Virtually any investment professional will acknowledge the value of diversity when it comes to investment strategy and decisions, particularly during the current uncertainty. Diversify, spread your risks and look for opportunities across sectors and asset classes.

Yet, the opposite practice is often true in the workplace. Women as a percentage of CFA Institute United States members have barely moved from 17 per cent since 2017 yet have reached a still low 30 per cent for corporates generally. And Morningstar found that the gender diversity of fund managers globally has remained largely unchanged over 20 years. It noted that women fund managers are twice as prevalent in Asian markets.

The investment profession also trails on race and ethnic diversity. In 2020, 2 per cent of CFA Institute members in the US identified as Black, far below the US population of Black graduate degree holders. Only 3 per cent identified as Hispanic and 1 per cent as Latino. Although numbers are higher for Asian investment professionals, they are often not reaching the highest leadership levels.

Yet Willis Towers Watson, the global investment consultancy, found in 2020 that diverse investment teams outperformed those with no women or ethnic minority employees by an average of 20 basis points a year. Clients are also demanding movement on DEI. In short, the industry’s glacial pace of change has to accelerate.

Why we need a framework for change

In an industry that moves quickly and can be both opportunistic and strategic, the investment sector needs to operationalise a structured DEI approach.

This is why the CFA Institute DEI steering committee asked the DEI Code working group of CFA Institute committee members, investment professionals and DEI practitioners to create a voluntary DEI Code in March 2020, beginning in the US and Canada. The code was launched in February 2022 following a two-year plus industry-wide consultation and drafting process.

The working group made the code practical for all organisations in the industry. Although voluntary, the code requires strong commitment and accountability from senior leaders at investment companies and engagement from employees. DEI needs to be embedded within strategic business imperatives to create an impact.

This was highlighted in a CFA Institute report in August 2021, Accelerating Change: Diversity, Equity, and Inclusion in Investment Management, which outlined practical and actionable takeaways from DEI efforts. The report also forms the research underpinning the DEI Code’s implementation guidance.

Understanding the code

The DEI Code comprises six core principles. The signatories commit to:

  • Pipeline: Expanding the pipeline of diverse talent.
  • Talent acquisition: Designing and implementing inclusive and equitable hiring and on-boarding practices.
  • Promotion and retention: Designing and implementing inclusive and equitable promotion and retention practices to reduce barriers to progress.
  • Leadership: Using their position and voice to promote and improve DEI in the investment industry and to being held accountable for their firm’s progress.
  • Influence: Using their role, position and voice to promote and increase measurable DEI results in the investment industry.
  • Measurement: Measuring and reporting on their progress in improving DEI within their firm and providing regular reports on the metrics to their senior management, board and CFA Institute.

When adopting the code, signatories will need to report on the relevant metrics for their organisations annually using a confidential reporting framework. This is important as the code looks to meet the organisation where it is, define its current state, and drive improvement from a realistic foundation.

CFA Institute will then report its overall findings on industry progress every year. It will also hold various roundtables with the signatories to understand their implementation strategy, share tested practices, and showcase successes.

Sustaining improvements

The DEI Code is designed on a common belief: that improvements can offer better investment outcomes and help create better working environments. The latter is especially important as attracting and retaining talent continues to be a significant challenge in the investment industry. We also wanted to make it adaptable as practices evolve, keeping aspirations high and grounded in business needs.

When it comes to DEI, we know that regionally specific nuances are critical to capture within any code to make an impact. In this regard, we see the current DEI Code for the US and Canada as a starting point. We will be adapting the code for each region, working with local stakeholders to reflect key priorities.

At CFA Institute, we continue to advocate for professional excellence and adherence to ethical standards. Our existing codes and standards are how we hold ourselves accountable, and now they include DEI.

Sarah Maynard is global head, external diversity, equity & inclusion, at CFA Institute

 

The long awaited merger between the two Australian super funds, QSuper and Sunsuper, which has been two years in the making, came into force on Monday, February 28, creating Australia’s second largest super fund after the A$260 billion AustralianSuper.

The newly formed A$220 billion Australian Retirement Trust (ART) is aiming to more than double its size to become a A$500 billion fund by the end of the decade, according to chief executive Bernard Reilly.

Reilly who steps into the role having been chief executive of Sunsuper since October 2019 after an extensive career in the international banking and finance sector in Australia and overseas, calls it a merger of equal players which is unusual in the current superannuation industry.

“We see ourselves as a A$500 billion fund by the end of the decade with about 2.8 million members,” Reilly said.

QSuper had assets of more than A$130 billion with 500,000 members while Sunsuper was slightly smaller in size with assets of A$97 billion but had a much larger membership base of 1.4 million.

Reilly says ART’s growth plans include potentially more mergers, continued expansion of its management of corporate super accounts and continuing to partner with outside financial advisers. It has many merger deals, including with Australia Post super fund and other corporates, in the pipeline.

New institutional giant

The new ART will become one of the institutional giants of Australia, with a current annual inflow of funds of just under $14 billion a year.

Reilly, whose career includes 25 years working for State Street Global Advisors in Australia and its headquarters in Boston where he was global head of strategy, said the combined fund was expecting to play a bigger role in investment deals given its financial firepower.

QSuper has been involved in the A$24 billion industry super fund-backed bid for Sydney Airport while Sunsuper was a part of a consortium including the Future Fund and the Commonwealth Superannuation Corporation, which last year bought a 49 per cent stake in Telstra InfraCo Towers, a business with some 8,200 towers around the country, for A$2.8 billion.

“We have already been playing in that space (deals for major infrastructure assets),” he said. “But now we can look at taking a bigger stake in some of these opportunities going forward as a partner.”

The fund’s investments will be headed by Sunsuper’s chief investment officer Ian Patrick, a former chief executive of JANA Investment Advisers, who has been with Sunsuper as CIO for the past six years.

Reilly said being able to take a larger and more active role in big ticket investments could result in better returns for the fund’s members.

“When we think about the investment outcomes, (it can help) to be able to have a seat at the table in some of those deals,” he said.

“Ultimately, it involves better investment outcomes for members.”

The question of internalisation

But Reilly said ART had no plans to undertake a major internalisation of its investment management which has been the case with many other larger super funds over the past decade.

He said he expected that the fund would continue to use external fund managers for “a long period of time”.

“This (the merger) gives us the increased scale to really drive down the cost of using managers,” he said, adding he thought the jury was still out on the merits of internalising fund management.

“There needs to be a longer time frame than 10 years to see whether internationalisation works.”

Longer-term thinking

Reilly said the fund’s younger membership cohort, with 70 per cent of its members under the age of 50, also gave it the capacity to make long-term investment decisions.

“It means that we have long periods to retirement, the money is locked up for long periods of time, which allows you to be able to invest for the long term,” he said.

He added the combination of a younger demographic of members with the annual cash inflow of A$14 billion would allow it to make long term investments in infrastructure and other privately owned assets and that the merger would also allow the fund to take advantage of economies of scale.

Sunsuper told its members in January that they would see the account administration fees on their accumulation accounts reduced from $1.50 a week to $1.20 a week once the merger took place.

Reilly said the new Australian Retirement Trust intended to take its role as a “new pillar of capital in the Australian market very seriously”.

“Whether that’s engaging with companies, whether it is in the provision of capital when listed companies are raising money or whether it is in the unlisted space,” he said.

“We take that responsibility very seriously.”

New name “logical and literal”

Reilly defended the prosaic nature of the combined fund’s new name, Australian Retirement Trust, which also has similarities with AustralianSuper. He said the board wanted to adopt a new name which was logical and literal.

He said the three words “Australian”, “Retirement” and “Trust” were all important statements about the combined organisation.

He said the fund was about retirement. “The word ‘trust’ was also a really important word for us to use,” he said.

“Coming out of the Royal Commission (into misconduct in the banking and finance sector), trust is a really important attribute. We want to put it upfront in our name.”

The combined fund now has 162,000 employer clients, with plans to take over the management of the Australia Post super fund this year, and has tenders outstanding for management of corporate funds worth a total of some $5 billion.

Reilly said there were “a couple of discussions” underway about possible mergers but the primary focus on both funds had been the successful completion of the merger.

 

Value add investing has evolved through many different business cycles over the last two decades. While buying low, ‘fixing’, and selling high has remained the broad strategy, each period of market dislocation has brought new layers of complexity – and with it, reward, for those with the tools to unlock real estate value. In today’s market, the spectrum of potential opportunities is widening, with new sectors moving into the scope of institutions. But not everything is cheap. What could this mean for higher-return-seeking investors in the post-pandemic era?

Read more

Important information

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within. This guide reflects M&G’s present opinions reflecting current market conditions. They are subject to change without notice and involve a number of assumptions which may not prove valid. The distribution of this guide does not constitute an offer of, or solicitation for, a purchase or sale of any investment product or class of investment products, or to provide discretionary investment management services. These materials are not, and under no circumstances are to be construed as, an advertisement or a public offering of any securities or a solicitation of any offer to buy securities. It has been written for informational and educational purposes only and should not be considered as investment advice, a forecast or guarantee of future results, or as a recommendation of any security, strategy or investment product. Reference in this document to individual companies is included solely for the purpose of illustration and should not be construed as a recommendation to buy or sell the same. Information is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While M&G Investments believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. All forms of investments carry risks. Such investments may not be suitable for everyone. United States: M&G Investment Management Limited is registered as an investment adviser with the Securities and Exchange Commission of the United States of America under US laws, which differ from UK and FCA laws. Canada: upon receipt of these materials, each Canadian recipient will be deemed to have represented to M&G Investment Management Limited, that the investor is a ‘permitted client’ as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Australia: M&G Investment Management Limited (MAGIM) and M&G Alternatives Investment Management Limited (MAGAIM) have received notification from the Australian Securities & Investments Commission that they can rely on the ASIC Class Order [CO 03/1099] exemption and are therefore permitted to market their investment strategies (including the offering and provision of discretionary investment management services) to wholesale clients in Australia without the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth). MAGIM and MAGAIM are authorised and regulated by the Financial Conduct Authority under laws of the United Kingdom, which differ from Australian laws. Singapore: For Institutional Investors and Accredited Investors only. In Singapore, this financial promotion is issued by M&G Real Estate Asia Pte. Ltd. (Co. Reg. No. 200610218G) and/or M&G Investments (Singapore) Pte. Ltd. (Co. Reg. No. 201131425R), both regulated by the Monetary Authority of Singapore. Hong Kong: For Professional Investors only. In Hong Kong, this financial promotion is issued by M&G Investments (Hong Kong) Limited. Office: Unit 1002, LHT Tower, 31 Queen’s Road Central, Hong Kong. South Korea: For Qualified Professional Investors. China: on a cross-border basis only. Japan: M&G Investments Japan Co., Ltd., Investment Management Business Operator, Investment Advisory and Agency Business Operator, Type II Financial Instruments Business Operator, Director-General of the Kanto Local Finance Bureau (Kinsho) No. 2942, Membership to Associations: Japan Investment Advisers Association, Type II Financial Instruments Firms Association. This document is provided to you for the purpose of providing information with respect to investment management by Company’s offshore group affiliates and neither provided for the purpose of solicitation of any securities nor intended for such solicitation of any securities. Pursuant to such the registrations above, the Company may: (1) provide agency and intermediary services for clients to enter into a discretionary investment management agreement or investment advisory agreement with any of the Offshore Group Affiliates; (2) directly enter into a discretionary investment management agreement with clients; or (3) solicit clients for investment into offshore collective investment scheme(s) managed by the Offshore Group Affiliate. Please refer to materials separately provided to you for specific risks and any fees relating to the discretionary investment management agreement and the investment into the offshore collective investment scheme(s). The Company will not charge any fees to clients with respect to ‘(1) and ‘(3) above. M&G Investments is a direct subsidiary of M&G plc, a company incorporated in the United Kingdom. M&G plc and its affiliated companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential Plc, an international group incorporated in the United Kingdom. This financial promotion is issued by M&G International Investments S.A. in the EU and M&G Investment Management Limited elsewhere (unless otherwise stated). The registered office of M&G International Investments S.A. is 16, boulevard Royal, L-2449, Luxembourg. M&G Investment Management Limited is registered in England and Wales under number 936683, registered office 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. M&G Real Estate Limited is registered in England and Wales under number 3852763 and is not authorised or regulated by the Financial Conduct Authority. M&G Real Estate Limited forms part of the M&G Group of companies.

Back in 2001, Sweden’s four buffer funds had combined assets under management of SEK 546 billion ($57 billion). Today, the combined assets of AP1, AP2, AP3 and AP4 have grown to SEK1,937 billion ($203 billion) in a year that also saw the four funds active, low-cost approach focused on ESG integration reap the best returns in their history. The average return of the four funds came in at 19.3 per cent after expenses, (compared to an average of 10.5 and 10.7 per cent on a five and 10-year basis respectively) well above the income index returns.

Active strategy

At AP1, where returns just topped the pack at 20.8 per cent, strategy focuses on robust, active decision-making and a bold risk mandate. All Swedish equities and most of the fund’s exposure to Europe and the US is managed internally although emerging market equities are managed in collaboration with selected external managers.

“Our strategy was to allocate capital actively and act quickly to achieve desired exposures for the fund as market sentiment changed,” said chief executive Kristin Magnusson Bernard. “Formulating strong views, daring to act on them and constantly challenging them have been critical success factors for us during the last year, and will remain so going forward.”

At AP4, which returned 19.2 per cent, active management was also a key tenet of success. It contributed 3.5 percentage points to the return corresponding to SEK15.2 billion ($1.6 billion) in 2021. The fund also has around 17 per cent of its portfolio in alternatives where integrating sustainability is a key theme.

AP3 also bagged its best ever annual results of 20.7 per cent, delivering an average annual return of 11.1 per cent over the last 10 years bolstered by the fund’s large exposure to listed Swedish equities with renowned sustainability credentials.

At SEK 441 billion ($46.3 billion) AP2, returns of 16.3 per cent were led in the main by private equity which returned 66.1 per cent, said chief executive Eva Halvarsson.

Low Costs

Low costs linked to sophisticated internal management define strategy across all four funds.

At AP1 the total expense ratio came in at 0.07 per cent. At AP2 the fund reduced the asset management costs to historically low levels of 0.11 per cent while at AP3 the asset management cost ratio was 0.08 per cent. At AP4 2021 costs were also 0.08 per cent of assets under management.

This amounts to “less than half that for corresponding pension funds internationally,” according to Niklas Ekvall chief executive at AP4.

ESG

ESG integration is a key tenet across all the funds. At AP2, global equity and credit portfolios have been managed in accordance with the EU Paris-Aligned Benchmark (PAB) since 2020. It means the fund no longer invests in around 250 companies because they receive revenue from coal, oil or gas. The total carbon emissions of AP2’s equity portfolio continues to drop, declining 20 per cent in 2021 compared with the previous year mainly due to changes in holdings but also companies cutting their emissions.

Elsewhere, AP4 has cut the carbon footprint of its investments in listed equities by 60 per cent since 2010. AP4 has also set a target to have net-zero emissions by 2040 and is increasing its allocation to investments that contribute to the sustainability transition.  During 2021, AP4 made such new thematic sustainability investments of SEK 13.7 ($1.4 billion).

ESG integration is shaped by the Council on Ethics which continued advocacy at around 90 companies, focusing dialogue around  human rights, corporate governance and climate. As sustainability is increasingly being integrated into the funds’ management strategies and objectives the Council on Ethics plans to review its mission and strategy ahead.

Looking ahead

All buffer fund CEOs warned of a more difficult investment climate ahead.

“If 2021 was the year of recovery, we are now heading towards reductions in monetary and fiscal stimuluses around the world,” said AP1’s Magnusson Bernard. “The economic cycle is maturing quickly, and central banks have started to unwind their asset purchases in various ways ahead of future interest rate increases. When, and if so by how much, inflation falls back will affect both how decision-makers react and risk appetite in financial markets. Geopolitical tensions and energy dependencies are likely to continue influencing markets.”

AP4’s Ekvall warned of widely varying economic outcomes ahead.

“The tug-of-war between various scenarios will likely at times lead to nervosity and market turbulence. In general, in the coming years we cannot expect to see the same, favourable investment environment and very favourable returns on financial assets that we have experienced during the past 10 years.”

 

As the number of SWF’s announcing their decision to divest from Russia in response to the invasion of Ukraine grows, SWFs in the Middle East with the largest allocations to Russia are notable for their silence. Australia’s A$204 billion ($147 billion) Future Fund is the latest sovereign investor to announce its decision to divest its Russian holdings  following Norges Bank Investment Management’s decision to sell $3 billion worth of Russian investments held in its giant $1.3 trillion portfolio earlier this week.

“Many sovereign funds have been speaking out against Russia and are divesting Russian assets, but we haven’t heard a peep from funds in the Middle East,” says Scott Kalb, chief executive of KLTI Advisor and the former chief investment officer and deputy CEO of Korea’s $195 billion SWF, the Korea Investment Corporation (KIC).

GlobalSWF, a data platform which tracks the world’s largest SWFs, estimates that foreign sovereign funds hold less than $50 billion in Russian investments, representing a mere 0.13 per cent of their total capital. But of this cohort, Gulf funds are the biggest and most influential investors.

Saudi Arabia’s PIF is the largest SWF investor in Russia with an estimated $10 billion exposure. Mubadala, which first invested in Russia in 2010 and has an investment team on the ground in the country, has a program spanning 45 investments worth $6 billion. Elsewhere, GlobalSWF data reveals Qatar’s QIA has $9 billion worth of assets in Russia with stakes in St Petersburg’s airport and energy giant Rosneft, among others.

Partnerships with russia’s swf

One important seam of sovereign investment in Russia comes via partnerships with Russia’s own sovereign fund, Russia Direct Investment Fund (RDIF) tasked with attracting foreign capital into the country in a portfolio targeting domestic businesses, property and infrastructure.

Its unique model attracts sovereign investors to set the price and conditions for investment projects in Russia and then invest side-by-side with RDIF, explains Kalb who counts around 15 RDIF partnerships, most with Gulf sovereign funds, including KIA, Mubadala, Saudi’s PIF, QIA and Bahrain’s Mumtalakat, but also China Investment Corporation (CIC), CDG in France, and CDP in Italy.

All of these investments face decimated returns ahead on a cocktail of high interest rates, currency depreciation and hyper inflation, he predicts.

“It is a disaster in Russia.”

Losses

Away from these partnerships, SWF losses in Russia are unlikely to make much of a dent in their giant portfolios – mostly because they are small. Like NBIM’s 0.2 per cent allocation to Russia or Future Fund’s $200 million of divestment.

“Russia is not a big market,” explains one sovereign fund expert. “SWFs tend not to invest much in emerging market fixed income especially. Advanced economies sweep up the bulk of SWF fixed income allocations.”

Still, selling in today’s climate won’t be easy. With no buyers in sight the only demand for SWF government bond allocations or stakes in major conglomerates like Gazprom, Rosneft or Sherbank will come from domestic, Russian investors.

“Sellers will lose a lot of value and end up giving these assets away to domestic buyers,” predicts the sovereign fund expert, echoing earlier comments from Nicolai Tangen, NBIM’s chief executive and a former hedge fund manager who flagged the danger of selling stocks now because Russian oligarchs can buy them on the cheap.

All investors involved in quick fire sales of Russian assets will also struggle to repatriate funds since Russia has been knocked out of SWIFT. It could lead to funds opting to freeze assets until they can work out a favourable exit, says Diego Lopez, founder and managing director of GlobalSWF.

Others, particularly the Gulf funds, used to volatility in Russia and less concerned about write offs may hold on, predicts Kalb.

“In my view, a bigger problem for these funds stemming from sanctions will be that they can’t reinvest or average down at low prices.”

impact on China

However Kalb predicts a more challenging environment for Chinese investors. GlobalSWF puts CIC’s current Russian exposure at around $1.4 billion, but data shows that Chinese funds, including CIC, sold stakes in assets like the Moscow Stock Exchange, fertilizer producer Uralkali and gold miner Polyus Gold in 2016 “at a significant discount” because of Russia’s deteriorating economic situation.

It’s a sign of things to come, predicts Kalb.

“In my experience, the Chinese do not like volatility and are not patient investors.  I think losses incurred by China on Russian investments could put pressure on China’s support for Russia,” he says.

SWFs and pension funds will also suffer losses from valuable assets in Ukraine. For example, Japan’s GPIF holds an estimated $179 million in Ukrainian government bonds and Mubadala has a myriad of investments in Ukrainian public and private entities.  Russia and Ukraine are major producers of grains, together accounting for a third of the world’s wheat exports, a fifth of its corn trade and almost 80 per cent of sunflower oil production, according to the US Department of Agriculture.

Meanwhile pension funds across the world are looking at freezing, and potentially divesting their holdings in Russian assets. Across the United States legislators are introducing bills to force state pension funds to divest any Russian assets, including those in California, New York and Pennsylvania.

There is no engagement strategy with Russia, only divestment will prevail.

Pensioenfonds Metaal & Techniek (PMT), the $112 billion Dutch fund for metal and technical workers, has integrated ESG via bespoke equity and bond indexes across all its developed and emerging market liquid allocations. The strategy, which began gradually in 2018, now applies to its €35.9 billion equity allocation and €21.5 billion bond allocation, comprising high yield (€6.6 billion) and IG Credits (€14.9 billion)

Now, in the most recent evolution of the strategy, the pension fund has introduced two additional screens barring ESG laggards from the indexes and raising the threshold to entry. Companies that score poorly (in the lowest 20 per cent) in MSCI’s low carbon transition score are removed, as are all non-metallurgical coal producers.

The latest development of the strategy is enshrined in PMT’s new climate strategy which outlines how the fund will tighten its net zero commitments for companies in the portfolio, and expand its climate engagement program, in an approach shaped by consultation with its beneficiaries, the sectors they work in, and wider society.

It has also been spurred on by sister fund ABP’s decision to sell its entire €15 billion-worth of holdings in fossil fuel companies last year.

“We thought we should also step up and do more,” says PMT’s chief investment officer Hartwig Liersch, who sees the growth in ESG investment at the fund as the most significant and thrilling evolution of his five-year tenure . “Ten years ago, investment was all about the trade-off between risk and return. Now it’s about how you want to achieve that return in a much more data driven approach.”

Data: the biggest challenge

The biggest challenge to the strategy is data. Not only access to data, but deciding which data providers best fit the strategy, how many data providers to use (PMT uses one – MSCI ESG) or whether to use PMT’s own data.

“At the moment we buy in all the data, but we are exploring how efficient it would be to use our own data and if this is something we could or couldn’t do.”

Another key challenge is devising the right boundaries around companies entering and falling out of the index. Companies can always get back into the index if their score improves when the universe is annually re-set.

The challenge around data accuracy and quality is amplified in emerging markets. It’s one of the reasons why PMT has also introduced a country framework that screens out countries according to factors like human rights and corruption. It means many SOEs (classified as where a government has more than 10 per cent of the voting rights) fall out of the emerging market equity and bond indexes, he explains.

“If we exclude a country, we also exclude the SOEs of that country.”

Diversification

The approach has roughly halved the number of companies in PMT’s indexes compared to a the MSCI World Index.

“We’ve dropped a lot of names,” he says. Still, given the size of a traditional passive universe he insists PMT still has well above a thousand companies in which to invest ensuring the diversification benefits of passive aren’t harmed.

“We have excluded companies with a higher risk profile. The risk of the whole portfolio is actually lower and the returns we make are comparable to the general index.” PMT has a long-term excess return target of 1.5 per cent a year above the change in the value of its liabilities.

The strategy is accompanied by annual back testing as new sectors and layers are applied.

“This is our fifth year of back-testing. The longer we do it for the easier it is to learn from back-testing,” he says.

Costs

Liersch says the strategy retains the low-cost benefits of passive.

“The key difference is the cost of buying in the data but we buy in data for the whole fund on a centralised basis which reduces the cost bulge. We do have the cost of the research work, but we think it’s worth it because we want to see this in our portfolio.”

The strategy also comes with more transaction costs as companies adjust to the new index.

“There are more transactions as you adjust to the benchmark,” she says. “But the actual fee is the same as passive and very low.”

The strategy has been built in partnership with MN, PMT’s fiduciary manager and strategic partner alongside MN’s other client fund PME, also developing the strategy.

“We discuss all these topics as a three,” he says. MN also back tests the strategy and runs analysis with other asset managers and members of its network in another element that marks the strategy apart from a traditional passive allocation.

“Our mandate is to work together and keep on learning; there is an added component to work together on our research.”

Engagement

PMT’s strategy doesn’t just stop with screening. The pension fund actively engages with companies via MN in a new, beefed-up strategy. In the past, PMT’s climate engagement was risk-based targeting the top ten carbon emitters. Now engagement targets the companies it seeks to change of which oil and gas companies and utilities that remain in the portfolio after the screening process make up the majority.

“All together there are 50 companies in the program,” he says.

In the first year, engagement focuses on companies net zero ambitions and utilities’ plans to phase out coal. A second year of engagement will involve ensuring companies meet set reduction targets based on Climate Action 100 + and IIGCC.

“We use these standards because it means we are working with other investors. If you do it yourself, it is not nearly as efficient. It’s difficult achieving something on your own.”

In contrast to other investors dialling down engagement, he reiterates the importance of persuading companies to put in place climate strategies.

“Companies have to accept the consequences that if we don’t see changes we will divest,” he concludes.