ESG And The Institutional Investor

Patrick Woods, Apr 28, 2020 10:00:00 AM

As an institutional investor, if you weren’t already interested in ESG, then the increasing glow of the
regulatory spotlight is surely getting you there. If that’s the case, you may find some the following
thoughts and suggestions to emerge from a recent client roundtable on the subject useful.

Don’t enter the definition cul-de-sac

There are probably as many descriptions of ESG is as there are industry practitioners and discussions
on the topic tend to spend an inordinate amount of time seeking to come to a singular definition.
Instead focus on what ESG means to you, what you believe in and how it is relevant to the specifics
of your pension plan. Don’t worry about what the other guy thinks it is.

Consider the ABC of ESG

There are many ways for an investor to express their Environmental, Social & Governance
objectives. Therefore, it can be useful to consider them as either an A, B or C approach:

Avoiding exposure to an asset that is incorrectly priced or where risk is not fully understood.
• Through active engagement with companies we invest in, there is a focus on benefitting all
stakeholders. Passive investors also participate as it is the engagement with company
management that is active.
Contributing to identifying solutions to society’s ESG problems by investing in companies
that are themselves actively engaged.

Focus on what ESG means for you

Regardless of which of these broad approaches is your preferred option, understand the implications
for you given the following:

• Your organisation's ability to implement ESG.
• How much effort can be applied given your resources, and how much time you may wish to
commit considering your purpose and beliefs, and those of all stakeholders.
What you are seeking to achieve.

Having this clarity will ensure that you can effectively communicate your ESG preferences and
objectives with those responsible for managing the assets of your plan.

Consider carefully how you can measure the success of your efforts 

Whilst this provides a considerable challenge for the industry, two important points are clear.

1. As an industry, it will be important to develop a methodology that both investors and fund
members can understand. Jargon is to be avoided.
2. Focus on outputs rather than on inputs or processes. It is the broader evidence of impact
that is important, not numbers of meetings or nicely presented stories that tend to highlight
an asset-manager's analytical skills.

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