The Explosive Growth of ESG Managers | Chief Investment Officer

The Environment Agency Pension Fund has done the hard work, identifying more quality responsible asset managers than ever. They want you to join the rush.

“It has never been easier to take a responsible investment approach in an equity mandate.”

This sentence, taken from a recent report from the UK’s £2.9 billion ($4.5 billion) Environment Agency Pension Fund (EAPF), can be seen both as praise for the progress made by asset managers and as a challenge to asset owners—it’s easier than ever before, so why aren’t you doing it?

In an unusually detailed and open report, EAPF CIO Mark Mansley lays out the exhaustive process taken by his team in search of strong global equity managers that have integrated environmental, social, and governance (ESG) factors into their investment processes.

Ultimately, two mandates of roughly £90 million were awarded. The first went to a relatively new boutique, Ownership Capital. Frankfurt-based Union Investments took the second. Hermes Investment Management and Mirova—a French boutique owned by Natixis—were also appointed to the EAPF’s list of reserve managers.

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It is the journey to those mandates that Mansley and his colleagues feel reveals the most about the development of ESG investing, and may help persuade other investors that it is a path worth following.

“With many leading fund managers now capable in responsible investment, there are no significant impediments to implementing responsible investment for asset owners. It has never been easier to take a responsible investment approach in an equity mandate.”The global equities mandate put up for tender last year had been in operation for the best part of 10 years and had performed well. But, as Mansley tells CIO, the competition a decade ago was nothing compared to now, as “only a handful of managers really understood what we were talking about.”

Many pitches made the use of screening processes to throw out unwanted stocks before managers undertook fuller company analysis, but this was not what the EAPF was interested in (and it still isn’t).

A decade later, the pension received roughly four times the number of responses it had for the original mandate. In total, 60 managers pitched for the pool of money, which was set out for mandates between £75 million and £250 million.

“The quality has improved,” Mansley observes. “The challenge in the past was that a lot of managers had offerings but they weren’t very credible.”

That has changed significantly. Mansley says there is “a lot of innovation out there”, including from dozens of “blue chip” management groups. Having global giants such as BlackRock, Goldman Sachs Asset Management, Columbia Threadneedle, and UBS Global Asset Management on the long list of 31 groups was a significant change from previous tenders. “It is less of a quantum leap now,” he adds.

All of these 31 groups—details of which are available in the EAPF report—are “likely to be worth considering” for asset owners in search of responsible investors.

“The implication is clear,” Mansley writes. “With many leading fund managers now capable in responsible investment, there are no significant impediments to implementing responsible investment for asset owners. It has never been easier to take a responsible investment approach in an equity mandate.”

This is good news for asset owners such as France’s Fonds de réserve pour les retraites, which is seeking managers for three responsible equity mandates totalling €3 billion ($3.3 billion).

But, as anyone who has worked with the EAPF will know, this is a pension that is not afraid to challenge its managers —and the industry. Having the capability is not enough: The report talks of managers that can demonstrate “a strategic understanding of sustainability or an enhanced ability to extract value from ESG factors”.

From the 31 mainstream managers, the EAPF team cut the list down to eight groups. Eight boutiques and specialists were also considered, with four making it through to the shortlist.

(Continued…)

Nick Moore, Environment Agency The EAPF receives a CIO Innovation Award in 2013On the subject of boutiques, Mansley says the EAPF was more flexible with its requirements, giving consideration to newer startups that “wouldn’t normally get a look in with other major pension funds”.

“We didn’t have a minimum assets under management requirement for companies, and we didn’t want to have to heavy a demand on organisational strength,” he says. “We tried to make sure that we gave them a chance to come through.”

Ownership Capital was awarded a £90 million mandate very early in the tender process. Alex van der Velden, partner and CIO, was responsible for a team running €3 billion at PGGM before he and his colleagues decided to forge their own path in 2012. Having launched the first Ownership Capital fund in early 2013, its track record was little more than 18 months when the EAPF tender came up, but this did not put off the pension’s CIO.

“We’re very keen to support those sectors and support innovation,” Mansley says. “There are managers doing some very interesting stuff.”

Some were “a little too early-stage for us”, he admits, but Active Earth Investment Management and Sustainable Insight Capital—two of the newest groups that pitched for the EAPF’s business—were nevertheless considered alongside much larger, more established names such as Impax Asset Management and Alliance Trust Investments.

Now that the equity mandates have been awarded, what is next for Mansley and his colleagues?

“We are building up our real assets exposure, and we have decided to put money into private debt,” he says. “That’s a sector in which ESG integration is in its infancy, but we have had some interesting conversations in that space.”

“ESG factors are likely to be discounted by the market more quickly, making it more challenging to extract value.” —Mark Mansley, Environment AgencyIn mainstream fixed income, the challenge is a little different. The EAPF does not have any plans to tender for a new mandate in this area, but Mansley and his colleagues are “watching with interest”.

“ESG is still developing in bonds,” Mansley explains. “We’re looking at long-duration sterling bonds, and the innovation is mainly in US or short duration bonds.”

Many are yet to be convinced by the ESG argument, but the breadth and depth of offerings uncovered by the EAPF’s research shows it is taking hold. If you’re still waiting to see genuine value from this approach, however, Mark Mansley has a warning in his conclusion,

Despite the undoubted good news of increased quality and competition in responsible investment, Mansley includes a caveat at the end of his report.

“With more and more managers integrating ESG considerations, these factors are likely to be being discounted by the market more quickly, making it more challenging to extract value,” he warns. For managers, “increased discipline and sensitivity to what is already in the price is likely to become more important.”

Whether there is true value in ESG investing may not be obvious to all—the EAPF is convinced, as are many other major European asset owners—but the opportunities and innovation in the sector are better than ever.

So what’s your excuse?

Related:The ESG Takeover

Greece’s possible exit from the Eurozone will have limited long-term effects on the financial system, according to asset managers.

Market reaction to the news that 61% of the debt-ridden country’s population voted against a new bailout deal on Sunday was muted, industry experts said yesterday. This is despite the vote being likened by many commentators to a referendum on Greece’s membership of the Eurozone.

Negotiations over debt restructuring and possible further bailouts could continue for some time, fund managers said.

“We are surprised that the moves have been so modest and continue to believe that market participants are optimistic,” Columbia Threadneedle Investments said in a blog. The asset management firm said it continued to forecast an uptick in European economic growth that would withstand Greece’s ongoing debt crisis.

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“Market reaction this morning has been muted. We are surprised that the moves have been so modest and continue to believe that market participants are optimistic.” —Columbia ThreadneedleBlackRock also expressed similar sentiments and said the general selloff in global equities and “so-called ‘safe haven’ bonds” was modest compared to the European debt crisis in 2012.

While the referendum vote is likely to encourage further selling, the firm continued that the monetary environment and low bond yields would help soften the blow.

Valentijn van Nieuwenhuijzen, head of multi-asset at Netherlands-based NN Investment Partners, said the likelihood of contagion across other Eurozone member states was “significantly lower than it would have been two, three, or four years ago.”

“The willingness and ability of policymakers to fight off contagion is much higher than in recent years,” van Nieuwenhuijzen said. “There is a higher willingness than ever to support peripheral countries that are willing to play by the rules.”

TIAA-CREF also had positive outlooks for European institutions, aided by the offloading of most of its Greek exposures, and said the European Central Bank (ECB) would be able to prevent a massive contagion using “a wider range of liquidity tools in its arsenal.”

“The willingness and ability of policymakers to fight off contagion is much higher than in recent years.” —Valentijn van Nieuwenhuijzen, NN Investment PartnersHowever, with Greece struggling to raise funds to repay up to €3.5 billion ($3.8 billion) to the ECB on July 20, asset managers admitted that the increased likelihood of a “Grexit” could have a less-than-ideal impact on the European economy and assets.

Schroders argued that if Greece were to default on the loan, the ECB could cut the country off from its emergency liquidity assistance.

“Assuming Grexit plays out, we would expect a 50% devaluation in its new currency,” the British firm said. “This is likely to plunge Greece into a severe recession. For the rest of the Eurozone, we would expect a slowdown over the rest of the year.”

Even if the ECB is able to “combat market nerves,” investors are likely to become more risk-averse in investing in sovereigns and businesses, Aon Hewitt said.

The firm added that, in a worst-case scenario, Grexit could “put a dampener on the outlook for European equities and debt,” weaken the euro, and put stresses on global markets.