Leigh Gavin, CIO of Australia’s first industry fund, LUCRF Super, admits the job he has held since 2016 is about to get much harder. Poor market performance in the final months of the last calendar year pulled annual returns from balanced options down towards zero and several factors have experts fearful of volatility ahead.

“When I started at LUCRF Super, some people were thanking me for the strong absolute returns in 2016-17, and I said, ‘Don’t thank me. If you want to thank anyone, thank Donald Trump, although he’ll probably muck it up between now and November 2020,’ ” Gavin says.

Back in December 2016, Australian superannuation funds across the board were buoyant, as Trump’s unexpected win in the US presidential election pumped up the sharemarket. Analysis by local ratings agency, SuperRatings for November 2016 shows the median balanced option fund returned 1.2 per cent for that month, reversing a -1 per cent return in the previous month.

But by November 2018, SuperRatings data had revealed that returns of -0.6 per cent in November for members invested in the median balanced option – following -3.1 per cent in October – had brought calendar-year returns to just 1.8 per cent.

“It’s definitely harder, and it’s about to get a lot harder,” Gavin notes. “We noticed through our contact centres and seminars in November 2018 there were a lot more enquiries from members about circa -3 per cent returns, year-to-date. This just shows you we’ve had an elongated period of really good going.”

Member attention

If there is one thing that Gavin, who joined the $6 billion ($4.3 billion) LUCRF after 14 years at Australian asset consulting firm Frontier Advisors, is attuned to, it’s the members.

“I loved my time at Frontier,” he says. “I had a lot of really good mentors there…who taught me a lot about not only investments but just working with funds, especially industry funds…and the sense of purpose that comes from working with these funds. So I guess it was somewhat inevitable that I was going to end up at a fund like LUCRF.”

Gavin’s family background also makes him likely to be ideologically aligned with a profit-to-member fund. His grandmother, in Gavin’s own words, was a “single mother from Glasgow”.

“She came out here in 1952 with my dad when he was 12,” he says. “She worked at the Heinz cannery factory in Dandenong [rural Victoria] all through the ’50s, ’60s, ’70s and into the ’80s, and Dad was a carpenter and cabinetmaker by trade. I think for a lot of investment personnel who work within industry funds, or work with industry funds, many of us are not third-generation stockbrokers.”

Industry fund pioneer

As LUCRF celebrates its 40thanniversary, Gavin says the fund has had an “enviable record as an industry pioneer and establishing what are now industry norms for Australian defined-contribution funds”.

Superannuation belonging to many, not a privileged few, was one of the founding tenets of LUCRF, which was established in December 1978 by Greg Sword and predominantly represents those in the warehousing, pharmaceutical, food and agricultural processing sectors, Gavin says.

At establishment, LUCRF members’ funds were invested broadly along the lines of the 70/30 growth/defensive assets model. That split is now the industry norm; at the time, however, that was not the case.

“Most funds at the time, predominantly defined-benefit funds, were invested 50/50 or even 30/70,” Gavin recalls. “People told Greg he was mad.”

Another of Sword’s guiding principles was that LUCRF should be fully portable between jobs, something that is increasingly relevant with the rise of the “gig economy”.

“This sounds obvious now but was less obvious in 1978,” Gavin says.

Fast forward to 2019 and the typical LUCRF member – there are 160,000 of them – is increasingly in outsourced or casualised labour.
“They’re increasingly vulnerable, increasingly from non-English speaking backgrounds. And it’s tough for them to get superannuation, as they may have multiple employers,” Gavin explains. The typical LUCRF member is 38 and has an average balance of $33,000 in accumulation. Even within LUCRF’s roughly $600 million in pension assets, the average balance is only $175,000. That membership profile drives the fund’s ESG priorities.

“For some time, LUCRF’s focus has been on the ‘S’ issues, which is an area that has generally not got the same airtime as the ‘E’ and ‘G’ issues.” Gavin says.

But that is changing.

“The recent introduction of the Modern Slavery Act in Australia means the issue is likely to garner more traction in 2019,” he says. “Modern slavery is not an ethereal concept for us. We have LUCRF members who are subjected to modern slavery, and who work in the supply chain of some of our largest ASX companies. We also have a focus on active ownership, rather than divestment.”

A challenge

LUCRF’s member profile has also given Gavin an interesting challenge when it comes to managing the portfolio, and he is keenly aware of members’ needs when going into a fee negotiation.

“That’s a hobbyhorse of mine, as many people know,” he says. “There is still too much money that goes to agents in the system, rather than the principals in the system – that is, the members – and fund manager profit margins are still too high.”

Due to LUCRF’s size, he says, the fund will “generally never write the biggest mandates in the industry”.

“The way we try to get around it is to try to be nimble and help seed either new managers or new strategies from established managers,” he explains. “We’re lucky we have an investment committee that recognises the need to take on enough risk.

“A lot of these things are uncomfortable at the time. Being the first or second client for a new manager is not comfortable, but generally speaking, it’s worked out pretty well.”

LUCRF’s portfolio is, unsurprisingly, also linked to how much risk it requires.

“My observation for some time has been that the financial services sector seems to spend a lot of time devising products seemingly for other members of the financial services sector,” Gavin says. “So how we think about risk [is critical], along with how we think about a superannuation balance that, for most of our members, will need to be paired with at

least a partial age pension. But that doesn’t mean it’s a one-way bet on growth assets.”

In 2015, LUCRF chief executive Charlie Donnelly and independent director Judith Smith began working with the investment team and investment committee to re-envision LUCRF’s portfolio based on the fund’s demographics, taking into consideration that one of the biggest risks to members was “not taking enough risk”.

That led the fund to add 7 per cent to listed equities in 2015-16, Gavin says.

The right amount of risk

Once Gavin joined, in 2016, LUCRF continued to add “a little more risk to the portfolio, but only at the margin”, he says.

The fund also began developing a dynamic asset allocation philosophy and process.

“We had to spend a fair bit of time before we started making tilts to the portfolio on a quarterly basis. This included asking, ‘What’s our philosophy, what’s our process and what’s our reference portfolio?’ And, probably most importantly, ‘How are we going to measure this?’ ” he explains.

Infrastructure now forms about 5 per cent of the fund, compared with as much as 13 per cent for some peers.

“With respect to liquid alternatives, that was about 16 per cent before I started and now it’s about 12 per cent,” Gavin says. “Our fund, unlike most industry funds, has expressed its preference for alternatives in terms of liquid alternatives, rather than infrastructure and private equity. That has hurt, as anything with duration has done well over the last decade. Conversely, anything without duration (like most liquid alternatives) has been left behind.”

Another asset class Gavin speaks passionately about is private equity, although he describes its current fee model as “warped”.

“It is just a classic case of being a model that doesn’t work in favour of the buyer – and in this case the buyer is our industry fund members,” he says. “There’s a heap of dry powder around in the world of private equity at the moment. I’ve got concerns about the amount of money raised versus the [number] of opportunities out there. We may do it again but it will probably not be in the traditional model either.”

Despite an outlook for 2019 that is indeed “more challenging than usual”, he adds that “most of the traditional economic indicators that we look at are still broadly positive”.

“Equities could still earn high single-digit or even low double-digit returns in 2019, particularly given the falls of late 2018, but the unwinding of quantitative easing will probably lead to continued volatility in 2019, as there is no historical parallel for this unwind.

“The Australian economy has gone for 27 years without a recession, which does make you worry that the next one could be a doozy, especially if combined with a housing downturn. The role of industry funds in helping with that transition is going to be important…in helping finance the economy…stepping in and plugging the liquidity gaps, and earning a compelling return for members in the process.”

In December 2018, dozens of Dutch pension funds and other stakeholders pledged to prevent or tackle any negative consequences to society or the environment from pension fund investment.

In the landmark initiative, more than 70 funds, with combined assets under management of €1.2 trillion ($1.4 trillion), together with the Federation of the Dutch Pension Funds, six non-government organisations, trade unions and the Dutch Government, signed the Responsible Business Conduct Agreement (IRBC).

Pension funds invest in thousands of companies worldwide. In doing so, they can be confronted with all sorts of misconduct or abuse that could take place in companies or in the supply chains of these companies. The Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises and the UN Guiding Principles on business and human rights give guidance to enterprises and investors on how to prevent and mitigate such abuse or misconduct. Under the IRBC, all pension funds, regardless of their size or capacity, are given encouragement and support to carry out and report their due diligence in implementing the OECD guidelines.

An important aspect of the guidelines is holding multinational enterprises responsible for knowing their supply chain. By investing in enterprises, institutional investors can be directly linked to abuses that occur within a supply chain. Being directly linked to abuses doesn’t mean the investor caused or contributed to an abuse, but that the investor is connected to it via its position as minority shareholder.

As is stated in the OECD Guidance for Responsible Business Conduct for Institutional Investors, pension funds are expected to perform a risk analysis and impact assessment on their investments. It is due diligence specifically targeting risks and impact for society and the environment, rather than just financial risk, and the IRBC now lays out how this process should take place.

All pension funds will incorporate the OECD guidelines and the UN Guiding Principles on business and human rights into their responsible investment policy. This puts the onus on their asset managers or fiduciary managers to execute the investments in line with the policy of the pension fund, which will ask them to perform due diligence and to report on their findings and the actions they have taken.

Transparency is an important aspect of the IRBC. Pension funds have agreed to detail in their annual report how their investment policy takes the environment and climate, human rights and social relationships into account. Investors have also agreed to publish their Statement of Investment Principles on their website. They will also publish the names of the companies and investment funds in which they were invested over the previous period.

Progress so far

Partnerships between business, government, unions and non-government organisations have already led to IRBC agreements for specific sectors. It started with the Dutch Agreement on Sustainable Garments and Textile and there are now nine IRBC agreements in the financial sector, covering banks, insurance and pension funds.

In the first year of the IRBC, pension funds, government, unions and NGOs will work together on developing a toolbox that participating pension funds can use to implement the OECD Guidelines and the UN Guiding Principles into their policy, contracts with external service providers, monitoring and reporting.

Dutch pension funds vary greatly in size and investment preferences and all participating pension funds must be able to apply the toolbox in a meaningful and practical manner. To facilitate this, various tools and applications will be developed that are appropriate for the specific size, investment strategy and leverage of different pension funds and asset classes. The various parties will contribute their expertise to the development of the toolbox.

In the second and following years, pension funds will adapt their policy, monitoring and reporting to the agreement.

The second unique feature of the agreement is the co-operation of pension funds, government, unions and NGOs on selected cases. This co-operation will address human and labour rights issues that pension funds encounter in their investment practices and cannot resolve themselves. The objective will be to encourage learning and innovation that will help increase the leverage that pension funds have in their engagement with listed investee companies, with a view to preventing, mitigating and remediating any adverse impacts.

This co-operation will produce broadly relevant insights that will be reproducible and will become part of the toolbox for all pension funds.

Support for the IRBC represents nearly 90 per cent of all AUM in the Dutch pension sector. The six NGOs are: Amnesty International Netherlands; Oxfam Novib; PAX; Natuur & Milieu [Nature & The Environment]; Save the Children Netherlands; and World Animal Protection. The three supporting trade unions are: the Dutch Federation of Trade Unions; National Federation of Christian Trade Unions in the Netherlands; and Trade Union Federation for Professionals. The four ministries are: Finance; Foreign Trade and Development Co-operation; Social Affairs; and Employment.

 

Melanie Meniar is a policy adviser at the Pensioenfederatie (Federation of the Dutch Pension Funds).

 

Credit ratings agencies are increasingly meeting demands from fixed income investors to better reflect ESG factors in their credit-risk analysis and bond pricing.

“There is a lack of awareness amongst investors of the huge amount of visible progress CRAs, particularly the large ones, have made” in this area, says Carmen Nuzzo, senior consultant, Principles of Responsible Investment and author of the third and final report in the PRI’s ESG and credit rating initiative, which has worked with 18 CRAs and global investors over the last two and a half years to help encourage ESG reporting in CRA analysis. The potential for positive impact is huge, given that global bonds are the largest asset class in capital markets, she says.

High-profile losses at a growing number of corporations because of credit ratings that haven’t reflected poor ESG management have been a key driver of this change. For example, ESG-related risk wasn’t reflected in Pacific Gas and Electric’s credit rating before the California utility filed for bankruptcy in the wake of its liability for last year’s devastating wildfires. Also, Moody’s now rates Cape Town municipality Baa3 and at risk of a downgrade, because of drought in the region.

CRAs are increasingly building ESG teams, researching and publishing such risks and clarifying how ESG features into their methodology. Fitch’s introduction of ESG Relevance Scores demonstrates this. Produced by its analytical teams, the scores transparently and consistently display the relevance and materiality of ESG elements to the ratings decision and will initially apply to more than 1500 non-financial corporate ratings. Elsewhere, S&P Global Ratings has announced it will have a new ESG-dedicated section in each corporate rating commentary.

“CRAs have moved a long way,” Nuzzo says.

More to do

Despite these changes, the PRI’s research has revealed enduring “disconnects” hindering progress. CRAs focus on ESG risk only in the context of its impact on the relative probability of default by the bond issuer, yet fixed income investors also worry about other factors, like volatility. Admittedly, not all ESG factors are material to credit risk; some won’t trigger an issuer or issue default. But all could negatively affect the trading performance of a bond and may become material in the future.

Investors are also confused about the difference between a credit rating and an ESG score. The scores services providers like MSCI and Sustainalytics produce measure the issuer’s exposure to ESG risk, credit ratings measure the risk of default and the strength of the balance sheet. Nuzzo advises investors to use both products.

“CRAs can’t do what ESG services providers do and vice versa,” she says. “Investors need both to evaluate the investment but should not confuse their purposes.”

The confusion of ESG scores and CRA analysis is particularly acute in green and sustainable development goal bond issuance, where proceeds are allocated to a specific project, Nuzzo explains.

Investors also want CRAs to evaluate longer-term risk. CRAs typically view corporate bonds using a three- to five-year time horizon, which extends to 10 years for sovereign bonds. Investors seek more long-term guidance, which would include many ESG factors linked to secular or long-term trends that are difficult to capture.

“CRAs say they base their assessments on forecasts and there is only so much they can extend into the future, otherwise they lose plausibility,” Nuzzo says. “But investors say they want more signals on risks that may not be material now but may appear later on.”

Modelling

The evolving landscape includes ongoing analysis of whether CRAs should integrate ESG risk by building it into their credit ratings or with an ESG score that highlights risk separately. CRAs are also beginning to put into place frameworks that allow them to analyse risk systematically, but accessing accurate and standardised data to create models has made this difficult.

“You have to remember that the fixed income community is very quantitative when it comes to price and risk assessment, much more so than equity investors,” Nuzzo says.

She warns, however, that the amount of data that is starting to flow could also leave CRAs and investors unsure what is relevant to them.

The lack of standardised data makes comparisons difficult, which is particularly challenging because CRAs’ analysis is based on relative bias; for example, a rating assesses a company’s probability of default relative to other companies with similar characteristics.

“We don’t have this level of standardised data disclosure or standardised terminology,” Nuzzo says. “At the moment, ESG means different things to different investors and there are different attitudes in different regions of the world.”

Extracting data will get much easier if CRAs nurture a culture of engagement, she says.

“As part of their due diligence, CRAs speak to companies and have access to more information than investors,” she says. “They are now beginning to have these conversations on ESG topics, too.”

CRAs’ role here is important because unlike equity investors, who engage via voting rights, bond investors don’t tend to engage with issuers.

“It is not in their culture,” she says, urging bond investors to become more active and have “conversations” with issuers. “It will take time to see the movement of capital change and investors reward those companies that do well and penalise those that are not mitigating or managing ESG risks.”

Arguably, nothing is more important to a large asset owner than long-term investment performance. But measuring long-term performance can be somewhat elusive.

Many of the benchmarks used in investment management are relevant for short-term horizons (one to three years) and not germane for the investments now used by large asset owners that have identified their time horizon and scale as a competitive advantage.

Also problematic is the focus of performance metrics on just performance and not the journey to performance. For long-term investing, whether investors are on the right track in the journey is an important indicator of the potential success of their strategy in the future.

So now the doyens of long-term performance, academics Gordon Clark and Ashby Monk, have put some parameters around the measurement of long-term performance, in their paper  Assessing long term investor performance: Principles, Policies and Metrics.

The academics, from Oxford and Stanford universities, respectively, have spent many years, in theory and practice, discussing and implementing best-practice long-term thinking and investment implementation with pension funds, endowments and sovereign wealth funds.

This new paper is a boon. If investors are struggling with these problems, Clark and Monk have done the thinking for them. They outline a model of investment management relevant to all long-term investors, which they use to create a set of 11 appropriate performance metrics.

“We argue that our metrics of performance are superior, for long-term investors, to existing methods [for assessing] investment performance,” they state in the paper.

The paper recognises that an organisation’s chosen metrics of performance can affect organisational behaviour. But it also acknowledges that the “quality” of any organisation’s investment performance can be traced back to its “environmental enablers”, which are identified as governance, culture and technology, which also affect or reflect organisational behaviour. It’s a symbiotic relationship.

“A successful investment management organisation is typically described by its reported rates of return over well-defined time periods (quarterly, yearly, et cetera). In our view, this is a flawed way of measuring the success of any long-term investors (LTI). While it is acknowledged that metrics that focus on investment performance allow for comparison among different LTIs, these metrics tend to ignore the risks used to generate these returns and the liabilities that the chosen investment strategies are meant to cover,” the paper states.

In addition to environmental enablers, the paper identifies production inputs as having an impact on investment performance as well. This includes capital, people, process and information. The combination of these production inputs, supported by the environmental enablers, are the pillars of success for all institutional investment, they argue.

“If an investment organisation wants to improve the way it invests – i.e., if it wants to innovate and change – it has to look to these environmental enablers to do so.It can seek to better use its governance, culture and technology to alter the quality and combination of its production inputs to create better outputs. It can also seek to change its enablers, such as improving technology or governance, to then change production inputs as a result,” the paper states.

So having identified the inputs for investment performance, the paper focuses metrics on “meaningful and useful predictors of long-term performance”, rather than on the performance itself.

“Recognising that the long-term risk-adjusted rate of return is very important to institutional investors, whatever their type and whoever their sponsor, the integration of the short term with a long-term goal depends upon measuring in some acceptable way the onward ‘journey’ to that goal,” the paper explains.

“The long-term performance of an investment organisation is the product of its environmental enablers and production inputs, managed in ways that mobilise the commitment of investment professionals by ensuring alignment of interests and the sharing of information and knowledge consistent with its comparative advantages and the organisation’s goals,” the paper continues. “As such, the investment ‘journey’ is sustained by ensuring transparency on matters such as commitment and alignment of interests punctuated by checks on short-term performance towards long-term goals and objectives.”

In this way, the authors suggest moving away from return metrics, such as a Sharpe Ratio, and towards more useful metrics such as portfolio health, cost-efficiency, knowledge management and commitment.

By setting out new metrics of performance that long-term investors can use to assess their investment capabilities, the paper seeks to contribute to the long-run performance of those investors.

It’s worth a look.

 

The prevailing view in institutional investment circles, where I have worked on and off for the last two decades, is that investing for explicit social and environmental benefits necessarily undermines financial performance.

“How could we possibly serve two masters?” the argument goes. “By focusing on two bottom lines, surely we do a disservice to both.”

It’s an understandable perspective.

While the performance debate is all but settled when it comes to ESG integration, impact investing represents another giant leap forward in responsible investing.

Where ESG integration refers primarily to the management of material ESG risks across an entire portfolio, including in public markets, impact investing tends to be more targeted, with a focus only on sectors that deliver positive externalities, primarily in private markets, thereby limiting the opportunity set and upping the complexity of putting capital to work.

The problem is that emphasising the constraints inherent in some impact investing strategies represents only one side of the argument.

The opposite perspective contends that, with signs of convergence between business and society all around us, societally driven alpha is being left on the table when investors myopically focus only on the business drivers of value.

It was a point the United Nations made recently in the United Nations Environment Programme Finance Initiative report Rethinking Impact to Finance the SDGs. In the report, UNEP-FI points to new impact-based business models like smart lampposts, which provide wireless broadband connectivity in addition to street lighting. UNEP-FI proposes putting “impact considerations at the heart of our decision-making tools, from public tendering to…financial analysis, [in order] to help align the interests of governments, businesses and capital providers, and ultimately benefit society at large”.

The Business Commission report Better Business, Better World states that there is a $12 trillion market opportunity in building and scaling impactful businesses in four sectors: food and agriculture, cities, energy and materials, and health and wellbeing.

Now, new research from Tideline, in partnership with Impact Capital Managers (ICM)and 13 of the US-based network’s members, sheds more light on how exactly these mostly private equity managers are delivering financial performance through impact.

What we discovered were 10 specific drivers of financial return directly related to the pursuit of an impact objective, organised around three core value-generators familiar to all investment practitioners:

  • Accessing unique and high-quality investment opportunities. Impact investment managers leverage unique impact-focused networks, relationships and expertise in sectors like health, education and renewable energy that are increasingly shaping the global economy, thereby unlocking proprietary and high-quality investment opportunities.
  • Creating value across the portfolio. Impact investment managers bring market insights and networks that help design more effective products, build authentic brands, and attract differentiated sources of talent and capital, at a time when consumers are increasingly focused on their social and environmental footprint and talented young professionals indicate a strong preference for making a positive impact through their careers.
  • Strengthening outcomes through operational rigor and risk management. By focusing on social and environmental outcomes throughout the investment process – integrated with business results – impact investment managers bring additional rigor and discipline to operations, stakeholder engagement and risk management.

 

Figure 1: The 10 drivers of impact alpha

 

Each of these drivers links to specific sources of financial value, including increased deal flow and higher win rates, more attractive terms at entry, increased revenues, and lower capital and operating costs.

In 2015, Bridges US Sustainable Growth Fund, an impact private equity fund based in New York and London, beat out a bidder that lacked an impact focus to invest inSpringboard Education, a company that provides high-quality after-school programs at public, charter and private schools across the US. The owners of Springboard preferred to partner with an impact investor to deepen their mission and strengthen their social outcomes. Since Bridges’ investment, the company has grown from 50 schools to 110 schools and increased annual revenues 56 per cent.

Bridges’ unique impact perspective also surfaced a US federal government voucher program that could provide a new source of revenue for Springboard, which eventually helped the company increase enrolment in existing schools and forge partnerships with new institutions.

In 2016, another ICM member, Bain Capital Double Impact, invested in Impact Fitness – an operator of low-cost gyms focused on underserved communities in Michigan, Indiana and Canada – as a franchisee of Planet Fitness.

Bain established rules that linked a meaningful part of management bonuses to social metrics, which has proved to be an effective driver of performance. Gym memberships increased by 12 per cent and a strong sense of mission among gym staff has improved morale and reduced turnover 25 per cent among lower-wage employees.

The jury is still out on whether the “enhanced value proposition” argument will win the day over the “constraints” argument for most impact managers, most of the time. Yet there’s no question that, if the job of fiduciaries is to maximise financial returns, the ways performance is likely to be enhanced by managers pursuing explicit impact objectives merit serious attention.

 

Ben Thornley is a managing partner at Tideline.

A comprehensive guide to climate change, written by asset owners for asset owners, gives practical steps for trustees and pension fund managers who are framing their activities on climate change.

The guide, Climate Change for Asset Owners, is a collaborative effort produced by an International Centre for Pension Management working group led by Jaap van Dam. It outlines 10 practical steps for asset owners to address climate change in their portfolios.

The 10 action points fall under five core sections – prepare, build, involve, implement and learn – and consider the roles of both the board and management.

The guide looked at giving investors support around: how to get the board, trustees and senior leadership driving the change; how to translate climate-change language into investment language; and how to start managing something that isn’t yet measurable.

The guide encourages asset owners to start by recognising where the organisation is placed for climate change risks and opportunities before implementation.

It also emphasises that it is essential to make sure the whole organisation is on the same page. The guide includes contributions from 10 asset owners, which also provide peer case studies of their climate change integration journey.

The guide draws on the experience of a number of funds that have been addressing these challenges for years; for example, the £60 billion Universities Superannuation Scheme in the UK has 10 years’ experience tackling climate change, and the €211 billion Dutch fund PGGM, where van Dam is head of strategy, has been at it for five years. The case study in the guide of the NZ$37 billion New Zealand Super is a good example of how to get the whole organisation co-ordinated around the issue, van Dam said.

“By bringing experience to the table, the guide can help others begin the journey,” van Dam said.

“What I want from this guide is that it helps funds move from talk to walk, and that is urgently needed.”

Van Dam said the aim was to provide a practical guide to funds to integrate the impact of climate risks and opportunities in investment portfolios.

“Because it is early days and climate change is a long-term issue, it’s very hard to tackle. This is an investment problem and needs to be addressed,” he said. “The objective of the guide is to give as practical tools as possible, and to translate this generic idea into a journey, get stakeholders involved and end up with a serious strategy.”

Patti Croft, a board member at the C$193 billion ($147 billion) Ontario Teachers’ Pension Plan, explains how the fund’s board considers climate change and governance around it.

“Climate change poses potentially significant risks to financial returns and the long-term sustainability of a pension plan, meaning that the board needs to treat it like any other material risk. At Ontario Teachers’, the investment committee of the board oversees responsible investing, which encompasses climate-change risks. Ultimately, accountability for climate changes lies with the board, [which] sets the tone for risk awareness.”

The World Economic Forum’s 2019 global risk report, released in January, identifies failure to mitigate, and adapt for, climate change as the biggest global risk in terms of impact.

Van Dam urged asset owners to focus on understanding where climate change translates into risks in their portfolios, both in the short term and the long term.

“For example, 40 per cent of assets in equities face serious challenges because of technological change and flooding risk,” he said. “If investors list climate change risk as one of the risks in their risk statement, then they probably can overcome the biggest risk hurdle, as from that time it exists and you can’t just ignore it.

When it comes to implementation, the guide emphasises integrating climate change in the existing risk-management processes to ensure it is considered in investment decisions.

Putting some money to work is an important step, the guide states.

It also mentions that investors should be sure to measure the progress made in integrating climate change in the investment process and achieving overall climate change goals. One way to do this is by setting key performance indicators for each action described in the guide. It gives examples of KPIs.

The guide emphasises the importance of communication, both internally and externally, around the fund’s approach to climate-change integration.