RI Europe 2016: Investing in the Future: Conference Report (Part 2)

A further summary of some of the highlights from the two-day event

RI Europe 2016 took place in London on June 22-23 and was attended by over 560 delegates. Here is our second selection of some of the highlights.

The great debate

The two days culminated with The Great Debate, a lively session featuring two debating teams laying out their arguments over the future of ESG ratings and reporting. The motion was: “This House believes that, on the issue of ranking and rating of funds and managers, our industry is moving in the right direction…” Speaking in favour were Naomi English, Head of ESG Products for EMEA and APAC for MSCI and Fiona Reynolds, Managing Director of the Principles for Responsible Investment. Speaking against were Seb Beloe, Partner, Head of Research at WHEB Asset Management and Jennifer Anderson, Investment Officer at the Pensions Trust. It was chaired by Mike Tyrrell, Editor of www.SRI-CONNECT.com.

Reynolds opened by saying there was a “gross contradiction” in our industry in that investors call for corporate transparency but resist it themselves – and that there is too much green-washing. Ratings, she argued, makes ESG more accessible and showed how the RI sector was maturing. Anderson countered by saying the current methodology for rating funds “tells us nothing” about how responsible investment is conducted at asset managers; she cited the example of Ownership Capital, the Netherlands-based firm founded by former PGGM executive Alex van der Velden, which she said wouldn’t receive Morningstar’s five globe rating. Such rankings, Anderson argued, were “misleading” for retail investors and “very concerning.”

Seconding Reynolds, English said the new ratings could be like a TripAdvisor system for invetors swamped with too much data, adding: “Investors have been demanding this for years.” The ratings would complement existing due diligence.

Beloe, supporting Anderson, also called ratings “deeply misleading” and he said they failed to pick up on the “intentionality” of the fund manager and inherent geographic and size biases. The motion went to a vote but a show of hands was inconclusive and the casting vote went to Leanne Clements of the Pension Protection Fund, who sided with Reynolds and English and thus the motion was carried.h6. Alice in Wonderland

Paul Woolley, Senior Fellow, London School of Economics, said the academic theory of efficient markets was responsible for what was going wrong in markets. He added that the trouble with markets was that the bulk of trades bore no relation to fundamental value. “So it’s no surprise that markets don’t allocate capital efficiently, collapse, have low returns. It’s a bit like Alice in Wonderland.”
He said another issue was benchmarks set by asset owners to discipline and keep asset mangers under control. “It’s a sensible motive. But it means with benchmarking a fund you have to buy stuff that is going up which you don’t have.”

He said this lead to an inversion of risk and return, calling it a “dirty secret” amongst the academic and practitioner industry.

“Known for 50 years. How come there is an inversion of risk and return? The cause is benchmarking forcing investors to buy stock going up if you don’t own it. Momentum investors know this and exploit it.”

Mark Mansley, Chief Investment Officer at the Environment Agency Pension Fund, said it was working on an index combining low carbon and ESG with a true value process.

The big society roll-out

The panel looked at the lay of the social impact bond (SIB) landscape after the initial excitement and then the UK government policy shift that saw the first SIB for Peterborough prison inmate release recidivism have to revise its payment for success process. Martin Rich, Director at Social Finance, said the UK had reached 30 SIB deals out of a total of 40-45 globally, and that the UK government had recently pledged £105m in capital for SIB outcome payments, which would likely be leveraged with local authority/private capital to reach £350-400m, suggesting a strong revenue pipeline. Rich said returns from the SIBs that have paid out thus far have been “high single, low double digit”, noting that few investments at present could make similar claims. Owen Thorne, Investment Officer at the £7bn Merseyside Pension Fund, said it had co-invested a £150m pool in impact finance with other UK pension funds, part of which is invested in the income stream of SIBs. He said the fund put venture impact allocations into its alternatives bucket, but focused on finding the right manager using its internal ESG capabilities. He said the investments combined good local, social purpose with steady uncorrelated returns; an interesting remit for a local authority pension fund.

Asset owner expectations

Edward Mason, Head of Responsible Investment for the Church Commissioners, the UK faith investor, speaking of a resolution his organization co-filed at Exxon Mobil, said that though he had the support of several of the largest European fund managers when speaking at the oil company’s AGM, the final result was “not acceptable” given how asset managers used their voting powers on behalf of asset owners. “Asset owners expecting more of their managers is absolutely crucial”, he said. “This was a reasonable disclosure resolution that had passed at BP and Shell, and I’m so grateful for all the support we got for it, but it’s not acceptable. That resolution should have passed.”

ESG and Big Data

Pierin Menzli, Head of Sustainable Investment Research at Bank J. Safra Sarasin said he expected consumer technology firms like Apple, Google and Facebook to be taking market share from asset managers in five years time. “We can learn from outside our industry,” he said. The session was followed by the launch of the Deep Data Delivery Standard initiative. It’s a voluntary set of 10 standards that aim to outline expectations around data quality for the asset management sector that has been backed by leading investors and ESG research and data providers.

Managing Carbon Risks

David Lunsford, Head of Development at Carbon Delta, the boutique equity research firm, said carbon footprinting did not assess climate risk across your investments. “It’s not a metric for making an investment decision. Let’s be frank: very soon investors and companies will need to go much beyond carbon footprinting in assessing transition and physical risk for climate change.”

He said the Paris agreement was a great data resource for investors. “Lots of data is submitted to UNFCCC [UN Framework Convention on Climate Change]. You have to dig for it on the website, emissions data, sector-level data. 163 countries will be submitting on a regular basis on their industrial development. 163 countries submitted INDCs [national climate plans] to give insights.” Mamadou-Abou Sarr, Global Head of ESG at Northern Trust, said a lack of a carbon price meant investors could not evaluate risk meaningfully.h6. ESG in smart beta

Bruno Monnier, Portfolio Manager and Quantitative Analyst at Ossiam, the Paris-based fund manager affiliated with Natixis, said two dominating features were driving interest in smart beta: a push for investors wanting transparency and accountability and on the analysis side having the data and being able to use it to complement the investment process. He said it was working with Sustainalytics on the data side. Alice Martinou, Senior Advisor in SRI and Impact Investing at BNP Paribas Wealth Management, said her organisation was currently looking at smart beta ESG strategies trying to adapt to methodology for extra-financial impacts. She disclosed that it was working to see how private clients would be comfortable in having a portfolio based on synthetic indices. “We are working with Ossiam to see how a synthetic index can be more sustainable than it already is.” She said the approach on extra-financial returns had been driven by demand from its wealth management clients, half of whom were from Belgium. She expected this demand to continue.

Sustainable infrastructure

Emke Bus, Managing Director, ESG and Infrastructure at GRESB, said infrastructure was rapidly becoming a mainstream asset class. “It’s an important asset class. Companies are still relatively young. We’ve worked out ESG in most asset classes. But for infrastructure it is relatively new. For infrastructure ESG investing makes sense as investors are long-term.” She said data in the area was emerging and starting to be collected.

The role of the index provider

Peter Smith, Investment Officer at the Pensions Trust highlighted the role of index providers in his panel on carbon transition/footprinting. He said that the MSCI Emerging markets index has a lower carbon footprint than, say, its rival FTSE’s equivalent, the FTSE All Emerging. Jakob Thoma, Deputy Director at the 2 Degrees Investing Initiative, in the following session, noted that the S&P is now non-coal for the first time. He also explained how some ‘green’ SRI funds – while being green currently – aren’t necessarily so in the future. And, he said, given falling prices for solar, it was possible that investors were funding twice as much actual capacity as three years ago.