Irish Funds - ESG & Sustainability Centre Stage
In the last two months, I attended two Irish Funds events, The Irish Funds UK Symposium and the Irish Funds / IAPF webinar, “The Future of European Pensions”.
Of particular note at both events was the prominent part played by ESG and sustainability within the discussions. The Green Team Network supports its members’ efforts to be green at home, green in the community, green in the workplace and of course green in industry. In terms of “green in industry”, this focus was very much in evidence at both events, with the theme of ESG and sustainability woven throughout the topics covered.
Several of the ESG related soundbites and takeaways from both events are captured here:
IRISH FUNDS UK SYMPOSIUM
There was great representation from the Irish Funds industry (but also UK, Luxembourg and beyond) in London for this in-person event on 11 November, expertly moderated by Sarah Bradley (Grant Thornton), member of our Green Team Network Steering Committee.
Address by Minister for Public Expenditure & Reform
Following the opening address by Pat Lardner, CEO of Irish Funds, the scene was set by Minister Michael McGrath. Referencing the recently launched Sustainable Finance Roadmap and the Government’s Climate Action Plan, he highlighted the “pivotal role” Ireland’s Financial Services sector will play in addressing “the two major challenges facing society – transition to a green and digital future”.
The Airplane Analogy
(Jonathan Lipkin – Director, The Investment Association)
ESG investment today is akin to “flying in a plane while still trying to build it”. The plane carries a mixture of passengers including some not sure they want to be on board and others who know they want to be on board but don’t know where the plane is taking them. Furthermore, the air traffic controls are still being built around the plane and the journey. In order to satisfactorily complete the sustainable / responsible investment airplane, there are three critical success factors:
1. A Clear Definition of “Green”
2. Good Data Flow and Systems (getting it effectively to the customer)
3. Proper Communication to Customers
Word from the Regulators
On the positive side, while the incomplete ESG airplane can’t ultimately work, “the industry can” work. “Incentives exist to make it work. At the heart of success is whether those seizing the opportunity are embracing the spirit and outcomes. They need to see the opportunity not the burden.” (Gerry Cross – Director, Policy & Risk, Asset Management & Investment Banking at the Central Bank of Ireland)
The right balance needs to be struck “between Investors’ needs and the Industry’s desire to Innovate and show its Purpose. The industry must strive to explain its purpose here credibly”.
The challenges facing the funds and asset management industry in delivering this credibility include (1) “mistrust” from the public (at least some of this justified) and (2) “Lack of international consistency”. (Nick Miller, Head of Asset Management, UK Financial Conduct Authority.)
Featuring: Paul Stillablower (RBC Investor & Treasury Services), Andrew Alabaster (BlackRock), Teni Ekundare (FAIRR), Sonali Siriwardena (Morgan Stanley)
What Investors Want & Are Asking
For many investors now, ESG is no longer “separate to their day to day job, ESG is fundamental to it. ESG is a material financial risk”. Asset managers and owners are getting “much more into the weeds” and want to understand “how their money is being put to work and want to engage more with companies to understand how it is they are financing a transition”.
Smaller asset managers “certainly have a role to play” and can find “strength in numbers”. They should “use the information that is out there and tap into the networks that exist ….. finding those right connections”.
There is a huge increase in the “volume of questions that we get on ESG. In DDQs (Due Diligence Questionnaires) the % increase on ESG questions is 410%* over 2 years, and on our RFPs (Requests for Proposals) it is 153%*”. Questions are “no longer are you a signatory to the PRI, it’s a lot more detailed and granular – what’s your ESG philosophy on investment, how do you approach training and expertise, have you a dedicated resource on ESG, what kind of reporting do you provide …. It’s no longer about what you do but how you hope to go about it and not just at the front end, but throughout the lifecycle of your product.”
*Sonali Siriwardena, Morgan Stanley
Even for money market funds, where we “don’t immediately think of ESG”, investors want products and strategies that work first and foremost, but “ESG is an increasingly important layer …. and it IS a financial risk.”
The Data Challenge
Examples of “3 major headwinds” to be faced:
1. Regulation (CSRD~ for example may potentially be great, “but it is not here yet”. So it is like cart before the horse in asking asset owners to report. Furthermore, as it stands it will only apply to a “small set of companies”).
2. Availability & Accuracy of Data, i.e. re some of these data sets, companies themselves don’t know the answers. In addition, regulation to date is “hugely equity centric”, leaving data for other assets quite far behind still.
3. Data Vendors: few if any vendors have “end-to-end data solutions”. Huge disparity in the way different vendors approach an alignment among the ESG ratings. “It is almost Night and Day” (take the Tesla example where there is significant disagreement among data vendors regarding the “Do no Significant Harm” metric.”
~CSRD: Corporate Sustainability Reporting Directive
Dear CEO Letter on Climate and ESG Issues (Central Bank of Ireland)
Suggested success factors in responding to the Central Bank’s 5 stated supervisory expectations for regulated financial service providers:
1. Governance: Take ownership for setting ESG strategy. Make ESG a standing board agenda item and ensure the board is part of the ESG conversation.
2. Risk Framework: Ensure all 3 Lines of Defence are part of the conversation covered within your risk management frameworks, with the risk dashboards for each fund understood and presented to the board.
3. Scenario Analysis: should be conducted product by product. Focus for example could be on carbon price and consider aligning funds on the TCFD framework. Analysis should cover orderly, disorderly transition and hothouse scenarios.
4. Business Model Risk: classifying Funds for example – understand your internal classification process, but where the investment team is proposing a shift from for example Article 6 to 8, independent review could also be beneficial and should probe: what is the ambition, what is the process, what data infrastructure will support this, can we satisfactorily report on it and how?
5. Disclosures & Avoiding Greenwashing: show good intent not just box-ticking. Evidence that intent against outcomes. Say what you do in practice. Proprietary ESG scoring by asset managers is still a nascent process. Realise that there is no one individual investor view on ESG – it changes by region, asset class, client type and even among individual investors.
Panel Discussion: Trends in Private Equity
Andrea Lennon (Crestbridge), Vanora Madigan (Waystone – and also member of Green Team Network Steering Committee), Nicholas Blake-Knox (Walkers), Byron Griffin (Deloitte)
“ESG is arguably a slower journey in private equity due to the lack of data. However, buyer behaviour is driving change and can’t be ignored.”
“Private equity can play a huge part in funding sustainable innovation and influencing change.” There is a real opportunity for businesses to “grab ESG and provide a differentiated service ….. being able to evidence your differentiator will be critically important”.
Buyer Beware: “There will be good and bad assets.” There will be opportunities to invest in the bad assets at low valuations. Investors must exercise caution or risk the unintended consequences of their investment decisions. However, we may see “private equity firms stepping into this space and actually raising the standards of these companies”.
Diversity & Inclusion / Walking the Talk: Private equity managers are increasingly seeing ESG, focus on D&I and purpose as an opportunity to boost employee satisfaction, achieving greater productivity and lower staff turnover. It is now a “candidate driven market and talent decisions have come to the fore at every board.” Employers are being more creative and open minded in the candidates they seek and the talent they want to attract “building Diversity & Inclusion as part of that”. (Many thanks to Vanora for highlighting involvement with the Green Team Network as just one way firms in the industry can show their staff that they are "walking the talk" about being purpose-driven and environmentally focused).
Irish Funds / IAPF Webinar – The Future of Pensions
Hosted by Pat Lardner (CEO, Irish Funds) and Jerry Moriarty (CEO, Irish Association of Pension Funds - panel moderator).
Panel: Kathy Ryan (Head of Responsible Investment, Irish Life Investment Managers), Jim Foley (Executive Director, Trustee Decisions), Peter Branner (Chief Investment Officer, APG Asset Management).
Pathway to Net Zero
Arising from COP26, 450 organisations have agreed to sign up to the “Pathway to Net Zero”. The panel discussed what this commitment means to the various parties: asset managers, asset owners and pension scheme trustees.
Several asset managers have signed the pledge and must get busy now “setting targets and preparing themselves and their clients”. They may have committed to Net Zero by 2030, but it will be important to break this down into “targets for the intervening years”.
From the asset management side, “transparency and clarity” needs to be shown “on the impact of their actions”. Managers need to “talk to pension clients about what their client goals are” and “Net Zero requires looking at how you apply this in investments and how you engage with clients and consultants”.
Pension trustees are “a few steps more removed” than the clients and at this point rely mainly on feedback from the managers. At this juncture, there are not many requests for “feed forward” from the trustees on this topic. Trustees are on a journey “but must be in a position to challenge the managers on what they are actually doing on the ground.”
The Role of Regulation
SFDR: “This has forced funds to look at their sustainability characteristics. Investors need to trust that any green claims can be backed and evidenced. Therefore oversight needs to be good enough to give integrity to these claims and confidence to investors”.
IORP II: “The sustainability part of IORP II is quite minor as yet. Trustees only need to show they have “considered” ESG.” We are probably “relying on SFDR and TCFD to drive change instead”.
Fiduciary Duties & ESG
Trustees should be “concerned about the return and the risks. Failure to include ESG in your considerations is a failure in your fiduciary responsibilities”.
“My fiduciary responsibility is to get risk adjusted returns”. Therefore, it is necessary to “understand the risks”. The data received should “show the returns you are getting taking risks into account”.
ESG and Effect on Returns
“Responsible investment can contribute to lower costs as you are more careful with resources” (positive for returns).
“If you don’t take ESG into account, you are missing very important factors”.
In terms of engagement with investee companies, it is important to establish “for how long do you engage before deciding it isn’t working and you divest”. Divestment may be the right course of action in different situations – however, “if you divest, you lose influence”.
“The ESG information set is critical to investment decisions. If you want to future-proof your portfolio, also consider a future perspective (benchmarks look backwards) and look at companies that are governed well”.
Eye to the Future
“We (Asset Management & Pensions) have become much more of a purpose industry. This is a great time for innovations in our clients’ investments”.
Advice to Investors and their trustees: “Consider sustainability and climate risks with your managers” and “use your voice to engage and vote” on the direction in which you want businesses to go.
ESG provides “an opportunity for scheme members to engage in a way they didn’t before, especially Defined Contribution schemes”.
It is important to have “education and understanding of what you’re invested in now, but also, what are the other options?”
It was great to see the significant presence of ESG in each of the above events and to know there are so many of us singing from the same hymn sheet in terms of rising to both the challenges and opportunities of addressing sustainability within our industry. But now it’s very much time to #WalktheTalk.
Aedín O'Leary, Co-Founder, Green Team Network