Robeco has long believed in sustainable investing and in the 1990s was one of the first asset managers to take it seriously. From small beginnings, the integration of environmental, social and governance (ESG) factors in the investment process has grown exponentially over the past two decades. We embrace it wholly, integrating ESG criteria into the investment process for our entire range of fundamental equities, fixed income, quantitative and bespoke sustainability strategies. And it is not just us: over half of all asset managers in Europe now use sustainable investing in one form or another, according to the Global Sustainable Investment Alliance.

A fiduciary duty to make money for stakeholders now means that ignoring ESG is more likely to cost you performance than enhance it. It is our firm belief that integrating ESG will also lead to better-informed investment decisions and reduce the overall risk of a portfolio. Trends such as climate change, resource scarcity and greater regulation affect companies more than ever before, but they also provide opportunities for new markets in areas such as renewable energy or cybersecurity. So, it pays to be well informed about how sustainable investing works, and what it can do for clients.

For Robeco, this means more than just offering sustainable investment funds. Integrated sustainability also means using our position as a shareholder or bondholder to effect change at companies through active ownership, typically through voting and engagement. It also includes impact investing, where an investment is aimed at achieving a social purpose such as meeting one of the UN’s Sustainable Development Goals (SDGs) as well as earning a financial return. And it still means adopting key exclusions, such as refusing to buy shares in controversial weapons makers or tobacco producers. We think of these as building blocks to be configured appropriately to suit each asset class, strategy or client.

As the world moves on, sustainable investing now means combining both healthy returns and a positive effect on the world around us; to create wealth and well-being that meets the needs of the present generation without compromising those of generations to come.

In this handy guide, we share the knowledge and experience we have gained from decades of sustainable investing. After detailing the main approaches, we examine how sustainability techniques are applied across asset classes. And we highlight key questions to consider when you are assessing the ability of asset managers to deliver what is increasingly a mainstream style.

Click here to read the full paper. 

The new chief executive and president of the CFA Institute, Marg Franklin, completed her first 100 days in the job last week and already she’s made an impact. Amanda White spoke to her about the organisation’s influence in the decade ahead.

The challenges created by market disruption, a low return environment and a clearer focus on the purpose of capitalism are front and centre for the CFA Institute’s new CEO as she plans the strategy and assembles the team for the next decade.

Since taking on the role 105 days ago, Canadian Marg Franklin, has hired Allison Holmes as chief financial officer and Martin Colburn as chief information officer, cementing a team that will take the organisation into the turn of the decade.

“I’m thrilled so far, it’s been a very interesting 100 days for sure,” she says. “The world is changing, and there is lots going on and lots going on in our business. We have a great team and there are some very interesting opportunities for us.”

The CFA Institute, she adds, thinks deeply about the structural and cyclical challenges to the industry and has done an admirable job of providing thought leadership.

“Making sure the voice of integrity and trust is heard over a long period of time has been the raison d’etre for the CFA institute. Now there’s a lot of disruption that creates an interesting context for members and investors and the market at large.”

When looking to the challenges ahead, Franklin points out that the lower for longer interest rate environment is “not a trivial matter”.

“At the core, the context of what we can deliver to investors will be different than the past 30 years. on average ( delete?) We can see the real implications of that are starting to play out – pension plans are stretched by lower interest rates which increases liabilities and delivers low returns. What does that mean for their beneficiaries? Linking that in the ESG world, part of the “S” in ESG is to deliver financial security. We don’t have a playbook to address those structural and behavioural issues.”

The CFA will continue to deliver thought leadership and shape the elements of the market that are important to those structural and cyclical issues. In fact, Franklin believes the organisation is uniquely positioned to have a significant role because of its neutrality and lack of commercial interest in any particular outcome. In addition, it has a multi-constituent stakeholder group which allows it to see the market from multiple viewpoints.

Certification

The education standard is the cornerstone of the CFA Institute and how it serves its members is at the heart of organisation’s strategy.

“The thing about the charter program is that it is entirely democratic,” Franklin adds. “It doesn’t matter who you know or what experience you’ve had, if you have the discipline, knowledge, and ability to achieve that charter then you can get in. In that way it’s democratic and quite inclusive.” Her own experience was sitting the exams when she had a young baby and didn’t have the money to spend on an MBA program.

“The CFA was entrée to my success, and I could demonstrate commitment to ethics, integrity and the professional excellence standard,” she says.

On the other hand, it’s also exclusive because not everyone passes the exams, in fact only one in five candidates complete the charter.

There is an interesting conversation to be had about how the CFA certification evolves and whether that matches with the changing nature of the investment process, and the move from star individual portfolio managers to star teams.

“We can imagine a wold where understanding investments might be very important, but you may not require the charter. In the world I came from – the high net worth world –a tax adviser, an attorney and a financial adviser all worked together with clients, and each person was also able to converse in all the different areas. I can imagine a world where we expand out the CFA professional learning to be more applicable for those types of people,” she says.

Similarly, she says in a world of technology where AI and coders now play a meaningful role in the investment ecosystem, this group might want to have some level of understanding of investment principles.

“Where we have these types of situations – with subject matter experts that require some lateral skills- T shape skills – I think in that framework there could be more we could offer them.”

The CFA Institute has already begun to use computer based testing of the exams and has developed a staged process over the next three to four years to migrate to computer based testing across the different levels of the course.

Franklin believes “not doing it creates more risks than doing it” and it will increase accessibility and improve risk management.

“It’s not foreign for us to use technology and we have used computer technology and “AI” to make the exam more robust, for example to identify cheating. We have a staged process for the computer testing which will be across each year level, but start out in a phased process with level 1.”

Also within the last 100 days, the CFA Institute released the the AI Pioneers In Investment Management paper which outlines some case studies on the use of AI and big data technologies in investments.

“If you look at the headline around technology and the impact on our business, it comes off as a negative story, and that certain classes of jobs will be disrupted. Our view, which is demonstrated in these case studies, is that drilling down using big data and technology allows you to use a wider set of inputs and that can improve the decision making process, and ultimately create better decisions,” she says. “I think it is quite exciting. We have an obligation to do our very best for clients and while technology is causing disruption, forward-looking people could say this could be really neat and improve outcomes.”

Diversity

 Franklin has had a long association with the CFA Institute including acting as the chair of the Board of Governors in 2011. She is a past recipient of the CFA’s Alfred C. Morley Distinguished Service Award in 2014, a member of its Future of Finance Content Council and has been a board member of the CFA Society Toronto.

She is also a founding member of the CFA Institute Women in Investment Initiative and a passionate advocate for diversity.

“Diversity is a core tenet of our business – in portfolio diversification – it’s a real thing, it’s just never made it to team construction in our business,” she says. “We are very interested in the trajectory of change in five years since we started the Women in Investment initiative. There is now a level of intensity and intentionality about the strategies for diversity that are working. Our view is if we can crack the code for women then we could make the changes to attract a more diverse set of people, particularly millennials, to this industry and create a value proposition that is more holistic.”

CFA has released a guide, Driving Change: Diversity and Inclusion in Investment Management, which included 20 action plans for investors to use in a bid to increase diversity and inclusion. As part of that the CFA Institute will work with 30 asset owners and managers as “experimental partners”, implementing diversity and inclusion action plans in their businesses.

Over a two-year period, the partners will liaise with the CFA Institute in implementing diversity and inclusion action plans, with the aim of the process to be a guiding light for other investment firms to follow.

“We’re looking at the ideas, data, actions, and shared experiences to advance this. It’s not perfect but a pretty good system of addressing some of the major issues,” she says.

Trust

The issues around trust and integrity will always exist in the industry, Franklin says, and meeting those challenges will continue to be core for the CFA Institute.

“We are steadfast to meet those challenges.”

Franklin says it is clear that consolidation and compression is coming and the industry will become a barbell of very large asset managers and niche players. This, combined with a honed focus on the purpose of capitalism and investments in finance, will change who is attracted to the industry.

“This will help create a more solid industry where we attract the right players to our business,” she says. “We want more educated people who are paying a lot of attention to integrity and ethics. There is lots we can do throughout the eco system around that and we are making sure those affiliated with us are on top of their game.”

 

 

One of our defining characteristics, and main objectives, at Top1000funds.com, is to provide behind-the-scenes insight into the strategy and implementation of the world’s largest investors. An analysis of the most read stories of 2019 shows that’s where our readers’ interest lies. In 2019, readers were interested in learning from one another with regard to asset allocation, innovation on fees, new investment opportunities and organisational design.

This year, we have delivered more than 300 investor profiles and other analytical and research-driven pieces on the global institutional investment universe, and we now have readers at asset owners from 95 countries, with combined assets of $48 trillion.

We are also pleased to say that you, our readers, are spending more time on our site, as evidenced by our 10 most read stories, which averaged 5.2 minutes per article. Thank you to all our interview subjects, readers and supporters over the last year. Below is a look at the 10 most popular stories of 2019.

Is PE a superior form of ownership

Almost exactly 30 years ago, a famous article by Michael Jensen in the Harvard Business Review predicted that private equity would “eclipse” the public corporation because it was a superior form of corporate ownership. Academics at Oxford’s Said Business School examine whether this prediction has played out.

How to spot real ESG integration

There are many narratives from asset owners about generating value through strategies based on environmental, social and governance factors. Keith Ambachtsheer says looking at these value-creation stories through the lens of an integrated reporting framework can separate the genuine successes from the hype.

Metrics for long term performance

Academics Gordon Clark and Ashby Monk have created 11 metrics that focus on meaningful and useful predictors of long-term performance. It’s a boon for investors struggling with the problem of appropriate measures for investing for the long term, a horizon where traditional benchmarks don’t always fit.

Bridgewater and UTIMCO talk China

The $41 billion University of Texas Investment Management has been investing in China since 2007 and its CIO, Britt Harris says it “must be taken seriously”. Presenting at the endowment’s board meeting, co-CIO of Bridgewater, Bob Prince, agreed, saying “China is too big to avoid”.

Tough times greet new CalPERS CIO

Ben Meng isn’t easing into his role. The new CIO of CalPERS faces three new board members, a stressed private equity program and executive turnover, all under the pressure of a 70 per cent funded status and a maturing membership at the $340 billion fund.

Texas Teachers backs emerging managers

Texas Teachers has further evolved its emerging manager program, launching EM 3.0 which includes a further $3 billion allocation to emerging manager partners. Head of the division Kirk Sims explains.

CalPERS prepares for market dislocation

CalPERS’ CIO Ben Meng is preparing for a market dislocation by ensuring the $354 billion pension fund has enough dry powder on hand to take advantage of a drawdown. A liquidity management action plan is a top priority for the fund.

Texas Teachers revamps AA, adds leverage

The board of the $154 billion Teacher Retirement System of Texas has approved changes to its strategic asset allocation as a result of its latest five-year study, increasing its allocation to private markets, risk parity and introducing leverage.

Climate change risk to spur stress test

Mercer has quantified a ‘low-carbon transition’ premium in the sequel to its seminal climate change report, showing that a 2⁰C scenario equates to 11 basis points per annum to 2030 in a typical growth portfolio.

State Street chief predicts decade ahead

Low for ever, a risen China and climate change, are just some of the 10 changes set to sweep through the investment industry in the next 10 years, said Cyrus Taraporevala, president and chief executive of State Street Global Advisors, in his opening speech to 85 asset owners at the Fiduciary Investors Symposium at Harvard University.

 

 

Nearly half the assets under management in the UK are in pooled funds, and their stewardship is currently almost exclusively under the control of fund managers.

A recent study by the Association of Member Nominated Trustees (AMNT) indicates managers’ policies are often at variance with the views of their asset owner clients.

The continued refusal of fund managers to accept the voting policies, even on a comply or explain basis, of their UK clients in pooled funds is an issue of enormous importance.

At AMNT we believe that it should be the asset owners, not the fund managers, who should be directing the stewardship of their assets.

Since the Shareholder Spring of 2012, AMNT has been campaigning for asset owners’ right to have their voting policies respected by fund managers, particularly in pooled funds.

The catalyst for change back then was a fight by trustees from many pension schemes to have the votes associated with their investments used to curb excessive executive pay, but fund managers refused to accept their requests.

Trustees were told their votes didn’t count because they were invested in pooled funds and that there wasn’t enough demand from all asset owners to have just some trustees’ voting policies followed.

If there was, the fund managers might respond. AMNT, which has about 600 members from pension schemes with collective assets of more than £800-billion, decided to help build the broad asset owner demand required.

We have developed the UK’s first freely available, comprehensive voting policy for asset owner trustees covering ESG issues including climate change.

We spent two years consulting fund managers, investment consultants, proxy voting companies and custodians, pension scheme trustees and the executives running major pension schemes.

We had technical support from the Department for Business, and we based our policies on the principles of the UN Global Compact and the UK Corporate Governance Code. We also studied many existing pension scheme voting policies, and have developed a policy on climate change with substantial advice from Carbon Disclosure Project (CDP).

We are also grateful to the UK Sustainable Investment and Finance Association for their support.

Challenges

We called our voting policy for asset owner trustees Red Line and made clear that they could be followed by fund managers on a comply or explain basis.

Our policy flew in the face of custom and practice: investment consultants have for years advised many UK schemes to state in their statements of investment principles that matters of stewardship are delegated to the fund managers.

We found that when pension schemes adopted our Red Line voting policy, many fund managers refused to accept them. When AMNT discussed this with regulators it was suggested that if asset owners are unhappy with their fund managers’ refusal to accept their voting policy, then they should simply take their money elsewhere. It’s not that easy.

We decided to demonstrate the reality of the situation in which many asset owners find themselves.

First, we asked about 40 fund managers to state whether they would accept client voting policies in pooled funds – and received a blanket refusal. We then studied their voting policies and voting records in comparison with four of our Red Line voting policies: climate change, women on boards, ethnic minorities on boards and excessive executive pay.

AMNT’s policy on climate change asks trustees to vote against the re-election of the chair of a company’s environmental sustainability committee (or if there isn’t one, the chair of the board) if it fails to introduce and disclose emission reduction targets and adopt a coherent strategy and action plan in line with a 2 degree scenario.

Yet our study found that 20 major fund managers had no stated voting policy on climate change at all. Of those that did mention climate change, most had no voting guideline which made the climate change policy pointless.

Only four fund managers had stated voting guidelines for both climate change and 2 degrees, and even some of them only stated that they would “support” shareholder resolutions.

Fund managers’ voting policies on the other issues also revealed a lack of commitment.

AMNT’s study indicates that if asset owners care about climate change and other ESG matters they had better not leave it to the fund managers. It also shows that currently most UK pension schemes that are invested in pooled funds are having their voting policies refused and have nowhere else to go.

FCA support

We sent this study to the Financial Conduct Authority in May stating our view that this indicated market failure, and that the FCA should act. Months later there was no news. So, on 15 October the chair of the Treasury Select Committee, Catherine McKinnell MP, wrote to Andrew Bailey, head of the Financial Conduct Authority, demanding to know what action they had taken in response to our complaint.

Among several questions she asked: “Does the FCA intend to investigate the alleged failure of the fund management industry to allow pension scheme trustees to operate a stewardship policy governing the environmental, social and governance of the companies in which they invest via fund managers, particularly in pooled funds? Please provide details.”

McKinnell also asked: “Do you think it is possible for pension schemes to develop robust ESG policies and take savers’ views into account, if fund managers choose not to act on the stewardship policies of their clients?”

Fortunately, our campaign has been given further impetus with the publication of the 2020 UK Stewardship Code. Principle six requires fund managers to explain how assets have been managed in alignment with clients’ stewardship and investment policies.

Elsewhere it requires them to explain where they have not done so – but the intention is now there in black and white in the Stewardship Code that fund managers should be aligning with their clients’ policies.

Those UK pension schemes which for years have been advised to delegate their stewardship to their fund managers should now be adopting their own policy.

It is the role of investment consultants to advise and assist their clients with this, but they must also recognise that it is time to get off the fence and start demanding that the fund managers respect their clients’ policies. And large asset owners could support the campaign by also insisting their fund managers respect their voting policy in any pooled funds in which they are invested if they do not already.

The largest asset owners may not recognise the stewardship difficulties facing asset owners with less than £20-billion in assets. But if they are concerned about the same issues that are featured in our Red Lines, particularly climate change and voting according to beliefs, it should be of extreme concern to them if their fellow asset owners are being denied the chance to support positions that could, ultimately, undermine their chances of their voting policies prevailing.

AMNT would ask you to support our campaign by going to our website and signing our statement urging the FCA to act.

Janice Turner is founding co-chair of the Association of Member Nominated Trustees.

Economic growth is slowing, and governments have limited monetary and fiscal policy responses available in the event this slowdown becomes a recession. Today, investors need to weigh the investment implications of likely policy options. With central banks running out of room to lower rates and use quantitative easing (QE) at a time that debt levels are high, policymakers’ use of coordinated monetary and fiscal policy —fiscal spending financed by debt monetisation —seems inevitable in the next recession.

The risk of even moderate inflation is remote, but a recession could eventually set up conditions favoring a sustained period of elevated inflation in its aftermath if fiscal policy, aided by more frequent debt monetisation, is overused.

Conventional monetary policy stimulation works through lower policy interest rates, which help boost demand by lowering the cost of borrowing. Given today’s low policy rates, if a recession were to occur in the near term and G4 central banks were to lower rates by their average recessionary cuts since 1960, policy rates would become deeply negative.

Such low rates are not feasible, as they would either decimate commercial bank profitability or drive bank customers to prefer cash over deposits. QE also decreases financing costs for consumers and corporations by lowering rates further out the yield curve and increasing equity prices.

While the effectiveness of QE over the past decade is debatable, few would argue that a further expansion would be sufficient to stop a recession’s spread, given that rates are already quite low, yield curves are flat or inverted, and there is not much left for central banks to buy in Japan and the Eurozone.

In addition, all G4 central banks face structural, political, and legal constraints on QE expansion. Given the constraints on policy rates and QE, policymakers are increasingly looking to fiscal policy to do the heavy lifting in the next recession.

Fiscal policy has the disadvantage of increasing already-high debt loads, which could push up interest rates; it can take time to implement; and it may still fail to boost economic growth if it is invested poorly or if fiscal spending (e.g., tax cuts) is largely saved rather than spent or invested.

However, a consensus is building that governments (especially those issuing debt in their own currencies) may have more fiscal space than had been thought feasible and that austerity measures of the last decade have been misguided.

Further, some economists argue central banks should pursue “helicopter money,” or money-financed fiscal policy, to overcome some of these limitations. Indeed, we saw this move during the 1930s.

Central banks push cash or deposits directly to spenders through tax cuts or public spending, with the expectation that the Treasury will never pay back the central bank and the monetary base is permanently increased.

These conditions improve the likelihood that money will be spent rather than saved, as households and corporations should not anticipate associated future tax increases or other fiscal tightening.

Further, the permanent increase in the monetary base helps keep interest rates down, limiting the “crowding out” of private investment.

The big risk of this policy shift is inflation. Some readers may ask if the risk of post-recession inflation is real, given the experience over the past decade and after the 1930s. So what’s different?

During the 1930s and 1940s, the global financial system transitioned from a gold standard to the Bretton Woods system, which tied the dollar to gold prices and tied other currencies to the dollar.

Today those links don’t exist. Now, central bankers are perhaps biased toward easy policy, both because of prior failures to boost inflation and because debt levels are high. Money-financed fiscal policy can create inflation when overused.

If the printed money just offsets the decline in credit and spending that happens in recessions, then it should not produce inflation.

However, coordinated fiscal and monetary policy threatens central bank independence and raises the odds that fiscal policy will be overused, igniting inflation.

While elevated inflation after the next recession is a risk, it is far from a foregone conclusion.

In addition, policymakers will first try conventional measures, and only if those fail will they work toward more coordinated fiscal and monetary policy.

If this thesis proves correct, investors will have a window of opportunity to pick up select real estate and infrastructure investments at recessionary prices.

Such investments cannot be expected to serve as inflation hedges, but they should perform relatively well (high-quality real assets should hold their value better than financial assets in such an environment).

At attractive purchase prices, such investments would deliver competitive returns even without meaningfully higher inflation.

We would look to buy high-quality assets that have durable appeal. For example, look for high-quality core real estate and infrastructure opportunities sourced and operated by skilled managers.

To take advantage of such opportunities, investors need to maintain adequate diversification and liquidity to finance opportunistic investments.

Celia Dallas is Cambridge Associates’ chief investment strategist.

 

Sweden’s investment community is proud that their organisation, Swedish Investors for Sustainable Development, SISD, has been part of the inspiration behind the UN’s Global Investors for Sustainable Development, GISD.

With approximately $650 billion in assets under management, SISD has developed ideas around how investors can help achieve the UN’s Sustainable Development Goals, SDGs, since June 2016.

SISD consists of 18 pension funds, insurance groups and asset managers and was convened by the Swedish International Development Cooperation Agency, SIDA.

Some of our members compete against each other on daily basis, but still see the advantage of cooperation when it comes to the large sustainability challenges that are ahead of us, as well as the new possibilities that the Agenda 2030 offers.

The work within the Swedish alliance has resulted in new learnings, new investments, corporate governance actions and reporting in line with the SDGs.

SISD members have gathered around a “joint commitment” to the SDGs with a focus on corporate governance. This commitment and common ground that we all stand on has really been our “baseline” to come back to over the last three years.

Indeed, our joint commitment has become so important that we think it is a crucial success factor. The SISD partnership has resulted in new investment mandates related to the SDGs, new investments in green bonds and new products being launched related to the SDGs.

In 2018 four of our members invested $250 in a World bank bond raising awareness for SDG 11 (Sustainable Cities.)

Elsewhere, the group convened a study looking at investment in the water sector in Swedish communes, as well as studying water policies within the food, beverage, garment and mining sectors.

The target here is to push for better water management, focusing on SDG 6 (Clean Water and Sanitation.)

AP7 has also been active in climate issues, working to influence companies that are not aligned with the Paris Agreement.

For example, with others we are targeting corporate climate lobbying that is counteracting the Paris Agenda.

One working group within SISD is also engaging in best practice regarding Decent Work (SDG 8).

GISD Now it is time for the global investor community to take on more responsibility for the sustainable development of society, and become a clear voice in public discourse on the challenge humanity is facing.

“We face widening inequality, increased devastation from conflicts and disasters and a rapidly warming Earth. These leaders have seized our sense of urgency, recognizing that our pace must be at a run, not a crawl,” stated UN Secretary-General António Guterres on October 16 when he announced the launch of the GISD, informed by our initiatives in Sweden.

GISD consists of 30 influential financial companies who will work together over the next two years in a bid to free up trillions of dollars from the private sector to finance the SDGs.

There is great potential to make substantial progress. Figures show that only 25 per cent of global assets under management have ESG-strategies related to them. GISD’s aspiration is to catalyse real, impactful change through investments, including a focus on passive mandates where there is real potential to include more sustainable strategies.

The establishment of the GISD Alliance acknowledges the scale of the challenges we face collectively, and the role that the finance sector must play in meeting these challenges.

The development needs are estimated at trillions of dollars per year, and even if funding from all public sources is maximized, there will still be a significant shortfall, making financing from the private sector imperative.

The UN’s research suggests that there is no shortage of money from the private sector to be invested in sustainable development.

However, a combination of factors, including the policy environment, incentive structures and institutional conditions, tend to discourage the kind of long-term commitment that is needed.

Investors are important for financing the SDG-agenda. They can also lead on promoting corporate governance in companies where they are large owners.

Furthermore, Agenda 2030 offers investment opportunities with both good financial and impactful returns. Properly applied, acting and investing in line with the SDGs can be a win-win-win. As we have experienced with our own Swedish alliance, SISD.

Corporate governance is also an important tool that should be highlighted within the GISD.

The corporate governance dimension of Agenda 2030 is not yet fully developed and something we will push for within GISD, via working papers and working groups.

For active owners it is not only a question of new investments, but an opportunity to influence companies to become more SDG-aligned and to support the Paris Agreement.

Investors can act now and begin investing in line with the SDGs. We know most of the participants in the GISD are already using the SDGs.

With a group of actors like the GISD we can take the Agenda to a new level, working with policies, incentives and regulations, since we are committing to cooperate across borders, across financial sectors and with competitors. I think we all need to lean-in to make the GISD work and challenge ourselves and others to come up with new solutions.

We have a great opportunity to make a difference here, for the planet and future generations. SISD CEOs are very engaged and have a lot of enthusiasm for this.

Richard Gröttheim is chief executive of the AP7 Swedish National Pension Fund.