UK Environment Agency awards £185m in RI mandates

RCM, Generation Investment Management and Impax Asset Management have all won global equities mandates for assets of the £1.5bn (€1.9bn) Active Pension Fund of the UK’s Environment Agency, as part of a major drive by the fund to have its assets managed on sustainable grounds by signatories to the United Nations Principles for Responsible Investment (UNPRI). The new mandates were funded by the termination of Capital International, which lost the mandate for £67m in global equities and State Street Global Advisors, which was handling a £73m brief in global equities and £35m in UK equities. The other £10m was taken from part of a passive global equities mandate managed by Legal and General. In the new global equities mandates, RCM will run £100m, Generation £50m and Impax £35m. When the Environment Agency fund launched the tender in December 2007, it said it would favour managers according to investment in climate change themes as well as adherence to the UNPRI. It said Capital and State Street were replaced after a strategic review of both financial performance and client servicing. Notably, neither Capital International nor State Street are signatories to the UNPRI, which the agency said was another reason behind the change of managers.The three new fund managers have been set an out-performance target of +3% per annum and will sit alongside an existing global equity manager Sarasin & Partners, which was hired in 2005 to manage £132m with a +2% per annum out-performance target. The Environment Agency said it received nearly 50 tenders for the mandates and that it would shortly publish its experiences of the process with the aim of assisting other pension funds to develop responsible investment strategies. Howard Pearce, head of environmental finance and pension fund management for the Environment Agency said: “We are delighted to have appointed RCM, Generation and Impax, whom we, and our advisors, believe possess the necessary quality of staff, investment processes, research and track record to deliver our demanding financial performance targets. These appointments also evidence our opinion that those fund managers who seek to take into account financially material environmental risks and opportunities, such as climate change, in their investment decisions, will produce better financial returns for the beneficiaries of our pension fund, and this is entirely consistent with our fiduciary duty.”
Significantly, each manager’s performance will also be

evaluated according to their integration of environmental considerations into risk management, stock selection, company engagement, and proxy voting and annual environmental carbon foot-printing. Relative performance between managers will also be separately benchmarked using corporate governance and responsible investment indices.
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. 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. 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. The fund was advised by Mercer on strategic investment and fund manager selection. Rathbone Greenbank provided specialist advice on sustainable investment and bfinance assisted with the evaluation and selection of fund managers. Responsible Investment Metrics was also used for the selection of mandates.