• William Bourne


The last Linchpin ‘lock-down’ webinar roundtable took place on 25th June. Aoifinn Devitt kindly once again moderated our discussion on ESG after COVID-19. Our panellists were:

David Hickey, CFA, Portfolio Manager & ESG Lead, Lothian Pension Fund

Sharmila Kassam, Esq., CPA, Former Deputy Chief Investment Officer of Texas Employees Retirement System, Senior Fellow at The Milken Institute

Michael Marshall, Director, Responsible Investment & Engagement, LGPS Central Limited

Angela Miller-May, Chief Investment Officer, Chicago Teachers' Pension Fund

It was obvious from the start of today’s discussion that there is a transatlantic split. In the United States the focus is very much on the S of ESG, and in particular diversity and inclusion. One US state pension fund has a state-mandated 20% allocation to funds managed by minorities, women and disabled people, policed by certification. This was seen as effective but the focus needs to be on proper representation from bottom to the top. Large firms can help by running summer camps to help develop minorities talent etc but it was also important that senior management teams are diverse.

We looked at the problems of multi billion pound investors allocating to relatively small, perhaps first time, fund managers. Some of the panel thought that small allocations helped them get on the ladder, others thought that a satellite approach didn’t work and they needed sizable allocations alongside mainstream managers. The question was asked whether the outcomes were better and the general view was a strong positive.

Our US based panellists said that events of the last three months had not greatly changed what they were doing. If anything it simply validated that their long-held approach to inclusion and diversity was the right one.

Europe is a long way behind on this front, and the focus is much more on the G and particularly the E. We discussed the use of alignment with the Paris Agreement as a criterion for providing finance to companies and the effectiveness of collaboration. One panellist’s firm, for example, is prioritising four areas: climate change, plastics usage, tax transparency and the disruption caused by tech firms. Another commented slightly ruefully that for his firm diversity still tended to focus on gender.

Our UK panellists saw more change being catalysed by recent events and in particular a greater focus on good stewardship, CEO pay and racial inclusion. One wondered whether the oil price collapse would lead to a change in attitudes on climate change too – witness BP’s recent acknowledgement that their oil reserves had been overstated.

We then had a discussion on the merits of exclusion lists against engagement. One US based panellist had a short exclusion list, mainly on social grounds (eg. firearms) and a second made the point that fossil fuel companies varied greatly in their ‘dirtiness’. You might want to exclude coal but big oil is increasingly part of the solution. The Dogger Bank renewable scheme was cited as an example, which Equinor is behind.

All firmly believed in engagement as creating more leverage and delivering much better outcomes. Differing examples were given: engagement on opioid manufacturers had had some success; engagement on gambling less so because active managers tended not to hold them and passive managers were not prepared to prioritise.

We moved on to whether passive investors really could be responsible. The comment was made from the floor that while active managers chose whether to hold (for example) fossil fuel companies, it was hard to avoid the conclusion that passive managers, because of their methodology, were incapable of doing proper due diligence on the outlook for fossil fuels and that they were therefore less able to be responsible investors than active ones.

We moved on to metrics. There was general agreement that current metrics have been around for 10 years but are far from perfect. However, the point was made that it took 30 years (and the advent of computing) for measures like EBITDA to become easily accessible, and that this is still work in progress. In the US, certification was seen as a good way forward to measure diversity and inclusion. In Europe the panel suggested that, even if not perfect, current ESG measurement still helped to measure progress.

A different point was made that analysis often focused on the effect of particular scenarios but not on the probability of each scenario. This fund had spent some time doing its own analysis.

The question was asked whether there was a move towards sustainable mandates. This led to a debate on whether ESG should be separated from portfolio investment or embedded in it. One panellist commented that ESG factors are simply another risk which any portfolio manager should consider among all the others. Another saw ESG as akin to a style factor, perhaps quite close to ‘quality’ which could be separated out.

The point was also put forward that buying a listed equity did not of itself lead to a better outcome and therefore any ‘impact’ had to be made the primary stage, ie. when a company is raising money. The general view was that the universe of investment assets cannot be split into ‘sustainable’ and ‘not sustainable’, and that ESG has to be embedded into risk management.

We were unable to get on to topics such as greenwashing but the general conclusion was that the events of the past few months have simply served notice how important ESG issues are to investors.

Our prediction is that over the next few years the US will have to focus more on the E and Europe on the S. We would offer the challenge to all investors: how can you demonstrate you are walking the walk and not just talking the talk?