Using your influence to
drive improvements in investment management

Our viewpoint

Increasingly, many of the trustee boards I work with are concluding that a responsible investment approach has the potential to improve returns.  After all, poor practices in areas such as the environment, employment and human rights are likely to lead to the kind of events (eg oil spills, strike actions, rioting) that harm returns.  Conversely, good practice in these areas often enhances a company’s value, through benefits such as increased customer loyalty and staff motivation.

This is also a topic that pension scheme members care about, and one on which they are starting to challenge trustees.

I recently helped a board of trustees to clarify their investment beliefs (an exercise that the recent DB investment guidance from the Pensions Regulator heartily recommends). Whilst the trustees had not thought too deeply about responsible investment in the past, they concluded that they did believe that investing responsibly and engaging with companies as long-term owners would likely reduce investment risk over time and positively impact scheme returns.

Having decided this, the trustees considered their next steps. They identified two key questions:

  1. How should they assess their investment managers’ approaches to responsible investment?
  2. How could they influence their investment managers to improve their responsible investment practices?

Assessing the investment managers’ approaches to responsible investment

Many investment managers talk a good game when it comes to responsible investment, but in our experience, far fewer are able to give good real life examples of meaningful engagement with companies on the issues that matter, or articulate how ESG issues are incorporated into decision making.

LCP recently published the results of its Responsible Investment Survey, grading investment managers on how they incorporate responsible investment into their processes.  We asked detailed questions of the managers and really put them to the test.  We distilled our findings into a grade for each manager, so that at a glance, trustees can see how their managers compare to others.

These grades proved to be a great tool for my trustees, who were able to quickly compare their managers, without the need to trawl through pages of responsible investment polices!

Influencing investment managers to improve their responsible investment practices

As is common practice for pension schemes, the scheme I advise invests in a number of pooled investment funds. Investing alongside numerous other investors in this way can mean that there is little scope for an individual investor to influence the investment process on their own.  The trustees were therefore initially concerned that they might not have the influence needed to coax their investment managers towards better responsible investment practices.

However, following the publication of our survey results, the trustees wrote to their investment managers who scored a 2 or lower (the survey ranks managers from 1 – 4, with 4 being the best possible score). They emphasised the importance that the trustee board and the scheme’s members place on responsible investment and stated that managers’ approaches to responsible investment would be a material factor in selection and retention of managers going forwards.  They asked that managers aspire to improve their score going forwards.

The fact that LCP’s other clients are also engaging with managers following the results of the Responsible Investment Survey means that the trustees are not a sole voice requesting action. LCP’s manager researchers have this topic on the agenda for managers, and will continue to engage and challenge managers who are falling short of best practice.

Our belief is that if enough pension scheme trustees and consultants engage with their investment managers on this topic, this will foster positive change in the industry. I would therefore encourage all pension scheme trustees to take three simple steps:

  1. As a board of trustees, discuss responsible investment. Decide whether you believe it has the potential to add financial value to the scheme in the long run and consider documenting your beliefs within your Statement of Investment Principles. If you decide that responsible investment does add value, continue on to steps 2 and 3…
  2.  Review how your investment managers have scored on LCP’s Responsible Investment Survey. Identify those managers who could do better.
  3. Call, write to or email those managers. Ask them to improve their practices and let them know that you consider responsible investment to be a key aspect of good investment management. Inform the managers that you will be monitoring their scores on future surveys and expect to see improvement.
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