many of the issues are interlinked. How do investors decide where to focus their efforts?
It is only through a thorough understanding of the companies and industries to which they apply that investment teams can determine which ESG factors are material to performance and encourage companies’ management to take them into account.
Climate change is a good example of how ESG investing can make a material difference. Its financial impacts are increasingly reflected in AB’s analysts’ fundamental investment research and are a key consideration in engagement, as well as in voting activities.
AB’s focus reflects not only client demand, but also the increasing regulatory impetus to address climate risk, and the consequent implications for investment decisions.
As a PRI (Principles for Responsible Investment) signatory, it is mandatory for AB to align its reporting with the Taskforce on Climate-related Financial Disclosure (TCFD). In the face of new requirements from the UK Department of Work & Pensions, many of its clients face the same obligation. Striving to better identify and evaluate climate risks and opportunities, as well as engaging with companies to improve the quality of their climate-related disclosures, is therefore a significant part of their activity as a business.
Engagement Is Vital
For example, in 2020, AB launched its first ‘Thematic Engagement Campaign’, whereby its investment teams engaged with over 350 of its largest holdings on two issues: climate risk goals and disclosures, and metrics in executive compensation plans.
AB discovered that many companies had appropriate climate-related policies in place but were not communicating them effectively to their various stakeholders. Other companies were considering policies or actively formulating them, and we were able to provide them with useful guidance and support.
Some companies that had not previously contemplated any action were inspired to do so after active engagement, demonstrating how essential it is to establish meaningful and relevant climate goals for corporates to help combat the negative effects of climate change. This will continue to a key stewardship theme for AB going forward.
External Partnerships Bring Additional Insights
Given the scale of the environmental and social issues we face, action can and should go beyond investment. The investment industry has a responsibility to do more. As an example, AB’s commitment to combatting climate change is reflected in its partnerships, chiefly its collaboration with Columbia University. In 2019, AB initiated a dialogue with leading scientists at Columbia University’s Earth Institute (home to the Lamont-Doherty Earth Observatory, a world-renowned climate science research centre). This culminated in a climate-risk training program for AB’s investment professionals across asset classes.
The firm is now developing a series of research collaborations with Columbia’s professors on environmental topics – providing the opportunity to translate ground-breaking scientific research into investment decisions which capture the risks and opportunities emanating from climate change, and ultimately improve outcomes for clients.
Integrating ESG into Investment Products
Critically ESG and climate considerations must be integrated. Take for example AB’s range of different “Portfolios with Purpose” (funds with a responsible focus). The Sustainable Thematic platform, for example, aims to deliver superior financial performance by targeting companies that identify environmental and social challenges—including those relating to climate change—and offer solutions to capitalise upon them.
This process, which spans both equity and fixed income assets, combines a bottom-up focus on the ability of companies to ensure their longevity through the management of ESG issues, with a top-down thematic emphasis that determines the products and services which contribute to achieving the UN Sustainable Development Goals.
Pensions and retirement planning a key platform for the future of ESG
Whether we are talking about a workplace pension, Auto Enrolment pension or self-employed pension, defined contribution or defined benefit, the retirement planning market has both immediate critical mass with which to drive change now, and also long term investment and growth that makes that change sustainable.
Over the last two years we have witnessed the power that consumers have with which to change the behaviour of institutions across the world. As an individual you may think your pension pot has limited impact, but collectively you are talking about trillions of pounds.
As an example, it is less than 10 years since Auto-Enrolment launched in the UK, and in this time around £100 billion has already been saved. Imagine if a company such as Collegia had been around in 2012 how much more influence this lobby would have now.
Rest assured in a decade’s time they will.