I love autumn weather so the end of November with its bright skies, frosty roofs and piles of leaves has been delightful. At the start of the month, my latest article for IPE explaining how stewardship can help companies to adopt net zero targets was published to coincide with COP26. My blog posts over the last few weeks have also addressed sustainable investment. The first is a plea for asset managers to stop talking about ‘ESG investing’ and find better language to describe their purpose. The second takes a look at how providers embed ESG characteristics in auto-enrolled pensions while the third asks if cost constraints were preventing employees from fully embracing sustainable investing.
Stewardship: Heavy-lifting network
When asset owners and managers work together through Climate Action 100+ (CA100+) they can persuade large companies with significant emissions to adopt net zero targets by 2050. This article explains that while CA100+ can reduce the heavy lifting by identifying key issues and coordinating actions, asset managers need their own corporate engagement programs. These internal capabilities will be ever more important as investors focus on delivering net zero targets and will be tested when it comes to ensuring companies can meet these goals. It is such a complex task that it is far from certain asset managers will have the depth of resource to hold companies to account.
Don’t mention ESG
Asset managers love their jargon. That’s particularly apparent when it comes to sustainable investing. This post asks why asset managers talk of ‘ESG investing’ rather than describing their purpose with pithy language. Using a TLA adds to the confusion but even if you know the acronym stands for environmental, social and governance characteristics, you are none the wiser about what the manager wishes to achieve. Sustainable investing is a broad church with a wide range of admirable investment strategies. Why undersell it by calling it ‘ESG investing’?
ESG and you
This piece explains how pension providers are embedding sustainable investment principles into the pots of the millions of auto-enrolled employees. As the majority of these strategies use passive equity strategies, it’s likely this will included an index ‘tilted’ towards those companies with the highest ESG scores. But this could introduce concentration risk as more funds chase those companies with the best characteristics and it’s questionable whether these strategies will do enough to protect the planet and improve society.
The sustainability cost conundrum
Auto-enrolled pension providers can do more than avoid climate-change risk through tilted ESG-indices. This article asks if schemes could switch passive providers if they don’t do enough to change company behaviour. Pension providers could also add actively managed strategies which have a mandate to improve companies’ ESG characteristics but they tend not to. That’s because price is such an important consideration that there is limited budget for these more expensive strategies. While large schemes can use their scale to embrace a wider investment universe there is a danger cost constraints are preventing many employees from fully embracing sustainable investing.