Environment Agency tenders up to £150m in climate change equity mandates

RI Exclusive: The £1.5bn (€2.1bn) UK Environment Agency Pension Fund is investing up to £150m (€210m) in new money in one or more global equity portfolios where fund managers will be specifically favoured according to investment in climate change themes as well as adherence to the UN Principles of Responsible Investment (UN PRI).
The mandates are believed to be some of the most explicit institutional briefs in the market with environmental concerns as well as sustainable internal asset management practices at their heart.
The Environment Agency said it favoured positive stock selection rather than negative screening for the mandates and added: “The use of in-house and external company research and engagement, including on financially material sustainability and environmental issues like climate change, and/or partnering with third parties on the integration of these issues into the managers investment strategy and process would be advantageous.”
It said fund manager support of the UN PRI would be “desirable”, which will give a major boost to the UN’sinitiative to become a benchmark for the hiring of fund managers. It has also asked for fund managers to state whether they belong to other responsible investment organisations including Eurosif and the Institutional Investors Group on Climate Change.
The fund said it was also interested in pitches from fund managers with “other innovative approaches” in the areas of governance and sustainability. It said preference will be given to a segregated investment approach, although pooled funds and fund-of-funds will be considered.
The actively managed strategy, which the Environment Agency said could include a mix of styles, will aim to outperform a selected global equities index by a minimum 3% per annum on a rolling three-year basis within an agreed maximum risk budget that it said might suit a high alpha or moderately unconstrained stock selection style, rather than 130/30 products or hedge funds. It said the mandate would preferably be run on a performance-related fee basis.
The Environment Agency has been a leader in responsible investment since 2005 when it replaced a

poorly performing strategy of three balanced managers for ten specialist managers employing an environmental, social and governance overlay strategy. The strategy was led by Howard Pearce, head of pension fund management. 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%. Year two was better. The fund was 1.2% up against its benchmark and recorded a further 3% increase in solvency. Eight of the fund’s managers exceeded their benchmark and four beat their performance targets.During 2007, the fund extended its manager roster by appointing Royal London Asset Management to manage a £55m (€81.5m) UK corporate bonds mandate with an SRI overlay provided by Eiris.
The fund is also carrying out reviews of infrastructure, sustainable forestry, private equity and clean tech to decide if it could make new allocations to these asset classes.
Expressions of interest for the new global equity mandates should be received by the fund by January 31, 2008.