Pension funds should demand an overhaul in the product offerings of funds managers and change the terms of mandates to incorporate environmental, social and governance issues in portfolios, according to Colin Melvin, chief executive of Hermes Equity Ownership Services, who pointed to a number of funds in the UK, including the owner of Hermes, BT Pension Scheme, considering such action.
Melvin said the industry looked to pension funds as signatories of the United Nations Principles for Responsible Investment (UN PRI) to be leading the implementation of the principles, however investors were not being presented with the products that were needed.
“Look at carbon, it is difficult to get funds managers to take carbon risks seriously, but it is collectively agreed that pension funds should be able to integrate it into their portfolios,” he said. “Pension funds need to change the terms of mandates to facilitate this.”
He said the pension fund of the Environmental Agency in the UK now considered PRI in manager selection, and the membership of the Marathon Club, a collaboration of investment organisations in the UK promoting active long-term investing, was also considering long term mandates.
Hermes’ owner, the Ã‚Â£27 billion ($44 billion) BT Pension Scheme was also considering such mandate conditions, in an attempt to incorporate the Principles.
While a lot of the focus of corporate governance is on the buying and
selling of shares, it is more relevant for pension funds to be looking
at asset allocation and funds manager selection. With this in mind,
Melvin called for participants at this week’s PRI In Person conference to
manager selection as a key determinant of ESG portfolio implementation.
“Funds managers need to be courageous. They need to say the industry has been damaged and we have been behaving in a way that’s unsustainable, this has to stop and we need to make a change,” he said.
Melvin said in the past 30 years the average holding period in a company by an institution had gone from eight years to eight months.
Long-term mandates are being considered by some managers, including Generation Investment Management.
Hermes is an engagement service that acts for pension funds with combined assets of $86 billion.