Asset Owners Take On ESG

Shanny Basar

Mark Thompson, chief investment officer at HSBC Bank UK Pension Scheme, said asset owners need to push their agents, fund managers, to ensure their funds meet environmental, social, and governance standards.

Thompson spoke on a panel yesterday at a FTSE Russell conference, Past-Present-Future of Sustainable Investing, which also marked 15 years since the launch of the FTSE4Good Index Series.

The HSBC Bank UK Pension Scheme has £27bn ($34bn) in a defined benefit scheme and £3bn in a defined contribution scheme. Thompson said: “We question our managers on how they include ESG in their risk framework. We believe in the evidence on climate change and take responsibility for talking to our agents, asset managers, as we cannot talk to every fund.”

He continued that at the beginning of this year the scheme reviewed the global legacy equity market cap passive fund for the defined contribution scheme in order to achieve a better risk-adjusted return, incorporate protection against climate change, as 60% of the members in the defined contribution scheme are younger than 40, and to make a passive fund more effective on governance.

HSBC spoke to the passive manager, Legal & General Investment Management, and allocated £1.85bn to a new Future World Fund last month. The new fund is a multi-factor global equities index fund that incorporates a climate tilt to address the investment risks associated with climate change. Legal & General also invested its own capital in the fund.

Thompson added: “The new fund has outperformed the market cap index by 2.5% with lower volatility and a tracking error of just 0.5%. At the same time the portfolio has 70% lower carbon emissions and a 100% increase in green revenues.”

Legal & General Investment Management has also been given a mandate to engage with large companies on ESG and if no action has been taken after a year, can vote against the chairman at the annual shareholder meeting. The fund will divest from companies that fail to meet LGIM’s minimum criteria after an engagement period.

“This is a mainstream fund, not a green fund. This is the new normal,” added Thompson.

The new fund tracks the FTSE All-World ex CW Climate Balanced Factor Index and weights constituents based on certain factors or attributes, rather than market cap.

Mark Zinkula, chief executive at LGIM, said at the launch last month: “The Future World Fund retains some of the transparency and low-cost characteristics of a conventional index fund, but also provides the opportunity to enhance investment returns by incorporating these factor tilts. Pension fund trustees need to ensure they are able to offer better risk-adjusted returns while helping to manage climate change risk.”

Jack Ehnes, chief executive of CalSTRS, the Californian teachers’ pension scheme, said on the panel: “We like this long-term approach which also creates value. Pension funds have had difficulty translating members wishes for sustainable investing into products.”

A survey of pension scheme members by LGIM found that 81% of members voiced support for their corporate pension scheme to be invested in responsible companies, while 95% said fund managers should be more active in helping to guide companies to be more responsible. The study was conducted in October 2016 and there were 1,681 UK respondents.

CalSTRS and Calpers, another Californian scheme, launched their green investing wave in 2003.

Ehnes said CalSTRS has $192bn in assets and faces a demographic challenge as beneficiaries are living longer. For example, it pays pensions to 350 women who are more than 100 years old and 73% of the scheme is female. He added: “We have aggressive targets of between 7.25% to 7.5%, and 56% in equities, of which 80% is indexed.”

Enick Wan, chief executive of KWAP, the Malaysian public pension fund for civil servant , said the scheme awarded an ESG mandate in 2014 and will launch a global ESG mandate next year. The scheme will also look at environmental standards in its real estate portfolio

The FTSE4Good Bursa Malaysia Index was launched in 2014. Wan said: “There were 24 companies in index at launch and this has increased to 44. From next year listed companies will have to begin reporting on sustainability for the current financial year.”

KWAP was separated from a government fund in 2007 with $500m in assets and has grown to around £22bn, and will be used to pay future liabilities. The fund has 50% in fixed income, 40% in equities and 10% in alternatives and has invested 11% overseas.

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