The $10 billion corporate pension fund for US aerospace and defence giant Textron is providing seed funding to asset managers seeking capital for new strategies.

The offer is only for the pension fund’s most trusted managers, but it is proving a lucrative way to drive product design. The fund pays lower fees, and Textron can push specific liquidity conditions, benchmarks or volatility risk tolerance, explains Charles Van Vleet, Textron’s assistant treasurer and chief investment officer, speaking from the fund’s headquarters in Providence, Rhode Island.

Most recently, Textron seeded Lee Capital Management’s US large cap quantitative fund, which invests based on stock signals gleaned from data mining by investment research experts Value Line, and is benchmarked against the S&P 500.

That investment follows on from the pension fund providing $100 million to a short-duration convertible bond strategy run by New Jersey-based Palisade Capital. Textron helped develop the strategy, which now has $200 million in assets under management and five clients.It invests in unrated, CCC or B securities with a short duration and an average equity beta of 0.2-0.3, Van Vleet explains.

“If the stock market goes up, I get 0.3 per cent of the upside and if the market goes down, I will still get a CCC or B type of coupon. It’s one of the few ways we can be long volatility with positive carry.”

Van Vleet offers seed capital via separate managed accounts or co-mingled products, although he says he prefers the former.

Seeding new funds is just one example of Van Vleet’s dynamic strategy, shaped around the application of carefully managed doses of complexity, leverage and illiquidity. Adding too much of any of them can quickly turn poisonous, but so far Van Vleet has proved adept at getting it right. The pension fund targets a 7.75 per cent return, inclusive of 100 basis points of alpha. Since Van Vleet joined Textron in 2013, after being head of pension benefits for United Technologies Corporation’s $24 billion pension plan, the fund has posted three-year and five-year returns of 7.6 per cent and 8.5 per cent, respectively.

Belief in active

All management is outsourced in active strategies; Van Vleet equates passive to abdicating his key responsibility to find the managers and strategies that will bring home returns. Rather than work in asset-class silos, his team of five are experts across the total portfolio. He uses 30 managers in public markets, adding and subtracting about two a year, and 56 in private markets, most of which are private equity general partners. Assets are split between a 50 per cent allocation to equity, 30 per cent to fixed income, 11 per cent to direct real estate and 8 percent to private equity, with the remainder on hand for liquidity purposes, including cap calls, margin calls, benefit payments and tactical trading.

Over the last 18 months, Textron has pared back its public equity allocation from 55 per cent to 50 per cent, all taken from US large caps. Van Vleet predicts neither a recession nor even a downturn in corporate earnings; instead, he believes price/earnings multiples will de-rate. A contraction in S&P 500 P/E multiples, from 16 times to 14 times, will knock 10 per cent to 12 per cent off total returns, he says.

“You can have a good economy, and great earnings, but if the market is not willing to pay the same or higher multiple, you won’t make money. A P/E multiple de-rating is normal at the end of a stock market cycle, as interest rates normalise.”

Given this outlook, Van Vleet has sold equities to invest higher up the capital structure, re-allocating to fixed income in ways that include collateralised loan obligation equity (CLOs), publicly listed business development companies (BDCs), special situation fixed income funds, short-duration convertible bonds and high yield.

“Year to date, these trades have performed exceptionally well,” he enthuses.

He is also preparing the fund for rising interest rates in other ways. He expects the US dollar to strengthen and has hedged a considerable amount of the fund’s non-US dollar exposure.

“There is a Trump discount on the dollar right now,” Van Vleet explains. “It will strengthen as the US normalises interest rates more quickly than the rest of the world.”

He is also focused on seeking out tail hedge strategies that will give him upside while protecting the downside. He’s not a fan of S&P put options because of the price, but believes convertible bonds are a good way – along with being long the dollar – of accessing this kind of protection.

“In equity market corrections, the dollar, yen and Swiss franc are the better performing currencies. Being long the dollar is a positive carry trade that serves as tail-risk insurance.”

SPACs are back

Van Vleet is also exploring opportunities in investments that, like fashions, are making a comeback. Special purpose acquisition companies, SPACs, so-called ‘blank check’ companies or ‘cash shells’, seek to raise capital by listing shares on a stock exchange. Each SPAC has its own experienced management team, investment criteria and focus, such as a specific industry. At the time of the initial public offer, the SPAC is empty, but the idea is that it will identify attractive acquisition targets over the ensuing years. Failure to do so leads to liquidation and investors getting their money back. SPACs could offer a win-win, Van Vleet says, either via ease of exit with money returned, or through liquid shares in the market in the event of a successful acquisition.

“It is an interesting space because the investment you end up with is a five-year warrant,” he says. “It is, effectively, a five-year call option. It could be an inexpensive way for us to gain a long-dated portfolio of call options.”

New approach to hedge funds         

Textron is unwinding its portable alpha program and redefining hedge funds as an asset class. The pension fund will still invest in hedge funds, but they will be rolled-up into traditional rate, spread or equity allocations. The new approach is driven by Van Vleet’s belief that hedge fund strategies are never truly uncorrelated.

“Hedge funds have a lot more spread and rate beta than people are honest about,” he says.

Nor does he think hedge funds have enough skin in the game, with most of the risk left on the investor’s table.

“There is better alignment of interest in drawdown, private equity structures,” he argues. “In a PE structure, you invest as partners for 3-5 years, exit the investment, then split the spoils. With hedge funds, the spoils are split every year, on a mark-to-market basis, rather than at the exit of the investment.”

He does note, however, that some hedge funds have adapted their offering to include more drawdown structures to tap the 3-5 year, lock-up capital that gives more revenue and stability for the firm.

“Hedge fund managers that allow quarterly redemptions are at risk,” Van Vleet says. “Smart hedge fund managers diversify their revenue streams by launching drawdown structures.”

The portfolio is 11 per cent real estate, 70 per cent of which is in core US, invested across 21 different properties spanning multi-family living, warehouses and grocery stores. The balance of the real-estate allocation is in value-add drawdown structure funds.Textron is overweight real estate – it’s beyond its internal benchmark and two times its peer group – but Van Vleet has no plans to scale back, despite real estate’s sensitivity to rising rates and volatility.

“My core real estate portfolio is like a bond; it makes a 5 per cent coupon and I have control over the asset.”

He also believes pockets of value will remain because demand for affordable housing in specific cities or geographies isn’t going to disappear, even if the US economy slows.

“It is not a monolithic market; it is very geographic specific,” he concludes.

There are some jobs we do because we think we should. Charity volunteer, church warden and prison visitor are obvious ones. Nowadays, the list commonly includes pension fund trustee, too.

Until now, the typical pension board included former senior employees or directors, employee-nominated members, external independent trustees and just useful, decent people. They didn’t need specialist skills, although it was always handy to have a solicitor on board because they understood how trusts operated, or an accountant because the numbers could be tricky. But the way it worked best was to have lay trustees, committed to doing the best for their members and supported by technicians such as actuaries and investment consultants.

Such boards worked well, albeit imperfectly. They were cheap to run; few trustees needed more than their expenses paid. Boards operated collegiately; trustees needed to work together, and often used their inherent conflicts of interest to good advantage since they could use their knowledge of the sponsor or the membership to help forge agreements on policy and strategy.

It was even better if trustees were also members of the scheme, since balancing the various interests is one of the major tasks of trustees. The fact that they might not have had much understanding of the technicalities of pensions was not a concern. The supporting experts could advise on the meaning of a sub-section, or the most appropriate valuation technique.

In fact, the job of a trustee was to use honesty and common sense, not to be a technician; the fact that they were not experts was a benefit not a problem. Indeed, the obligation to place member-nominated trustees on boards, introduced many years ago in the UK, pre-supposed they were amateurs. Just like the directors of Rolls-Royce are not expected to be aero-engineers and those of High Street grocer Marks and Spencer aren’t meant to be authorities on the manufacture of prawn sandwiches.

But recently the scene has changed. Following the failures of UK department store chain British Home Stores and construction group Carillion, for which I am trustee chair, the UK’s House of Commons Work and Pensions Select Committee has assumed the outrage position and called for regulators to be tougher. It is hard to see what more might have been done at the time by the parties involved other than at the margins. At present, neither fraud nor misrepresentation seems to have taken place in those two cases. Nonetheless the political pressure on the Department of Work and Pensions (DWP) and, thence, on the Pensions Regulator, has been immense.

So far, instead of pressuring plan sponsors, it has proved easier for regulators to impose obligations on trustees. Over the last few months, we have seen a stream of papers from The Pensions Regulator (TPR) and DWP imposing additional obligations on trustees to produce ever more paperwork, to abandon their common sense on investment strategies, and to become subject to personal penalties far beyond what they had contemplated when they were appointed. In particular, both the TPR and DWP are proposing increased professionalisation and personal liability of trustees.

At first glance, those requirements do not seem unreasonable. There are millions of people in pension schemes who are concerned about their income in retirement. The law and rules are now very complicated. The sums involved are substantial – it is suggested that the Carillion deficit is about £2.6 billion ($3.4 billion) so having trustees who know what they are doing should be comforting both for members and lawmakers.

But with professionalisation comes ‘liabilitisation’ – a new word. The regulator is engaged in a small orgy of imposing penalties, mostly in relation to technical breaches, rather than substantive ones. This is the broken-windows theory – if they crackdown on minor infringements that will halt the major ones. There is no evidence for the validity of this theory, but that has not stopped TPR from penalising chairs with impeccable reputations minor amounts for alleged breaches of chair’s statement rules. Sensibly, chairs usually find it cheaper to pay rather than challenge, and TPR would rather claim credit for imposing fines for these minor infringements than devote its energies to preventing the theft of millions of pounds with impunity through pension freedoms.

Regulators argue – without evidence – that members’ outcomes might be improved by expanding trustee liabilities. It would certainly meet the regulators’ need to show they have teeth. But for trustees, the question now is whether there is any space at all for lay trustees, especially member-nominated trustees.

We can see echoes of this dilemma in relation to the appointment of British judges. Over the last two centuries, the UK has enjoyed an unrivalled reputation for the quality of its judges. Their selection had its drawbacks; they were drawn from a limited group of people, unfamiliar with problems of ordinary people, and were often somewhat aloof. But they were of impeccable intellectual ability, free from corruption, and experienced in the law. Today, however, it is proving increasingly hard to find judges – partly because of the reduced pay, partly because of the reduced pensions – but mostly because judges have to write an essay, like a schoolchild doing exams, before they are accepted. It’s the lack of dignity and respect for the judiciary that is making justice harder to find for the rest of us.

The same seems to be happening for pension fund trustees. The lack of respect the regulators show trustees, who are doing their best with their ever-increasing liabilities under difficult circumstances, makes being a trustee increasingly unattractive. Yet if the lay trustees disappear, we will miss them. Professional trustees are expensive, necessarily bureaucratic, and lack the necessary background knowledge of the plan sponsor.

So lay trustees should remain part of the equation. They bring the experience of the membership with them. Member-nominated trustees add value, even though they may not be experts, and company trustees have knowledge of the company’s position. What trustees need to make their roles more palatable is protection. The establishment of a more politically aware trustee defence union should help them cope with an over-zealous regulator and the political excesses of select committees, and also improve their reputation with their members and the public.

We need lay trustees, but they cannot do their jobs properly unless they are freed from over-zealous regulation.

Robin Ellison is a consultant at London law firm Pinsent Masons and visiting professor of pensions law and economics at Cass Business School.

The world’s largest investor, Japan’s $1.4 trillion Government Pension Investment Fund (GPIF) has revealed the details of its new performance-based fee structure, first reported by Top1000funds.com in May (“GPIF insists on paying only for alpha”).

The new structure signals a radical shift in how fees are paid in asset management and the power of large asset owners to be a catalyst for change.

It’s a considered approach by GPIF, and its examination of its own behaviour and skills in the manager selection process is admirable. It was willing to compromise and come to a solution that was not only a benefit for the fund but also had an element of fairness for managers, too.

About 20 per cent of the fund ($28 billion) is actively managed, but in the three years from 2014 to 2016, only a small number of active managers achieved the target excess return their mandates dictated.

This, alongside some self-reflection from GPIF on its manager selection capabilities, prompted the fund to revise its fees with the aim of better aligning them with performance.

The result is that, for active management, the base fee will now be lowered to the rate of a passive fund, and the maximum fee rate will be scrapped.

GPIF has also introduced a “carry over”, which partially accumulates payment of annual performance-based fees to link them with mid- to long-term investment results.

In a quid pro quo, the fund has also introduced multi-year contracts for managers.

While performance fees are common in high-octane mandates, such as hedge funds or private equity, they are less common for vanilla active equities mandates.

GPIF’s costs in fees are not astronomical. For fiscal 2016, the fund’s total fees were ¥40 billion ($370 million). This represents an average rate on the investments of about 0.03 per cent. That is a modest fee; compare it with the much smaller $350 billion California Public Employees’ Retirement System, the largest fund in the US, which had investment expenses of $873 million in 2017.

GPIF’s motivation

But that doesn’t seem to be the point. GPIF was looking for a way to align managers with their purpose and, ultimately, have managers do what they say they will do. For active managers, at a minimum, that means beating the benchmark.

GPIF is mostly a passive investor. Mainly due to its size, and the fact it owns the market, its investment strategy has been one of better beta, acting to improve the market as a whole, through its ESG strategy focused on governance. But within its active managers, better alignment is a priority.

The fund recognises its own part to play in this, stating “GPIF itself has room to improve its selection abilities, and is working hard to increase sophistication in this area”; however, it also states that the target excess return rates managers set are inappropriate, and that managers may be more focused on increasing assets under management than pursuing excess returns.

Before the new fee structure was in place, managers were paid considerable sums regardless of their performance and so had little incentive to set target excess return rates appropriately or to be innovative in seeking excess returns.

The new fee structure seeks to change that.

The effect on the sector of GPIF’s actions is not lost on the fund. While it states that the new performance-based fee structure came about as a consequence of factors specific to the fund – given the amount of assets it controls – it appreciates the new structure will have a big impact on the asset-management sector as a whole.

“For its part, GPIF is confident that if the introduction of this structure can serve as an opportunity for increasing the sophistication of the asset management sector, particularly of active managers, it will substantially benefit both GPIF and its beneficiaries.”

For the 2016 fiscal year, the fund’s investment return was 5.86 per cent, due in large part to domestic and foreign equities, which returned 14.89 per cent and 14.20 per cent, respectively. Its compound benchmark return was 6.22 per cent, representing underperformance of -0.37 per cent. Over the 11 years to fiscal 2016, it added 0.04 per cent.

The performance attribution is due in large part to the asset allocation mix, and over the last few years, GPIF has been actively diversifying away from a conservative allocation biased towards domestic bonds. (See “From bonds to equities for GPIF”).

The fund’s asset allocation as at December 2017 was domestic bonds (27.6 per cent), domestic equities (26.05 per cent), foreign bonds (14.13 per cent), foreign equities (25.08 per cent) and short-term assets (7.06 per cent).

On the seventh-floor London offices of RPMI Railpen, investment manager for the £28 billion ($37 billion) pension fund for the UK’s railway workers, young quants wearing headphones sit alongside a property team where investment insight comes from pounding the streets in hard hats and yellow jackets, rather than scanning screens and data.

In 2017, Railpen bought all its commercial property assets in house and boosted its own equity trading capabilities in alternative risk premia and fundamental growth, recruiting 23 new staff. By the end of this year, about two-thirds of the equity allocation will be in-house.

Fresh faces have added to diversity and internal management is also fostering a different sense of responsibility, new chief investment officer Richard Williams says, with an insight drawn from four years as investment director before taking his current role.

“In the past, it was all about overseeing others investing on our behalf,” Williams says. “Now we are doing it ourselves. It’s very different because if it is wrong it’s our fault. We don’t have anybody else to blame.”

Williams is Railpen’s first CIO. The pension fund created the role only after chief executive Chris Hitchen left at the end of last year.

Bringing the property allocation in house has lowered investment costs but it has also given Railpen much more control – the primary rationale behind the move.

“It is much easier to align internal staff with our long-term mission than [to align] third parties who are often allocating properties between multiple clients,” Williams explains. “Our property team also has the same benchmark as the fund’s return objective, whereas a third-party manager will want to outperform a market index that has no relevance to us.”

Property lies in Railpen’s Growth Fund, it’s largest of the five pooled funds available to all employers, which accounts for about two-thirds of scheme assets. The growth pool also includes allocations to equity, fixed income via high-yield and emerging-market debt, and total return. It targets a long-term performance of 4 per cent annually above the Retail Price Index; last year, it returned 11.7 per cent.

The ability to control strategy is proving particularly important as the property team navigates the fund’s exposure to UK retail assets struggling under Amazon-fuelled High-Street stress. The team, headed up by Anna Rule, also has a fresh perspective that enables objectivity.

“We have quite a large retail property exposure but our confidence level in dealing with this with an internal team is much higher,” Williams says. “We don’t query the alignment of interest and the team hasn’t fallen in love with particular assets because they developed them and have owned them for 10 years. We are fresh to the situation and can proceed accordingly.”

Property accounts for about 12 per cent of the Growth Fund and is all UK property.

The same access to internal expertise will also help the fund act on surprising trends in the equity allocation. Equities make up about 65 per cent of the Growth Fund, and about three-quarters of equities is now invested in systematic alternative risk premia strategies. The recent transformation of Railpen’s equity allocation looked significant. The fund has moved management in-house, swapped judgemental portfolios for more quantitative strategies and reduced the number of portfolios from about 20 to 10.

Allocations include the risk premia strategies, made up of single alternative risk premia factor portfolios and a multifactor composite portfolio, and a concentrated portfolio investing in leading companies with sustainable structural earnings growth. The equity allocation has outperformed the market and, as intended, total investment costs for the Growth Fund have shrunk to about 50 basis points, half what the fund was paying before. Yet a recent deep dive revealed that despite the high-level changes, the portfolio wasn’t as different as Williams thought and Railpen is now reassessing its equity portfolio again.

His main concern is that the portfolio is over-diversified and not taking a significant amount of stock-specific risk. The quant strategies are also spread across a wide range of factors, such as value, momentum, low volatility, income and quality, some of which overlap so that the aspect of one factor crops up in another. One way of eliminating this inefficiency could be having the team introduce more quantitative portfolios that incorporate all Railpen’s factor models in the one single envelope.

“Maybe this is a better route to pursue, rather than have lots of different portfolios,” Williams says.

Strategies for today

Williams has no plans to reduce equity risk, despite acknowledging that a correction lies ahead.

“Will there be a big correction? Absolutely,” he says. “Will there be low returns in the near-term? Not necessarily. Corporate earnings are strong, we don’t think valuations are excessive and we don’t think interest rates are about to head up very quickly.”

He doesn’t want to de-risk because the best returns tend to come in the last part of the economic cycle and the cost of getting it wrong is high. He is also just as wary of investors’ ability to time turning points as he is of the many predictions of a downturn. His team is explaining to stakeholders how the fund might perform in a downturn and readying strategies to put in place if there is a reversal.

These include using leverage. Railpen’s high return target means the fund is usually fully invested, leaving little readily available cash to step in and buy assets in a counter-cyclical way if prices do fall. Therefore, Williams is considering how best to access money, either via derivatives exposure or explicitly borrowing, should the need arise.

“It is more likely we will do more of the former [via derivatives], than the latter, but taking leverage in times of stress is quite bold. We won’t leverage up exactly at the bottom so it’s very important that we’ve all thought about it beforehand and have the confidence to act when the situation arises.”

As for picking where opportunities might manifest, he says areas that suffered in the last downturn are less likely to suffer to the same extent next time around.

“There was a liquidity banking crisis previously, so I doubt it would be here,” Williams says. “We haven’t had an emerging-market crisis for a while and we haven’t had a corporate credit crisis for a while either.”

He is also steering away from trading-oriented strategies because the fund has found more success in recent months diversifying into structural investments. Trend-following strategies and emerging-market debt, particularly local currency investments, have struggled, for example. In contrast, Railpen’s investments in royalty seams in the music and healthcare industries, where success is linked to sourcing interesting opportunities, have been more successful.

But it is in private markets where strategy is going in the most new and exciting directions. In a process overseen by Paul Bishop, Railpen’s head of private markets, the fund has set up a joint venture with the $66 billion Alaska Permanent Fund and the Public Institution for Social Security (PIFSS) in Kuwait to better access private markets where competition and elevated prices have crimped opportunities. The trio’s joint venture, Capital Constellation, will invest in private equity and alternatives managers and plans to deploy more than $1.5 billion in the next five years.

The process has revealed important lessons, none more so than a need to find partners that bring different elements to the party. In Railpen’s case, this includes ESG experience and UK presence, he says.

“It is also about finding heterogeneous skill sets that blend together,” Williams explains. “There are lots of hurdles to jump through and we would like to do more initiatives like Capital Constellation, but only time will tell if we do. It won’t be for lack of intention.”

It is also important to prepare the ground at the beginning of a collaboration in case things grow tricky in the future.

“It is a little bit like a [prenuptial agreement],” Williams says. “If it doesn’t work out, all parties need to know how they can separate without it getting too acrimonious. I’m not suggesting the best marriages have to have a prenup, but sometimes love isn’t enough.”

Railpen now manages about a quarter of assets internally and despite the benefits, Williams is not planning to bring any more in-house. He doesn’t want internal allocations that are “too complicated” and favours managing internally only those assets that the fund will always invest in, like UK property and equity. In contrast, allocations to high-yield bonds, where the fund will invest for a while but probably not forever, and where research is burdensome and complicated, are better outsourced. Railpen’s manager relationships are also governed by a fresh determination to align fees with the service the manager is giving.

“We want our managers to show us exactly what they are doing for us, and then we can pay appropriately for that service. What we are less keen on is fees where we can’t link the fee structure to the actual service being provided. If people are sourcing assets we pay for sourcing assets, if they are managing assets, we pay for that management.”

Investors seeking to link the UN Sustainable Development Goals to their investment strategies have an opportunity to help reduce tropical deforestation associated with agricultural commodities such as palm oil, cattle or soy.

Mitigating exposure to deforestation risk in investment portfolios relates directly to SDG15 (protecting terrestrial ecosystems), SDG13 (climate action) and SDG6 (water availability and quality).

Here’s how. Agricultural commodities production is a key driver of tropical deforestation; it produces 19 per cent to 29 per cent of global greenhouse-gas emissions. Companies that source agricultural commodities from suppliers that illegally destroy forests face material financial risks, such as reputational damage, regulatory action and loss of market access.

Palm oil giant IOI Group, for example, lost dozens of buyers when its certification from the Roundtable on Sustainable Palm Oil (RSPO) was suspended for compliance failures. As a consequence, the trader’s share price dropped 18 per cent, and its reputation was tarnished.

By engaging with portfolio companies such as IOI Group that have high exposure to palm oil deforestation risks, investors can mitigate portfolio risk while reducing the environmental impacts of deforestation and helping to achieve the SDGs.

But time is of the essence, as was laid bare at the recent Tropical Forest Alliance 2020 meeting in Ghana. Global tree loss went up 50 per cent, year on year, in 2016, reaching nearly 30 million hectares of forest land – an area a little larger than New Zealand. Much of this tree loss was associated with the clearing or burning of forests for commodities like palm oil, which produced more than 1 billion metric tons of greenhouse gas emissions in Indonesia alone.

If we are to hold global warming to no more than 2°C, companies and their investors with exposure to deforestation must mitigate this deforestation. Doing so offers the greatest near-term potential for reducing greenhouse-gas emissions and achieving the Paris Agreement’s 2°C goal.

Here are four steps investors can take to mitigate deforestation risk, particularly associated with palm oil production, while doing their part to meet the SDGs:

Get educated
Palm oil is the most consumed vegetable oil in the world, with a market value expected to reach $100 billion by 2021. Its demand has tripled over the last 15 years, making it one of the top four commodities contributing to deforestation (alongside cattle, soya and timber). Despite commitments from numerous producers, traders and buyers to produce and consume sustainable palm oil, unsustainable practices persist.

Palm oil expansion is greatest in Indonesia and Malaysia, where clearing for plantations is the leading cause of rainforest destruction, carbon dioxide emissions and human rights challenges. The surge in production is likely to continue, with demand expected to reach 77 million metric tons in 2050, compared with an annual average of 52 million metric tons during the last three years.

New hotspots for sourcing of palm fruit are also emerging beyond South-east Asia:

  • Nigeria, Cameroon, and Ghana combined to make up 4.5 per cent of global production in 2016 Food and Agricultural Organization of the United Nations (FAO) data shows. While growth has been minimal or negative, these nations remain on the World Resource Institute’s (WRI) Global Forest Watch list as potential hotspots. A recent report reveals that Nigeria loses its forests at the rate of 11.1 per cent annually, the highest on earth.
  • Papua New Guinea accounted for 0.8 per cent of global production in 2016, increasing by 19 per cent since 2011. The Global Forest Watch reports that the nation experienced “70 per cent more tree cover loss in 2015 than in any [other] year on record”.
  • Colombia accounted for 2.4 per cent of global production in 2016 and has increased its output by 47 per cent since 2011. It is the fourth-biggest palm producing country in the world.
  • Ecuador’s presence in the export market has been increasing in the last decade. It contributed 1.1 per cent of global production of palm oil in 2016, increasing production by 49 per cent since 2011. (FAO).

 

Pinpoint risk in your portfolio
Investors have increasing access to data platforms that can help them assess deforestation risks in their portfolios.

SCRIPT (the Soft Commodity Risk Platform): This interactive website designed by the Global Canopy Program provides tools and guidance to help financial institutions screen their portfolios to determine the companies and issues that pose the greatest risk to their institutions, while recommending engagement priorities.

SPOTT (Sustainability Policy Transparency Toolkit): Built by the Zoological Society of London, this website publishes transparency assessments of palm oil producers and traders. SPOTT’s resources can inform investor engagement with companies on sustainable commodity production and sourcing policies.

World Resources Institute Global Forest Watch: Investors can use this platform, and the forthcoming Global Forest Watch Pro, to analyse forest trends, receive supply-chain alerts, create custom maps, and download real-time data on forest loss.

Ceres’ Engage the Chain: Provides background information and case studies on the environmental and social challenges that drive financial risk for eight commodities, including palm oil.

Engage with portfolio companies
Through engagement with high-risk companies, investors can help drive stronger company zero-deforestation policies, supply-chain traceability, and supplier assurance mechanisms.

Many companies are starting to take action and are communicating their progress through platforms such as CDP and the RSPO; nevertheless, deforestation, land conflicts, and labour issues persist in palm oil production. Transparency on implementation of policies is critical for investors and all stakeholders to address the gap between corporate commitments and reality.

The Reporting Guidance for Responsible Palm – developed in consultation with 18 expert partners on palm oil and deforestation – provides investors with a framework and key performance indicators for engaging with companies on this implementation gap.

Help make standards stronger
This summer, RSPO is reviewing its five-year standards, offering a critical opportunity for investors to weigh in to ensure that standards for palm oil production catch up with global sustainability expectations. These standards will become the basis for enforcement protecting forests, carbon-rich peatlands and human rights for the next half decade. External stakeholders can provide input easily online.

Investors have a clear opportunity here. By engaging with portfolio companies, they can direct attention toward the business risks of deforestation, while raising solutions to help stop it.

Siobhan Collins is manager, food and water programs, at non-profit sustainability organisation Ceres.

Q: TCorp has undergone, and continues to undergo, much change – transformational change in fact. What has been your role, and the board’s role, in directing and overseeing that and what outcomes are you expecting? (TCorp pulls trigger on shake-up) 

A: The changes to TCorp [NSW Treasury Corporation] date back now four years, to when the whole idea of amalgamating the state’s funds management activities got legs. With the clarity of that, and going from a fund with $20 billion to $90 billion, it meant when we were looking for a replacement for [former chief executive] Steve Knight, who was retiring, we needed a fundamental change.

TCorp was a financial markets business with some funds management, but the profile of its debt and assets flipped and became about asset management. This changed the way we thought of selecting a new chief executive and the aspiration of the business.

The board played an important role. Before the amalgamation, the secretary of the treasury was the chair, but as part of this change, we moved to an independent chair, and I was appointed. I had been on the board since 2009 as an independent member.

We have seen transition at every level – a change in the governance arrangement and change in personnel.

David Deverall was appointed chief executive in 2016 when Rob Whitfield was still the chair and they planned the new strategy. This included the transformation that was needed to become a world-class organisation, and we are working with Roger Urwin from Willis Towers Watson on this. This includes looking at the key attributes of a world-class investment manager including beliefs and benchmarks, and we tried to absorb some of those attributes in TCorp. The real benefit to the state will be better performance

Other changes we have made include strengthening the investment committee. Susan Doyle was appointed chair of that committee and we also have another independent member of the investment committee – neither of those two is a member of the board.

We also brought in Stewart Brentnall as chief investment officer and he and the team are working with Willis Towers Watson and talking with our clients about their investment goals.

In some ways it was back to basics. We felt it had to be more than just crunching three organisations together.

TCorp has made so much progress in the two years since the merger. We have moved to one custodian and one team, and saved a lot of money on costs. But performance will be where the real upside is. If we can get a 0.5 per cent improvement in performance on $90 billion, that would dwarf any costs savings we’ve made.

What is the most important conversation you are having around the board table this year?

Portfolio risk is very important to us. Because we are a public-sector organisation, risks are somewhat asymmetric. When you are managing the public’s money, there’s a different approach, and you are more loss averse. So you are more conservative and want to manage downside risk but at the same time we want to be high performing. We are looking at tail risk hedging in some portfolios and not others and also managing different levels of diversification, depending on the client. But we are looking at investments in infrastructure, property and more in equity than in the past.

  1. How would you describe your relationship with David Deverall, Stewart Brentnall and the executive team?

We have a very positive relationship. I play the coach role that you’d expect the chair to play with the CEO. For example, I understand the public-sector world, and I think David has done a good job of fitting in with Treasury and the Treasurer. We meet regularly to discuss his our agendas but I’m clear that the role of the CEO is to lead the team. We still need to be aware of other executives’ capabilities and the chairs of our committees stay close to the relevant executives. The board likes to see all of the leadership team regularly.

What is your best piece of advice for how to chair a constructive board meeting?

I think ‘constructive’ is the right word here. It is always a difficult role for the board to be supportive and challenging to the executives. The art of a good, mature board member is to do that. Our executives can’t be complacent but they also can’t feel like the board is picking on them. The interaction has to have a performance focus.

  1. How have your views about what makes a good chair changed over the years?

I’m not sure my view has changed, but I’m now a lot closer to living it. In my executive life, I was lucky enough to work with a lot of good chairs, and I now pick and choose from their traits. It’s important to have a balance of keeping the climate open enough but having everyone perform and prepare.

  1. You have a board with a lot of financial services experience and board experience, what is your view of the current debate around governance and the value of independent directors for super fund trustees?

At the end of the day, super is about managing individuals’ retirement funds, and boards need to have a single purpose around that. Independence is important.

The only true protection for the member in the long term is being independent of other interests apart from the member. Some groups are in it for profit, for example to shareholders, or not for profit, such as employee and employer groups. There needs to be some measure of independence, where the sole purpose is the interests of the members.

  1. You and many other members of your board have had long careers in banking. What is your opinion of the royal commission and what are the most important practices that need to change in the finance sector?

All of financial services needs to ensure that we get back to thinking about customers first. Banks or insurance companies or whoever is being criticised are usually [facing criticism] because they’re focused on something else. Customer focus is the key. We need to form an ethical view here. Behaviour comes from the beliefs you have in the first place, then incentives come from that. My hopes are that we get out of the micro examples in the royal commission and get back to the big themes of finance’s role in benefiting society and making it better. Finance has an important role to play in the community. I’m an old-fashioned banker, and think that the business is about providing finance to help the economy grow.

Who are your most important mentors and to whom do you turn for advice now?

I don’t think I have any one a mentor in the sense they would know who they were. But I have learnt a lot from many people. I worked closely with David Morgan and observed Bob Joss (at Westpac) and also David Gonski at ANZ. I do think you need an element of humility on a board and as chair, to create the right climate. We can’t have people feeling intimidated but they also need to lift and be their best. A board operates best when that balance exists. If I look at my style as a chair, I guess most people would describe me as a good listener. I like to have different viewpoints before I form a view. If you rush, you can miss critical elements. I listen more than I speak. I guess I’m more contemplative than intuitive.