Responsible Investor

Environment Agency plans sequel to £1.5bn SRI success

Fund investment committee to consider sweating the assets to take advantage of strong performance at lower risk.

Howard Pearce, head of pension fund management at the £1.5bn (€2.1bn) UK Environment Agency Pension Fund has led a remarkable recovery at the scheme since it began a wholesale shift three years ago towards responsible investment with a 100% environmental, social and governance overlay on all assets.
Prior to his arrival, the fund was suffering from poor investment returns that had led to a solvency decrease from 116% to 94% of liabilities. Then in 2002, on the day Pearce moved within the Environmental Agency to take up the pension fund’s reigns, it was hit by negative press coverage over extensive investments in BP and Shell, which were accused of poor environmental records. Pearce says he heard the reports on the radio as he was driving to work for his first day.
After a 12-18 month review carried out with a mix of consultants including Mercer, Watson Wyatt and Rathbone Greenbank, which included an asset liability study and performance attribution research, the fund concluded that targeting companies with good corporate environmental governance could help to deliver

better financial returns and was consistent with prudent and responsible investment.
As a result, it replaced three balanced managers running a portfolio split of 75% in equities, 20% in bonds and 5% in cash with ten specialist managers employing the new ESG overlay strategy. (Environment Agency Mandates.pdf) Research for the overlay strategy was divided between Trucost, Innovest, GES in Sweden and some in-house capabilities within fund managers. In addition, the fund decided to allocate a portion of investment management fees based on performance. The investment split was adjusted to 31.5% in UK equities, 31.5% in overseas equities, 13.5% in gilts, 13.5% in overseas bonds, 5% in property and 5% in private equity.
Returns blossomed. In the first year of the new strategy, the fund beat its benchmark by 0.8% and increased its solvency margin by 4%. Its best performing manager, Sarasin, returned 9%. The fund also increased its governance presence, lodging 50 shareholder resolutions over the year, an increase of 80%.

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