Michelle Ostermann, managing director of investments at the £30 billion Railpen discusses the pension fund’s continued evolution including ongoing organisational change, more assets in-house, a new investment decision making framework, and an increased allocation to private assets.

Michelle Ostermann had only been in the role of managing director of investments at Railpen a few months when the COVID-19 economic crisis hit.

“So it was a real trial under fire,” she says. “But looking back now I realise it was a strong opportunity to understand the portfolio and its fortitude to withstand events like this and watch the team in action. So I look back and see it as a relatively positive experience.”

It’s testament to Ostermann’s mind-set that she can view such an extraordinary event – potentially testing the portfolio in real time more than any potential theoretical scenario – as a learning opportunity, as well as the subsequent debrief of the portfolio, the decision making and how the team handled the situation.

Railpen, which manages £30 billion ($39 billion) for the Railways Pension Schemes in the UK, has been under a journey of organisational change for some years now. Ostermann was originally hired in January 2019 as chief fiduciary officer, a role she sees really sets the pension fund apart from the pack, at least in the UK.

The fiduciary management role shapes the pension fund’s top-down decisions including asset liability management and actuarial work, asset allocation and risk tolerance as well as ESG considerations and client and stakeholder management. The CIO’s investment team then executes the bottom up implementation through the management of the pooled funds.

“This combination of fiduciary and investment teams is what differentiates us,” Ostermann says.

“Railpen is strong in its approach to how it manages such a large number of distinct complex client schemes and that is the cornerstone of what makes us most unique and is given a tonne of priority. The concert and hand-off between the two teams [fiduciary and investment] is really important, and together it makes for a fairly sophisticated investment management approach.”

Mads Gosvig, formerly head of investment strategy at ATP in Denmark, has been appointed to the chief fiduciary officer position when Ostermann moved into the MD role in December after the retirement of Julian Cripps.

“Pensions in the UK are becoming more challenging. As more schemes are closing, and more risk management is required, we will need that fiduciary team even more,” Ostermann says.

From an internal organisational point of view, there’s been a lot of change at Railpen in the last little while. In addition to Gosvig’s appointment, in the past year there has been a new trustee board chair, a new investment board chair, a new head of strategy and planning as well as the boosting of some of the internal teams such as the real assets team with new hires.

A focus on culture and building the team has been a key effort of Ostermann’s since she has been in the new role.

“Nothing matters more to me than culture,” Ostermann says. “What attracts me to a business is the culture and the purpose that underlies why we investment. Most people in our organisation are attracted to that, it’s an extra special motivation and pride in what we do.”

Diversity and inclusion has also been front and centre for Ostermann as she’s put the management team together, which now consists of four women and four men.

“The majority of my role as a leader is shaping those intangible aspects of a business, and trying to patiently and firmly encourage and create those dialogues, and give permission for the business to go through difficult conversations and opportunities to look, work and act differently,” she says.

“You can often see that dynamic inside of the team, and it’s a really enjoyable experience, they have enormous respect for one another.”

Soon after the onset of COVID-19, Ostermann said the investment board was convened quickly to discuss the impact on the portfolio and what the future looks like.

At a strategy day called “Post-COVID: So what?” the team looked at the risks and opportunities, emerging investment trends and themes, and how those should or could be implemented through changes to pooled fund strategies or allocation shifts.

“Looking at a single asset and a single deal is always fun. But as a big investor with long-term patient capital we make or break on those long-term strategic positions. We put a lot of emphasis on things like that,” Ostermann says. “The central theme was to think carefully about inflation.”

In addition to the inflation/deflation/reflation debate, the team looked at the impact of long-term trends on the portfolio such as the resilience of companies, the emphasis on localism rather than globalism, remote working and the impact on real estate, the impact of the leisure and travel industry disruption, as well as regulatory risk and potential subsidies.

“Our CIO Richard Williams has really been the star of the show leading us through this event,” she says. “We have an exceptionally strong investment team and I feel very confident about the positioning they are doing to take us into the next decade.”

During the volatility of March and April Railpen did not make any stark or extreme changes to the portfolio.

“We were very careful not to over-react to the short-term volatility, and we didn’t make any material changes to the portfolio. It was more us thinking about where we find opportunities and what we might de-emphasis, or look to divest from,” she says.

One example of that is in the real estate portfolio where a shift out of retail continues. The team has also been looking more seriously at distressed debt, may increase its infrastructure commitments, and has been looking to increase its allocation to fundamental equities.

“We believe there will be an increased opportunity to identify potential winners/losers given the environment so we will be increasing our allocation to internal fundamental equities,” she says.

Ostermann joined Railpen from British Columbia Investment Management Corporation where she was senior vice president responsible for investment risk, strategy, research and corporate relations. She’s bringing a number of the positive attributes of the pension funds from her native Canada to the UK including an attention on governance, private assets and inhouse management.

“Railpen’s vision is to have more of those characteristics, and I will leverage what I do know and make it homegrown, apply what is relevant and put a UK spin on it,” she says.

Most recently the fund has been working closely on governance aspects including some new thinking on risk management, and the board recently approved a new framework for investment decision making.

“We are starting to rethink governance as a whole. Given our recent transformation and the massive shift in how we manage assets, we’re looking at what that means for our governance and what we need to modernise.”

Railpen manages pensions on behalf of 107 different clients and Ostermann says the Canadian’s multi-client model – seen in BCI but also funds like AIMCo, CDPQ and IMCO – is what Railpen does just as well.

“We have quarterly pension committee meetings for a quarter of those clients, so we have had to build much of a front-office function for a traditional asset manager. Through our fiduciary team we bring that multi-client perspective and stakeholder knowledge into the investment business.”

To listen to the full interview and other podcasts in the Fiduciary Investors Series, click here.

In what promises to be a next phase in active management Robeco is working with clients to shape new portfolios where engagement drives returns.

Robeco, the Rotterdam-based asset manager, is in the process of designing a new group of portfolios structured so the manager engages with every company sitting in the portfolio. Up until now, Robeco’s active ownership in its sustainability portfolios typically involves around half the corporates coming under engagement, explained Peter van der Werf, engagement specialist at the asset manager in an interview with Top1000funds.com.

All companies in the new so-called engagement portfolios will be selected by Robeco’s portfolio managers and target sustainable milestones and returns aided and abetted by the engagement process. It promises to bring a new value to engagement that puts it at the heart of the firm’s ownership, explains van der Werf who heads up a department grounded in 15 years of engagement experience where the manager votes at around 5,000 shareholder meetings a year.

“The sustainable returns you can generate from achieving engagement milestones are an intrinsic part of the value proposition we have for our clients,” he says. “We see the future of active investment in this perspective.”

Social issues

Robeco also plans to increase engagement on social issues, particularly around human capital management. Already an enduring focus, it saw the firm take on the meat packing industry after COVID-19 exposed poor labour rights when clusters of the disease sprung in the US and Europe earlier this year. Now social issues will increasingly feature in Agenda 2021, the firm’s next set of engagement topics for the next three years, drawn from a wide consultation and research program.

“Labour standards are very important for Agenda 2021. We are now looking at human capital management across various sectors in response to COVID-19,” he said.

So far, engaging with the meat packers has met with a mixed response. While some companies have been open and willing to talk, others have proved more reluctant to engage.

“Those conversations have not been easy,” said van der Werf, listing tactics like companies declining any meaningful conversation with stakeholders but placing CIO letters espousing progress in national newspapers. The process has revealed stark differences in corporate cultures and leadership styles, he says.

The way forward

When progress is slow, it is important to remember successful engagement never belongs to a single voice – 40 per cent of Robeco’s engagement is via collaborative groups. Moreover, he urges companies avoiding engagement to remember that investors are aligned with shareholder value creation. Robeco’s focus is on profitability of the company in a way that should give comfort to change.

“We are different from NGO’s, government agencies and others,” he says.

The belief that engagement is a supporting hand rather than a source of conflict characterises Robeco’s strongest relationships and drives a process that evolves from an initial request for a meeting with investor relations, to identifying issues and companies responding to the asset manager’s key questions.

The best and most developed relationships involve the manager having multiple touchpoints with the company across issues spanning labour standards, biodiversity or plastic use so that Robeco’s views and opinions land on different desks across the company.

The asset manager’s approach is also characterised by sustainable and financial conversations blending into one so that portfolio managers increasingly ask the company sustainability questions, and the sustainability team ask the company financial questions in a feedback loop.

The most mature relationships also see companies actively seek out the manager for feedback before the launch of a sustainability strategy or materiality assessment, he says. That said, of course, other relationships are more trying. Polite conversations offering up information Robeco could just as easily find in the sustainability report or pushback on tricky questions that could improve sustainability are still common place.

But sucess via both a financial and sustainable return always makes it worthwhile.

“When we see three quarters of the points we’ve made have been incorporated by the company, that’s where we find success,” he concludes.

This interview was part of a podcast series, Sustainability in a time of crisis, to listen to more episodes click here.

Benchmarking income inequality would advance the inclusion of social issues in investment decisions the same way carbon footprinting has for environmental issues, according to global human rights leader, Kerry Kennedy.

The investment industry plays a crucial role in helping to solve issues of inequality in the United States and across the globe and has a number of a number of levers it can pull according to Kennedy who is head of Robert F Kennedy Human Rights.

“This is a $70 trillion industry where less than 2 per cent is invested by women and minority-owned firms,” she said. “Until we fix the inequality in who makes the decisions about where the investments go then we won’t fix the problems.”

Kennedy said investors should be demanding more from their portfolio companies in a time where three quarters of the largest 100 “economies” in the world are corporations not governments.

“If you are interested in human rights as investors you have to be talking to those companies and focus on the S in ESG,” she said. “The problem with corporations having that amount of power is they don’t have the checks and balances that governments do. That’s the challenge. We need to have more say and control and there needs to be responsibility by corporations.”

She pointed to one example of action, that taken by the chair of RFK Human Rights, Robert Smith who is the chief executive of private equity firm Vista Equity Partners and the first African-American to sign the Giving Pledge.

Smith has called on large corporations to use 2 per cent of their annual net income for the next decade to empower minorities.

Speaking in a Redefining Leadership Series interview, Kennedy said investors can demand more from the corporations they invest in, including advocating for a certain number of women and people of colour on their boards and in their C-suite.

“There needs to be a serious rethinking of the financial services industry, we have to do that. The E in ESG was incredibly successful because we put a number on it, and that was your carbon footprint. We didn’t do that with the S, but we need a number we can all agree on for the S and I think that is income inequality. That is a precise number that can be calculated and would focus and force everyone to think about it in all our financial decisions.”

RFK Human Rights has worked with investors to develop steps they can take to fight economic and racial injustice, developing a four step plan for action.

This includes screening for companies that have business models, products and practices that support a racist economic and legal system; build a workplace that honours dignity and is racially inclusive; and support policy and campaigns for positive change.

“There is a lot investors can do,” Kennedy said, urging investors to engage with companies on social issues.

Earlier this year RFK Human Rights and Willis Towers Watson conducted research into workplace dignity, and its link to business performance.

“Look at workplace dignity – how do you treat people in the workplace, are they listened to and treated with respect? Can they come to work as they are, who they are? Is the work they do valued, can they take pride in their work, do they know they have a future in that job, can they retire with dignity?” she said.

Kennedy urged investors to also look at the composition of their own boards and to set targets for change.

““There are many things that companies and investors can do to create change. If you’re an investor say you need to put five black people on your boards in three years. Or you can remove yourself from companies that sell facial recognition software to police as its used to target people.”

Kennedy engaged in a long conversation about leadership, looking both at the legacy of her father and uncle, and also to the future.

“Leadership is a question of vision – not age or youth – and the capacity to lead. I’m in a country now that is so divided and so angry, there’s nobody better than Joe Biden to be leader under those circumstances. He’s got a soul full of love that guy and he can’t help but express it,” she said.

When asked what the leader of the future needs to look like in order to confront the economic, social issues of the future, she said: “They should look like women.”

“Leaders need a sense of compassion, and having in mind that the people closest to the problem are closest to the solution. Leaders need to really listen to the people in need and what they need.”

Being a signatory to the Business Roundtable’s statement of the purpose of a corporation did not bear fruit when it came to a company’s responsiveness to COVID-19 pandemic and inequality issues, a groundbreaking new initiative has revealed.

The Test of Corporate Purpose – founded by by Mark Tulay and co-chaired by Bob Eccles, Hiro Mizuno and Sacha Sadan – assesses how companies respond in a time of severe global crisis, and test if they truly “walk the talk” in delivering to their stated corporate purpose.

Using research from Truvalue Labs, more than 800 publicly traded companies were assessed on their performance, providing the first comprehensive review of how companies are stacking up against each other in this crisis environment.

The TCP Report analysed S&P500 constituents, 300 FTSEurofirst companies and the Business Roundtable signatories on their performance in relation to the COVID-19 pandemic and inequality crises, looking at three tests:

The commitment to purpose test: Is there any relationship between being a company with aspirations to be purpose-driven and how a company performs when put to the test during times of crisis?
The historical performance test: What is the relationship between proactive company strategies to address issues before a crisis and their performance during a crisis?
The speed of response test: Does it matter how quickly a company responds to a crisis?

According to the results, when taking into account a firm’s historical performance and the timeliness of its response, the Business Roundtable statement on corporate purpose shows a small negative impact on the quality of a firm’s response to COVID-19. However it had a small positive impact on a company’s response to inequality issues.

“As events continue to unfold, it is crucial to analyse the responses and actions of publicly traded companies and to evaluate the degree to which these demonstrate a meaningful transition toward the promised stakeholder primacy model,” Mark Tulay, founder and CEO of TCP, said.

It has been a year since the CEOs of 181 major companies committed to deliver value to all stakeholders by signing the Business Roundtable statement on corporate purpose. This was touted as marking a shift in how companies operate, but as Lucian Bebchek, James Barr Ames Professor of Law, Economics and Finance at Harvard Law School points out this was largely a public-relations move.

Senator Elizabeth Warren similarly recently lambasted Jamie Dimon, CEO of JP Morgan and Doug McMillon, CEO of Walmart, and the former and current board chairs of the Business Roundtable, criticising them and other BRT member CEOs for their failure to honour commitments from BRT’s 2019 Statement on the Purpose of a Corporation.

She urged the BRT to fully commit to the principles and publicly report on their progress, pointing out that they have not “operationalised their commitment to workers and communities” but have been lobbying for their own narrow, short term interests.

“Rebuilding our economy so that workers, customers, and communities are able to share in prosperity requires real change in the way decisions are made in corporate headquarters and on Wall Street, not just the vague, empty-worded press releases that you have issued thus far,” Warren said.

Bob Eccles, who is Visiting Professor of Management Practice at the Said Business School at the University of Oxford, suggests that a good place for the BRT companies, and all companies, to start is for the board to publish a “statement of purpose” and that each year the company publish an integrated report. Eccles is considered the global leader on integrated reporting. He was the founding chair of SASB and one of the founders of the International Integrated Reporting Council.

“When the board holds itself accountable for the purpose of the corporation, empty words become real commitment words,” he said.

The TCP – which could be seen as a major first step in holding companies accountable on their corporate purpose – was launched to examine the best practices of corporations in managing the fallout from the pandemic, inequality and social unrest. It also set out to look at which companies are performing best in regard to employee, community, environmental and consumer interests, and importantly why. It also looks at what a company’s performance in the time of the pandemic, and rising concerns about racial and income inequality, indicates about the seriousness and durability of its commitment to stakeholder interest and corporate purpose.

The results found that in every scenario, companies that have been consistently top performers on inequality related issues between January 2015 and February 2020 show a significantly better performance on inequality during the crisis.

One of the most important, upcoming challenges at CalSTRS is how the fund should evaluate Chinese investments from a human capital and environmental standpoint, said Chris Ailman, chief investment officer at the giant pension fund.

Speaking at Sustainability Digital he noted how ESG integration has evolved from divestment and screening to these kinds of new criteria. Now strategies have shifted away from traditional benchmarks to enhanced indexes and issues around human capital management, he said.

In another nod to asset owners’ need to adapt, Ailman noted how some assets currently in the portfolio may not transition to the “new economy” with consequences for internal teams.

He expressed his admiration for models whereby asset owners collaborate to form their own asset manager like Australia’s infrastructure investor IFM Investors. In a call for more syndications and networks, he said teaming together to bid on investment opportunities meant asset owners would be able to cut out costs. “Wall Street is too expensive,” he said.

Ailman noted that although sustainability is a core part of CalSTRS’ culture, there are many “laggards” both at home in the US and in other parts of the world.

He said America’s November election is revealing divisions in the US and only “some kind of shock” would wake people up to the reality of climate change. “Personal examples wake people up,” he said.

He also espoused the need for more regulation to force change.

“I am pushing a price on carbon,” he said. Regulations will cause pension funds to adjust their portfolios. He said there was a need to take issues out of the hands of politicians and talk about risk. For example, real estate managers needed to “pay attention” to the impact of storms and climate change on their portfolios.

Ailman urged more US pension funds to move on sustainability, calling the current cohort of sustainable investors “too narrow” a group.

“It needs to be a broader discussion with all pension plans,” he said.

While Dutch and Canadian funds “get it,” he said other parts of the world are not thinking about it.

“I am worried about the future; it is harder to make money and do it in the right way that is sustainable.”

Fellow panellist Barbara Zvan, president and chief executive of Canada’s University Pension Plan noted a key evolution at the pension fund was an expanded stewardship role to “help transition to a low carbon economy.”

The pension fund has an ESG framework that includes measuring carbon and setting meaningful targets across the portfolio.

She said that the investment industry is moving on sustainability and noted the growing recognition of what asset owners can achieve both individually but also collectively.

Urging cooperation, she said no one group can solve today’s challenges and that when asset owners tackle issues from climate change to diversity together, they have a bigger impact. She also noted how the private sector was a great source of industry and market insight.

“Governments’ role is much more in terms of instigation,” she said.

For all the conference sessions, stories and white papers visit the Sustainability content hub here.

AO talk manager selection and data gap

Discussing how they integrate sustainability across their portfolios investors at New York State Common Fund, PKA, and TCorp, highlight the importance of manager selection and the challenge of the data gap.

Sustainable strategy at New York State Common Retirement Fund includes at $20 billion commitment to a range of investments linked to the SDGs, said Andrew Siwo, director of sustainable investments and climate solutions at the pension fund.

His focus falls on nine areas split between three SDGs, he told delegates at Sustainability Digital. He added that New York State has exited companies perceived as “climate intensive” and “value destructive,” and actively engages with fund managers and companies. Regarding manager selection, the pension fund focuses on “identifying managers that can help the portfolio in terms of the future,” he said.

Siwo also called for asset managers to identify their source of alpha/

“Gone are the days when they could hide behind their firm’s history or signatory status,” he said. He noted that sustainable investments have been largely untested by a decade-long bull run, but now as COVID-19 reveals a new investment landscape, it is possible to assess claims made versus claims achieved.

Turning the conversation to asset class integration, Siwo urged for more cooperation between ESG ratings providers. Noting that ESG data is often unverifiable, voluntary and unaudited, he said greater standardisation was essential, and contrasted ESG data to the better correlation in fixed income ratings.

“When you think about how often we mention standardization, I don’t know how much progress we’ve made,” he said. “The variability of ESG ratings is huge; if this was reduced it would be additive to the industry.”

Lucy Thomas, head of investment stewardship at Australia’s TCorp detailed a total portfolio approach where ESG is integrated across all parts of the pension fund’s investment process.

Thomas referenced how active ownership – characterised as the degree to which stewardship can impact portfolio outcomes and ensuring TCorp isn’t “a lazy landlord” – is an important seam to strategy.

For example, directly owning an infrastructure asset gives the pension fund more control over other assets like, for example, a minimum volatility hedge fund strategy focused on the very short-term.

“We believe in active ownership over the long-term,” she said, adding that viewing sustainability across the total portfolio meant TCorp didn’t see sustainability as just another asset class.

She said that TCorp looks at the ESG risk and opportunities specific to each investment.

“We assess whether we can mitigate ESG risk or gain exposure to the benefits,” she explained, citing a recent investment in a Canadian hydro power plant as an example of tapping into the opportunity. The fund evaluates the contribution an investment brings to the whole portfolio, spanning liquidity, diversification, conviction and stewardship.

Regarding manager selection, she said that TCorp requires alignment with fund managers, particularly around culture. This is the “big one,” she said referencing a “robust framework” for assessing partners. After selection, agreements and reporting standards, plus regular reviews, follow, she said.

She added that the next five years presents a “wonderful opportunity” for clarity around purpose for the investment industry and an opportunity to build trust. It is a chance to look at what ESG infers on the portfolio and understanding the materiality of ESG for financial returns. She also said a better understanding of how issues are inter-connected would unravel in the future.

Sustainable investments at Denmark’s PKA include a large wind portfolio built up since 2011, sustainable housing and an allocation to green bonds.

“We have met our targets and will increase them going forward,” said Dewi Dylander, deputy executive director, PKA and former head of department at the Danish Ministry of Climate.

Dylander said that PKA expects all its managers to adhere to the pension fund’s policies and guidelines around sustainable investment and holds regular meetings to “explain its point of view.”

She also hailed the importance of the EU’s new taxonomy to help create standardisation in ESG and prevent greenwashing. Looking to the future, she expects the social element of ESG to move high on the agenda.

“We are seeing the shift from the E to the S and G,” she said. In a traditional approach, she detailed how the pension fund excludes sectors like weapons and tobacco and engages with companies via asset manager Hermes. Strategy also includes actively speaking with other investors and NGOs, she concluded.

For all the conference sessions, stories and white papers visit the Sustainability content hub here.