Environment Agency Pension Fund: Developing the mandate of the future?

Influential investor explores industry best practice and how the market has evolved

The £2.2bn (€2.6bn) Environment Agency Pension Fund is reviewing its allocation to sustainable equities and is currently surveying the market to identify high quality opportunities. At present the Fund is undertaking market research before deciding what changes are appropriate (if any) and how best to proceed. According to Mark Mansley, Chief Investment Officer: “The EAPF has had an allocation to sustainable equities for over eight years and it has been, and remains, a successful and core part of our responsible investment strategy. However, recognising continuing developments in the market, we are keen to identify what opportunities are available that represent best practice and may meet our needs. We are keen that any new allocation should represent the ‘mandate of the future’ as much as possible.”
The preference is for global equities (which may or may not include emerging markets), and the focus of the fund is likely to be on well managed companies able to contribute to sustainable development (broadly defined) over the long term. Simple screening or engagement only products are not of interest. The allocation is likely to be circa £100m.
Working with Responsible Investor, before starting any formal tender process or allocation, the EAPF is keen to explore with the industry what best practice is and how the market has evolved. We will be publishing a brief series of articles by Mansley covering some of the key issues being considered. The first of these looks at the concept of sustainable equity investment itself:

Sustainable Investment after the Crash

The last few years – since the financial crash in 2008 – have been particularly challenging for sustainable investment. The turmoil in the renewable sector is well documented. An environment where many (investors, consumers, companies) are focused on short term survival is not ideal for those focused on sustainable investment and the long term.
Yet out of these challenges come new ideas, improved understanding and better analysis. While less developed approaches have struggled, the best have thrived.And events such as the Macondo oil spill in the Gulf of Mexico demonstrated unequivocally that damaging the environment damages shares prices. Meanwhile, while share prices of renewable energy companies are only starting to recover, evidence is growing of a real energy revolution on the ground.

So, as we revisit sustainable equity investment in this post crash environment we are keen to learn how fund managers have changed and how best practice has evolved. We have three specific questions here – on learning, on the scope of sustainable investment and integration with financial analysis.
Firstly, what lessons have you learnt from key events of the recent past and how has your investment process evolved?
Three key events stand out, but you may wish to consider others:
• The Financial Crisis itself (many sustainable investors did not really appreciate the risks of the unsustainable growth in lending pre crash)
• The Renewables Crash (growth has been there, but not profits or share price performance)
• BP and the Macondo oil spill (the importance of reporting the right metrics).
More broadly, we are interested in understanding the process of learning itself – a key component of the best managers. How do you refresh your ideas and evolve your process more broadly? In particular, how do you avoiding the perils of “framing” – believing the world must be the way your models say (while of course also avoiding flirting with every fad and trend)?
Secondly, what should the scope of sustainable investment be in this new world?
How can we consider issues such as local economic growth, income inequality, tax avoidance etc. as well as the established “sustainability” issues: e.g. environmental impact, climate change, labour standards and good governance? And what is the evidence that such a broader approach will deliver enhanced investment returns?

Finally, on integrating sustainability with financial analysis, can you demonstrate its impact on the portfolio and the performance?
Is it important to have a consistent process and underlying philosophy – across financial and non financial criteria? Is it sensible to be somewhat pragmatic with ESG issues – more so than with financial criteria? We have noted that ESG integration seems to have fared best when combined with a “quality” style bias – companies with good returns on assets/equity, low debt and strong cash flow. While a quality bias is better than many, is this inevitable or desirable?

Can sustainability be successfully integrated with, for example, a value style (perhaps to identify “value traps”)?The EAPF would welcome responses to any of these questions. In addition, managers who have interesting products / strategies are invited to send summary details of them to email, ideally by end-October.

Please indicate clearly if you consider some or all of your answers confidential, which the EAPF will respect, as we will otherwise share responses with Responsible Investor and summarise in future articles.

Future articles will look at the contractual, incentive and benchmarking arrangements that should be adopted by a mandate of the future.