Towers Watson chief says integrating sustainability could save pension funds 100bps per annum

Long-term investment and ESG integration advocated by influential investment advisor.

Roger Urwin, global head of investment content at Towers Watson, says institutional investors using a broad sustainability approach including longer-term mandate criteria and ESG research could save up to 100 basis points in investment costs per annum. Speaking at a National Association of Pension Funds (NAPF) seminar on corporate governance, Urwin, one of the most influential UK investment advisors, said the costs could be reduced through longer-term investment briefs, less stock turnover, and better cost and risk management. He described the approach as an “integrated sustainable” strategy, marrying long-term vision in manager selection with an awareness of potential risk and return factors in environmental, social and governance (ESG) issues. The impact of ESG factors on investment returns, he argued, had reached a “tipping point”, based on the progression of climate science and increasing evidence of natural resource depletion. He argued that investing in sustainability mandates could act as a hedge against the potential impact of climate change on other investments in institutional portfolios. In addition, he said societal views on ‘what is fair’ were changing and that as a result of the credit crisis governments had new political capital for policy based on sustainability
issues. A new ‘fiduciary capitalism’, he said, looked likely to feed into sustainability-based corporate responsesand related investment returns. However, he described sustainable investing as a “marmite subject”, alluding to the yeast-based savoury spread whose taste divides consumers: “Some like it, some don’t. For every five pension funds I speak to, four aren’t interested and don’t allocate to this area. I think though that there are several compelling strands in the sustainable investment argument and that these could make a significant difference to the performance of pension funds.” He attributed some of the lack of interest to a dearth of “measureable” sustainability elements, citing the ‘what can be measured can be managed’ maxim. But he said he believed many of these, such as the potential impacts of climate change on investment, would soon be better researched. On corporate governance, Urwin said that while there had been improvements among UK institutional investors, its overall impact had been nullified by an increasing governance complexity: “There is a big gap in capabilities and competencies.” He said he would be surprised if the pensions management industry aligned to act on the critique by Paul Myners, UK Financial Services Secretary that better governance could combat “ownerless corporations”. Instead he predicted that governance improvements would be driven forward by collaborations between leading, large and well-resourced pension funds, both nationally and internationally.