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It didn't take a pandemic for interest in environmental, social, governance (ESG) investing to increase. From 2016 to 2018, sustainable investing already had grown by more than 38 percent, according to US SIF. But during the recent economic downturn caused by the coronavirus pandemic, it did not pass unnoticed that funds that invested in companies based on their ESG ratings became "relative safe havens," as S&P Global Market Intelligence put it, and BlackRock noted, "Overall, this period of market turbulence and economic uncertainty has further reinforced our conviction that ESG characteristics indicate resilience during market downturns."

Matt Seymour, CEO of RiskFirst, discussed some of the recent trends in the pensions industry around ESG, as well as misconceptions that are still circulating. RiskFirst provides risk management analytics and reporting solutions for the pension and investment industry.

BenefitsPRO: What trends are you seeing around pension plans and fund managers looking at incorporating ESG factors into their investment strategy? What is their motivation?

Matt Seymour: Investors, particularly the growing generation of younger investors with increasing decision-making powers, are demanding more responsible and impactful investments. Asset owners are increasingly examining investments and wanting more in the way of reporting and meaningfully directing capital to impactful investments, rather than eliminating sectors in broad strokes.

In the US, there has also been an uptick in public perception of certain kinds of investments. Particularly given the increased scrutiny on issues like climate change and data privacy, individual companies are being held to a higher standard than ever before, and that is now affecting how investors choose where to allocate their money.

What misconceptions are there around ESG? What challenges still remain to be addressed by the industry?

There is a big misconception that there currently aren't tools to support an ESG investment strategy, particularly around attribution and reporting – but this isn't true anymore. It is true that up until now it's been difficult, if not impossible, for managers to have full insight into their portfolio's performance attribution for any one factor, like ESG. But now these tools are emerging, and being developed at a rapid pace, particularly due to the increased interest in ESG, and it's important for managers to be aware that these are things they can now track.

What expectations do fund managers have about incorporating ESG into an investment strategy? Are they realistic?

Consensus across the board is that exposure to ESG-related investments is set to rise in the coming years; therefore it's becoming increasingly important for fund managers to demonstrate how ESG factors will affect their performance. Demand is on the rise for the tech to support these goals, and that's just now maturing.

Until recently, solutions have typically been built in-house, tacked onto existing systems, with a high degree of manual effort to produce an end result. But there are solutions emerging that take ESG reporting to the next level of industrialization.

Is there a difference in interest levels/attitudes toward ESG between public pensions versus corporate pensions? U.S pensions versus U.K./European?

In the UK and in Europe generally, there are a lot more regulations and standards already in place when it comes to ESG. Regulators are close to enforcing TCFD-style reporting for pensions in the UK specifically. Europe has been far ahead of the curve in terms of incorporating ESG into their investment strategies, and has been doing so for several years.

As an example, the European Association of Public Sector Pension Institutions (EAPSPI) has announced already that Europe's public sector pension funds have adopted ESG principles.

Public pensions tend to have more public pressure to incorporate "responsible" investment strategies, because they are associated with the government (and therefore open to public scrutiny) whereas corporations have a little more leeway; however the gap is lessening between the two as companies are being held accountable for their impact on things like climate change, social issues, and other ESG concerns.

In the US, the SEC is currently exploring putting forth regulations for potential disclosure requirements for funds claiming to invest in sustainable companies, or to follow ESG guidelines. Currently in the US there are no widely established standards for what constitutes ESG investments, and it is largely left to the discretion of individual investors to make that decision.

What is the importance of ESG attribution?

As ESG investment continues to rise, it's critical that performance attribution exists so that outperformance can be accurately understood. For this to be meaningful, it's critical to have not just ESG attribution in a silo, but understood alongside traditional factors.

How is the coronavirus affecting ESG investing? ESG and pensions?

That's probably more a question for our clients than for us, but what we can say is that we're seeing increasing demand for our solutions that support asset managers and pensions plans to better manage ESG investments.

How did you get into this specialized field? What makes it worthwhile?

RiskFirst has been focused on buy-side analytics and reporting for over 10 years. In the last few years we have broadened our offering from our initial defined benefit pensions focus to support portfolio managers and other types of Institutional Investors. We have always prided ourselves on the leading-edge technology we deliver, which allows us to quickly enhance and adapt our solutions. As part of the rise in focus on ESG, coupled with Moody's Analytics' focus on ESG, it made obvious sense to incorporate this within our products, as it's a true differentiator.

Instant Insights /

ESG investing and pensions: Taking reporting to the next level

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