Responsible Investment Senior Manager, Kaisie Rayner discusses the recent outcomes of the Asset Management Market Study (AMMS) and its potential positive impact for responsible investing.
All-in-fees and a duty on fund managers to act in the best interests of investors were among the most eye-catching proposals in the final report on the regulator’s Asset Management Market Study.
The measures set out by the regulator built on themes that featured in the interim report last year and included a desire for investment managers to demonstrate a more long-term focus. A number of respondents to the interim report proposed that environmental, social and governance (ESG) indicators should be among the factors reported by asset managers “to aid investors’ understanding of long-term performance”. The suggestion indicated a disappointment in parts of the industry that the FCA had not recognised the value of ESG in promoting a sustainable, long-term investment perspective.
So the comment that the FCA would chair a working group to consider how to make objectives clearer to investors is one that we at Scottish Widows will follow with great interest. The working group could include ESG factors among the information given to investors to help them better understand the returns in relation to objectives, under the proposal.
Gaining positive momentum
As a reminder, ESG refers to the criteria factored into investment decisions by those aiming to invest responsibly and generate sustainable, long-term returns. It’s used by investors to improve risk management and typically involves a stewardship approach that encourages engagement with companies regarding ESG issues, as well as voting and other shareholder activity.
And respondents to the AMMS report are not the only ones to push the ESG agenda. The Law Commission’s paper on Pension Funds and Social Investment, also published in June, called on the regulator to require Independent Governance Committees for contract-based pension schemes to report on a firm’s policies in relation to “evaluating the long-term risks of an investment, including relating to corporate governance or environmental or social impact; considering members’ ethical and other concerns; and stewardship”.
Similarly, in 2016 The Pensions Regulator published new guidance for DC pension trustees that included the consideration of ESG factors as part of the investment process when making investment decisions. Earlier this year the Pensions and Lifetime Savings Association (PLSA, formerly the NAPF) published a paper on ‘ESG risk in default funds’, which recommended that “pension funds undertake more active stewardship of their investee companies in order to mitigate ESG risk”. It also noted that “based on Eurosif data, we estimate there is £1.4 trillion in assets managed by UK investors that incorporate ESG information, up from £500 billion in 2013”.
That there is a growing momentum within the industry to embed the principles of ESG within the wider investment market is clear.
Our support of ESG
Lloyds Banking Group’s engagement in this area is demonstrated by its status as a signatory to the UN’s principles for responsible investment (PRIs). These were introduced in 2006 with the aim of developing the understanding of the investment implications of ESG factors and to encourage the use of responsible investment to enhance returns and better manage risks.
Just over a decade after launching with 100 signatories the UN PRI now has nearly 1,700 signatories who collectively invest more than $60 trillion of assets under management.
That growth reflects a shift among investors such as pension funds and insurers towards an approach more closely aligned with the values of their customers. Increased awareness of ESG and impact investing mirrors greater public awareness of social causes and growing demand for products that support or account for them. Research suggests this is especially pronounced among younger investors. The Schroders Global Investor study 2016 found that ESG factors were significantly more important to millennials (those aged 18 to 35) when making investment decisions than to older generations.
As one of the UK’s biggest asset owners, Scottish Widows has an important role to play in promoting responsible, social and impact investment. The majority of our customers invest through their workplace pension and are in their default fund, placing the onus on Scottish Widows to make responsible long-term investment decisions on their behalf.
Our customers benefit from the ESG and stewardship focus of Aberdeen Standard Investments. As our main investment partner, Aberdeen Standard Investments run our mandated funds according to our specific requirements, such as the performance objective, the assets in which a fund can invest and the level of risk it can take. While our long-term strategic relationship means that they will typically be our first port of call when we are looking to establish a new fund, we have the autonomy and flexibility to engage with one of our other investment partners should they be unable to meet our requirements.
In fact our customers benefit from the internal oversight of all our external fund links (managed wholly by external managers) thanks to the ongoing review by Scottish Widows’ Fund Manager Assessment team. ESG is considered within the FMA team’s process through its proprietary P6 model, which examines six factors influencing the future performance and suitability of a fund. One of the six stages is a firm level assessment that can include ESG policies, stewardship disclosure and business environment considerations that make up the firm’s investment culture.
In November 2016 we became the first UK insurer to offer the Columbia Threadneedle Social Bond fund, when it was among the additions to the external funds range for pension and life products. The fund aims for a total return from investing in fixed income securities, primarily in the UK, that have a clear focus on achieving and supporting positive outcomes for individuals, communities or society as a whole.
Looking to the future
The growing emphasis on ESG isn’t just a result of regulation and a political shift. It also reflects a growing understanding that embedding such factors into the investment culture could reduce risk and promote sustainable long-term returns. It’s an approach that we are embracing and working towards embedding in our own investments.
Scottish Widows therefore welcomes a more proactive approach from the regulator in promoting ESG as meeting a growing investor need, supporting a long-term investment outlook and driving competition within the industry.
Find out more about Scottish Widows approach to responsible investing here.
PLEASE REMEMBER PAST PERFORMANCE IS NOT AN INDICATOR FOR FUTURE RESULTS. INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, ANY VIEWS EXPRESSED SHOULD NOT BE TAKEN AS STATEMENT OF FACT, NOR SHOULD RELIANCE BE PLACED ON THESE VIEWS WHEN MAKING INVESTMENT DECISIONS.