In the largest investment a private foundation has ever made, the $12 billion Ford Foundation has just committed $1 billion over 10 years to mission-related investment (MRI) strategies that earn both financial and social returns.

It’s a change in strategy from one of the world’s most celebrated foundations, which was set up in 1936 by the son of the motor company’s founder, Henry Ford. The shift brings a fresh approach to endowment management and acts as a rallying call to others to follow suit.

Top1000funds.com talks to Xavier de Souza Briggs, vice-president of the foundation’s economic opportunity and markets program.

Could you detail the background to your recent decision to commit $1 billion to MRI, and why the foundation has reached this decision now?

XB: Over the last five decades, the Ford Foundation has made more than $670 million in program-related investments (PRIs) as part of our programmatic work around the world. In addition to our experience as an impact investor through PRIs, we were motivated by the growth and maturation of the impact investment marketplace and by recent guidance issued by the US Treasury. That guidance clarified that private foundations in the US may consider their missions when making investment decisions.

My colleagues, our chief investment officer, chief financial officer and general counsel, worked closely with me and my team to determine the most prudent way to launch an MRI portfolio. Our great board of trustees, especially our investment committee, joined us on this journey every step of the way, asking tough questions and fulfilling their fiduciary duty to the fullest. While we are by no means the first foundation to embrace MRIs, we concluded that the time was right to make a strong statement as to where we see the market moving, to help it get there, and to encourage other institutional investors to find meaningful ways to make a social impact through their work.

Why have you decided to invest in these specific sectors?

We believe these two sectors, affordable housing in the US and financial inclusion in emerging markets, are great places to start for two main reasons. First and most importantly, relevance; both sectors align well with our larger strategy to combat growing inequality in the world. They offer crucial leverage points.

Second, experience; we have a strong history of grant-making and previous experience investing in these sectors. Third, investable opportunity; there are capable funds and fund managers with track records, achieving both financial and social returns, able to absorb significant new capital.

 

Could you outline your investment process? How will you choose and structure investments and how will you assess social value?

Our MRI team, led by a seasoned portfolio manager we are recruiting now, and with the support and oversight of our newly established MRI committee of trustees, will review each potential investment to determine if it meets our financial and social objectives. We will initially focus on the private markets, primarily private equity and real estate, and will invest with specialty impact fund managers with experience in our target sectors.

All investments will be approved by the MRI committee, a sub-committee of the board of trustees. Building on the monitoring practices in place with our PRI Fund, we also will spend time this year developing an impact evaluation and a monitoring framework to ensure that we have structures in place to evaluate, monitor and learn from these investments over time.

What returns are you targeting – financial and societal?

Financially, we are targeting attractive, risk-adjusted rates of returns. That is relatively straightforward. The social returns are a bit more complex, but we hope in time they will be more commonplace. Our goal is to deliver mission impacts directly over the long term and advance the foundation’s programmatic goals.

We hope that through the example of our MRI portfolio ramping up to achieve scale, we can demonstrate how prudent financial returns are possible while creating positive, measurable impact. This type of evidence base will further the development of the impact investment market. We are committed to transparency and plan to share our lessons learned with the field.

To what extent can financial markets advance social good?

Let’s be honest: The financial markets have a long history of driving change but a mixed history, at best, when it comes to advancing social good. Though the roots of the responsible investing movement go back to the birth of stock markets centuries ago, investing to achieve both financial and positive social returns is still a relatively nascent and contested idea for the mainstream marketplace.

However, the reality is that the scope and scale of our social challenges today demand more from our markets and underscore the need to use every tool we have. Also, from a bigger picture perspective, there is a growing interest in aligning our money with our values, both as consumers and investors.

Start with philanthropy, since it is inherently mission driven: The Foundation Center estimates that American grant-making foundations alone collectively hold about $865 billion in assets, while pension funds and sovereign wealth funds worldwide hold trillions.

If foundations were to take even a fraction of their endowments and put assets into MRIs, this would be a significant advance. But ultimately, we’re going to need every player – governments, foundations, financial institutions and other institutional investors – to step up if we are to meet our financing challenge. We see an incredible opportunity for entrepreneurs, especially those who are at the leading edge of creating businesses that deliver social impact, to be targets of this investing and to scale accordingly.

 

How will your strategy encourage other institutional investors to consider MRI, too?

We want to get more and more institutional investors thinking about how to make the best use of their assets. It is encouraging that many big players are already working on this, both here in the US and abroad – focusing on long-term value investing, considering what meaningful “double bottom-line” investing can mean for their results and reputation.

By sharing our strategy, experience, questions and results, we want to accelerate this clear trend. And beyond our MRI and PRI investing, through our ongoing grant-making to help build the marketplace, we will continue to strengthen market infrastructure, advance public policies to accelerate and deepen market development, and make the practice of impact investing more rigorous, tested and widely understood. We’re supporting standards development, for example, mechanisms for aggregation, performance measurement, matching capital supply and demand, and more – all the ingredients of a healthy marketplace able to function efficiently and flexibly at scale.

What are the biggest challenges around MRI for institutional investors?

First, there is a shortage of high-quality, representative and standardised data. At Ford, we are using our grant-making to support more and better data to help move the market forward. A second challenge is the lack of supportive policies that would help both retail and institutional investors fully and effectively engage.

In other words, there is untapped demand to do this kind of investing. There have been a number of policy wins over the past 18 months, and Ford remains supportive of impact investing policies through its engagement in the US Impact Investing Alliance. There are also longer-term challenges. In order to truly mainstream impact investing, for example, investment professionals and thought leaders who help shape the profession will need to look not only at risk, return and liquidity but also impact. This will require education and culture change, but the stirrings of change are there. There is much to build on.

 

President Donald Trump has been a sugar boost for markets, but he’s not a catalyst for sustainable growth, says Dan Farley, chief investment officer of investment solutions at State Street Global Advisors.

“The drivers of markets are fundamentals, not Trump policies,” Farley told delegates at the Investment Magazine Fiduciary Investors Symposium, held in the Blue Mountains, NSW, May 15-17, 2017. “The Fed is on a path and will raise short rates at least twice more this year. We think earnings growth is key in the US to justify higher valuations and drive stock markets.”

But he warned that equity and bond markets remain volatile.

Examining the impact of the “US’s first Twitter president”, Farley said Trump has been using those 140 characters in a specific way.

“It’s been an effective tool for him,” Farley said. “He’s maintained attention on what he wants, he’s managing the headlines and it’s played into the straight-talking image that he ran for president on. But we need to understand the diminishing marginal utility of this – people are getting used to him throwing out something outrageous – and also how the market distinguishes between the literal and figurative meaning of these tweets.”

Standard & Poor’s research on the impact of Trump’s tweets on the potential default ratings of companies showed that three out of five negative tweets were followed by the potential default ratings increasing the day after a tweet.

Similarly, positive tweets about an industry, by Trump, were followed by some “nice bumps in stock prices” in the sector – for example in the car industry.

But, in the case of both the positive and negative tweets, Farley says, the impact was quick and then started to mitigate.

“This also has a diminishing marginal effect,” he explained. “The tweets have taken on less of an impact than before. This is a short-term issue. “Trump may have been a pop for the markets, but [his tweets are not a catalyst for] growth and sustainability of that growth.”

Influences on allocations now

Farley pointed to economic conditions, including the fiscal expansion happening around the world, and the fact, he thought, that the deflationary concerns have passed. However, he said the populist voting trend has not come to an end and that there is an inane dissatisfaction with the status quo.

“From an active risk point of view, this has all led us to be more risk seeking and we are about 8-10 per cent overweight in stocks, against government bonds on a global basis. There is a positive monetary backdrop, fiscal policy is coming in, and earnings are good. It’s a good environment for equities.”

The main driver of the overweight position in equities at State Street, he said, has been improving earnings sentiment. The biggest risk to that, he said, would be something happening in fixed income markets.

“The market is accepting a risk in rates over time; if there was a shock then it would create a challenge.”

Farley said the expectation is that there will continue to be mid-single digit returns across many asset classes, with fixed income in the low single digits.

“That’s very hard to work with to get towards outcomes we all want.”

In conclusion, he said, the Trump administration is evolving, and how it reacts and who’s in power and whom they rely upon is still coming out.

“The backdrop is improving but challenged,” he said. “It does favour equities but with a more modest return.”

Farley is based in Boston and oversees a team of more than 75 investment professionals managing more than US$180 billion in multi asset-class portfolios, including tactical asset allocation, liability driven investments and customised portfolios.

Norges Bank Investment Management has developed a proprietary database allowing it to assess non-financial risks across the 9000 portfolio companies in which it invests. The database gives its risk team and portfolio managers the ability to make more in-depth decisions around the sustainability of a company’s business.

Speaking at the Fiduciary Investors Symposium at INSEAD, Patrick du Plessis, global head of risk monitoring at Norway’s NOK7.93 trillion ($940 billion) NBIM, explained the large investor’s approach to environmental, social and governance (ESG) risk and integration.

“Most investors are familiar with traditional investment risks and use these as the starting point for analysis, but we think to get a holistic picture of a company’s risk profile you need to take into account other risks, those that are below the surface and harder to identify,” du Plessis said. “We believe that what gets measured gets managed, and non-traditional financial data has been slower to become available.”

To counter this, the fund built its own database, which incorporates non-financial data alongside financial information.

“We don’t just look at financial data for opportunities; we think you need to look at ESG considerations as well, and that works for risk mitigation and investment opportunities,” du Plessis explained. “We need to consider all externalities and understand what they mean, because we are running a global fund.”

The database includes non-financial information on issues such as carbon, climate change, waste, water, child labour, corruption, and health and safety, at the country, sector and company level. The NBIM risk team incorporates the data into relevant systems, analyses and processes to facilitate a more comprehensive assessment of risk exposure. The data relies on company-reported ESG information, which is supplemented by other service providers, such as Trucost, MSCI and CDP.

This all allows for a deep dive on certain ESG themes. For example, all countries could be assessed on greenhouse gas risks. Risks can be viewed across countries and sectors, so a matrix could assess a risk threshold between countries and sectors, du Plessis said.

“The intention is to create a one-stop shop,” he said. “In one place we have traditional valuation metrics, benchmark-relative positions and a standalone ESG tab that looks at company ratings, fossil fuel compositions and inherent country and sector risk. The risk team and portfolio managers can use the tool and find much of what they need. The intention is to create a good dialogue between the risk team and portfolio managers.”

NBIM can look at specific ESG risk related to a certain theme, such as conventional electricity in the US. The database will spit out those companies with an inherent risk related to that theme that could affect the sustainability of business models. The risk team can then focus on 60 or 70 companies specific to that threat.

“This is not a discussion about ethics, it’s about the sustainability of business,” du Plessis said. “We are not just looking at income statements but other things below the surface of the iceberg. This is the quantifying and formalisation of ESG in the business analysis process.”

Risk and portfolio managers get a more holistic company profile, including traditional and non-traditional factors, on which to assess companies.

NBIM has three pillars to its responsible investing approach:

  1. Standard setting: It collaborates on global standards and expectations. Because of the sheer size of the portfolio (9000 companies) the fund can’t engage with all of them. Standard setting, and expectations documents, create an opportunity to affect them all.
  2. Active ownership: NBIM engages on specific ownership issues with the most material holdings.
  3. Risk: the entire portfolio of 9000 companies is examined on a risk basis. The database is a key tool for this.

Separate from this ESG risk analysis, NBIM is mandated by the Norwegian Ministry of Finance to implement certain exclusions, including coal, on ethical grounds.

The investment market in Saudi Arabia has many challenges, driven by structural, economic and regulatory constraints. For insurers, regulatory restrictions exert much pressure to manage risks while optimising returns in a limited investment universe. In addition, the local bond and equity markets are shallow and volatile. Investors navigate these restrictions in various ways.

First, there are some good signs for insurance companies in Saudi Arabia, with the opening up of the market to foreign investors, albeit conditionally, and the potential inclusion in the MSCI Emerging Markets Index.

The challenges in the Saudi Arabian market are driven by structural, economic and regulatory constraints. Investment managers are often flummoxed while choosing investment products and asset classes, with asset quality continuing to be a key credit weakness for many insurers in the region.

Also, the bond/sukuk market needs to be strengthened, as it is the linchpin of investments by insurers. Allowing insurers to invest selectively in alternative assets would go a long way towards reducing the difficulty in imparting effective diversification to the book.

Shallow local bond market

Low levels of sovereign and corporate bond issuance limit insurers’ fixed income investment options, increasing their exposure to equity and real estate. This leads not only to volatile investment returns but also to severe tightening of solvency margins, which the finance managers of companies don’t cherish.

In addition, the local bond/sukuk market is narrow and shallow, with hardly any trade reported to the bourses for days or even weeks. There are only five bond or sukuk issuances registered on the exchange, with a total value of SR26.2 billion ($7.0 billion), in addition to about 48 privately placed issues, totalling SR32.7 billion. So the local fixed-income market is not big enough to facilitate investing and trading.

The equity market, in contrast, is arguably deep and wide, featuring 176 stocks with an average market cap of SR9 billion ($2.4 billion) or more. But there is considerable volatility.

As a result, both the fixed-income and equity markets pose challenging environments for insurers trying to achieve required investment return targets. In response, insurance companies manoeuvre using different products within regulatory and investment guidelines to achieve their objectives. Insurers also approach the regulator seeking permission to invest in otherwise prohibited classes, though the regulator more often than not says no.

A reasonably large number of products are in the money market space, with good size and liquidity and yields on a par with typical deposits or better. Structured products are also an alternative to medium- to long-term deposits, offering better returns.

Because the local bond/sukuk market is so inhibiting, particularly in terms of liquidity, insurers resort to Regulation-S or 144a issues (securities sold within the United States by non-US companies), consciously taking the currency exposure into consideration, including the fact the Saudi riyal is pegged to the US dollar. Insurers also have the option to invest through funds inside or outside of Saudi with a solvency margin of 5 per cent and 1 per cent, respectively, of total assets. This gives considerable leeway, avoiding the typical restrictions on asset classes.

Insurance companies (mostly branches of foreign entities) were registered in Saudi Arabia only with the enactment of Control of Cooperative Insurance Companies Regulation per Royal Decree No. M/32 of July 31, 2003.

The regulation was passed on November 20 that year and became effective on April 23, 2004, with the publication of Implementing Regulations by SAMA (now Saudi Arabian Monetary Authority, then Saudi Arabian Monetary Agency).

Regulations abound for insurers

Implementing regulations were followed by many other regulations – essentially drawing upon the parent regulation – such as risk-management regulation, outsourcing regulation and investment regulation. Most of these changes focused on mandating higher solvency margins with robust balance sheets, which an efficient and effective regulator ought to do in a fiduciary capacity.

As many as 34 companies have been licensed and listed over the years, most of them with paid-up capital of less than SR500 million ($133 million). It’s pertinent to mention here that minimum paid-up capital required for an insurance company is SR100 million and that, for a reinsurance company, the minimum is SR200 million – the majority of the companies have both insurance and reinsurance licences. There is only one company, Saudi Re, that has a licence only to transact reinsurance business.

Gross written premiums reached about SR37 billion at the end of 2016, posting a meagre accretion of less than 1 per cent over 2015. However, the profits, before zakat (alms) of insurance companies, reached about SR2.5 billion ($670 million), almost 30 per cent contributed by return on investments, compared with about SR1billion the previous year. Insurance penetration in Saudi Arabia is more or less on par with other Gulf Cooperation Council countries, at about 2 per cent.

At the end of 2016, the insurance sector, with a market cap of about SR43 billion ($11.5 billion), contributed only 2.55 per cent of the total market cap of SR1.68 trillion.

But when it comes to trading and volatility, the insurance sector makes up quite a significant part. Insurance companies contribute about a quarter of total trading transactions – including 20 per cent of transactions in listed companies – and one-seventh to total trading value and volume.

The economic environment is driven by low oil prices and they are a headwind for the Saudi insurance companies, as evident from growth of just half a per cent in the top line during 2016. The same may happen in the short to medium term, as economic growth is held back and weighing more on government spending.

Since insuring and investing are quite correlated and complementary, especially in terms of risk and capital allocation – as more risk in insuring has to be supported by less risk in investing and vice versa – a deceleration in the top line arguably results in lower net cash inflows and necessitates higher liquidity in investments, thus thwarting the achievement of optimised returns. In addition, regulatory requirements mandate that insurance companies invest at least 50 per cent in Saudi riyal and a minimum of 80 per cent in Saudi Arabia.

Regulations also prohibit investing in derivatives, option contracts, hedge funds, deposits with foreign banks, private equity investments and any off-balance sheet instrument, again unless specifically approved otherwise. The regulations essentially direct and encourage investing in bank deposits and highly rated bonds, particularly sovereigns.

The risk weights attached to assets depend on the size of balance sheet, rather than, ideally, on the quantity and quality of the asset itself. For example, investments under the “Shares-Saudi-listed” asset class are eligible for solvency margin up to 5 per cent of total assets (balance sheet size) irrespective of their own size and quality.

This means all investments in Saudi listed stocks up to 5 per cent of total assets are fully admissible for solvency margin – and anything above 5 per cent, fully inadmissible. Any other equity, be it developed market equity core/satellite or emerging market equity, attracts admissibility of only 1 per cent of total assets, leaving some of the asset classes even with zero per cent admissibility.

Mamraj Chahar is the chief investment officer of Saudi Re.

Evolution is the buzzword at the Local Pension Partnership (LPP), the collaboration between two of the United Kingdom’s local authority pension funds. The Lancashire County Pension Fund and the London Pension Fund Authority (LPFA), with combined assets of about £12 billion ($15.5 billion), set about joining forces to better access investment opportunities in private markets before the government decided to pool local authority schemes into fewer, bigger funds.

That trailblazing has earned the LPP real expertise as the wider pooling process is still gathering momentum. As the evolution continues, Chris Rule, LPP’s managing director and chief investment officer, is heading a quiet revolution as well.

“It’s all about making sure you get proper delegation of decision-making because, bluntly, if you come together and pool but actually all of your portfolios look very different to each other, you haven’t created much scale.

“I think the real challenge people are having, not only in the Local Government Pension Scheme (LGPS) but also in private-sector pension funds, where there is also talk of consolidation, is how you get people to give up their favourite manager, give up their authority to make decisions on minutiae, and focus on the real decisions that make a difference, namely asset allocation. They then need to replace the historical structure with a professional, scalable operation underneath that can report back to stakeholders.”

Rule is convinced that the key to successful pooling lies in getting the governance right. It’s what he refers to as “the governance premium” that will ultimately enable the fund to “maximise benefits of scale”.

LPFA and Lancashire have both maintained control of their strategic asset allocation, and how they deal with their employers and contribution rates. They also both still sign off on funding strategy.

A typical “sovereign decision” includes LPFA having a liability hedge in place using an overlay, whilst Lancashire doesn’t. However, in terms of sub-asset class strategies, manager selection and stock selection, control is fully delegated to the LPP.

“Once an asset allocation decision is made, LPP has full discretion,” Rule says.

Although the asset allocations between the two entities differ, he says the funds are on similar paths. Both already have low allocations to traditional equity (50 per cent at the LPFA, and about 40 per cent at Lancashire) compared with peers. And although there will be no dramatic shifts, both ultimately aim to expand investments outside fixed income and equity.

Not courting more local authority funds

Rule plays down the need to attract more local authority funds to the LPP pool to increase assets under management in line with the government’s £25 billion ($32 billion) target for each fund. He argues that the LPP is already big enough to negotiate the “lowest possible fees” with external managers “sitting significantly above the threshold below which fees start to escalate”.

He also says the LPP’s current size ensures it can be nimble. He says he is considering additional clients and pursuing a “number of avenues”, although he cautions that any considerations around taking on new investors have to be balanced against the fit with existing clients.

Besides, LPP is achieving greater scale in other ways, like collaborations in infrastructure. GLIL Infrastructure is an infrastructure partnership that began between the LPFA and Greater Manchester Pension Fund.

It has grown to a £1.3 billion pool that includes other local authority funds Merseyside and West Yorkshire. Now, Rule wants to make it available “to all investors”.

With this in mind, the joint-venture structure is being converted to a fund structure that will allow entry for passive, or smaller, investors.

“There are a number of investors out there who would like access, but don’t have the size of allocation that would warrant them coming into the structure we have today,” Rule explains. “A fund structure will allow limited partners to come in.”

So far, other local government pension funds have shown the most interest, but he believes smaller private asset owners “unable to join consortia” will join. He particularly likes UK infrastructure because of the advantage of local knowledge and the currency and inflation match.

“There will be a home bias, although we do look globally in all asset classes,” he says.

It is also a model he hopes to roll out to real estate, and possibly other real assets. Collaboration with other funds on infrastructure investment has developed a structure that has some parallels in real estate.

“The pooling at an asset class level, rather than on a multi-asset class level, does have some merit, especially in private markets,” Rule says. “We are at the early stages of thinking about how we might expand at this level. But the concept of sharing capital and sharing resources and underwriting capability is successful. We are able to do much more with much less; we are not operating with a huge cost base.”

Building up internal resources

Managing more assets internally is another stated aim at LPP, where the internal headcount is now 24, double what is was a year ago.

This effort has focused most on listed equity to date. About 40 per cent of LPP’s global equity allocation is now managed internally. Rule is reluctant to set a target for how much that should grow.

“We are very cautious about setting targets, because it is a false incentive to allocate internally if you don’t have the best ideas internally.”

Indeed, some of the internal capability will be invested in manager selection, in line with Rule’s belief that those choices are just as important as stock selection.

Along with building internal skills to allow more direct underwriting in infrastructure, he also wants to increase resources around underwriting credit investments. He’s looking to build expertise in total return as well, an asset class that catches more opportunistic and liquid investments at LPP, like re-insurance.

“We have done some underwriting in this space,” he says.

Although the rationale behind building internal teams is partly cost, Rule says it is also driven by a desire to invest in private markets in a way that’s different to how many investors do it.

“Our horizon is long term and private assets are often held by short-term investors,” he explains. “A traditional closed-end fund structure has a three- to four-year investment period, but we would rather own an asset for 30 years.”

That observation leads him to reflect on the beating heart of the pooling process.

“It’s about coming together to make more of one of the true competitive [edges] in the defined benefit pension world: being a genuine long-term investor.”

A company’s long-term success depends on how it operates today and, perhaps more importantly, how it allocates capital for future growth.

As a long-term investor, environmental, social and governance (ESG) issues are important factors in AustralianSuper’s investment philosophy on behalf of our more than 2 million members.

The building of our members’ A$110 billion ($81.5 billion) of savings into decent retirement outcomes requires strong investment returns over decades, not years. To achieve this, we need strong returns from companies we invest in over the long term.

ESG issues – including climate change, other environmental issues, health and safety, and labour rights in the supply chain – are determinants of the future operating environment. Other factors, such as technology and the regulatory environment, are also critical. Awareness of how these factors will unfold in the medium term will be critical to the success of capital allocation decisions.

As a long-term shareholder, we are acutely interested in how companies integrate ESG and other long-term factors into managing their business today and planning for the future. Specifically, we expect companies and their boards to incorporate this broader range of factors into their strategic and financial planning processes.

This is not always easy, especially as non-financial factors are more difficult to quantify than purely financial factors. However, this does not diminish their importance, particularly as the time horizon extends.

While there are encouraging signs that boards and management are realising that ESG issues are increasingly linked to long-term value, work remains to be done for these elements to be fully integrated into the capital allocation process.

In recent EY survey, 68 per cent of respondents said that in the past 12 months non-financial performance played a pivotal role in their investment decisions. While this was up from 58 per cent in 2015, it is still too low.

Only 60 per cent percent of institutional investors who responded to the survey said their clients were demanding ESG information, while, perhaps most alarming, 73 per cent said they conduct only informal assessments or no review at all.

There is clearly work to be done.

The key ESG areas for AustralianSuper are:

  • Encouraging companies to incorporate ESG factors into their analysis and reporting of current business conditions and future opportunities
  • Increasing direct engagement with company management and boards to better communicate our expectations as a long-term shareholder focused on long-term value creation
  • Ensuring remuneration frameworks deliver appropriate pay for performance outcomes, with reasonable pay levels and appropriate disclosures
  • Getting the right directors on boards to ensure the board operates effectively and that shareholder rights are appropriately protected.

We are finding that boards are increasingly willing to engage on ESG issues, as there is a greater understanding of our long-term view. More and more companies are coming to us as a sounding board throughout the year, which results in a much more productive relationship than waiting for an issue to come up to a vote.

In particular, forward-looking companies view ESG performance as an opportunity to better align the company’s long-term strategic goals and maximise opportunities by talking to their major shareholders.

This also benefits the companies, as directors and management are increasingly keen to engage directly with shareholders who have a long-term outlook and are, therefore, more valuable sources of long-term capital than investors with a more short-term focus. After all, our primary objective as a shareholder is the same as any director’s. We want the company to have sustained long-term success.

Remuneration still a sticking point

With regards to remuneration, we are still seeing far too many issues coming to the fore.

It’s an area that seems to be becoming more contentious and complicated, which means it can take up too much board and shareholder focus.

AustralianSuper is giving much thought to how we can communicate effectively to companies our expectations in relation to remuneration as a large, long-term shareholder. We are primarily interested in appropriate pay for performance outcomes, reasonable pay quantum, and clear disclosures that demonstrate how the company has performed on these issues.

Boards are increasingly willing to engage on these topics, as there is a greater understanding that we represent the interests of AustralianSuper members. The engagement process provides a valuable mechanism to express positions in relation to remuneration.

All of the above relies on having the right people with the right skills on boards. We need directors who can establish and clearly explain the links between strategy and ESG issues and demonstrate that the company is genuine in its approach to managing these issues and how this will create long-term value. This is what generates alignment with shareholders.

AustralianSuper seeks to assess the way a board operates in practice. To do this, we are developing a board evaluation framework.

Governance will always remain a high priority. The rights of shareholders and how they are treated in relation to stock issuance is a key issue, right alongside remuneration structures, getting the right directors on boards and effective board operation.

Sustainability reporting

We are seeing more companies using sustainability reporting frameworks than ever before, and it is increasing across the spectrum of companies in terms of size and sectors. Many companies are doing it well, especially in resources and financial services.

Of course, there is still room for improvement and we want to see more transparency, which we believe will ultimately benefit both companies and their shareholders.

ESG reporting has become an increasingly important forum for companies over recent years – to better explain their strategic intent. The firms that are doing it well have been able to show clearly how the strategic priorities of the company are directly linked to ESG issues.

AustralianSuper has seen many companies take a positive approach to engaging on these issues, and as we grow, it will be an increasing area of our focus, on behalf of our members.

Mark Delaney is deputy chief executive and chief investment officer of AustralianSuper.