Brunel Pension Partnership’s chief responsible investment officer discusses climate change, greenwashing and the urgent need to repair flaws in the financial system.
As society, companies, financial institutions and governments finally face up to a wide array of pressing environmental, social and governance (ESG) issues, those individuals who have pressed to push these up the agenda over many years could be forgiven for thinking: “What took you so long?”
Faith Ward, chief responsible investment officer at Brunel Pension Partnership, has little time for such thoughts; her focus is on finding solutions to the big challenges facing the world, from climate change to social inequality.
After twenty years at the Environment Agency, she joined Brunel in late 2017, shortly after the £30 billion local government pension scheme pool came into existence. Ward leads Brunel’s engagement with the asset management industry and is actively involved in multiple industry initiatives, including as co-chair of the Transition Pathway Initiative and chair of the Reporting and Assessment Advisory Committee for the United Nations Principles for Responsible Investment.
The progress made by Ward and her colleagues in advancing the responsible investment agenda is impressive; demonstrated in Brunel’s comprehensive climate change policy, published in January 2020, and in the quality of transparency and reporting to its clients through its quarterly ESG and carbon metric reports.
In a wide-ranging interview, Ward spoke to AIQ about her key priorities and the power of collective action.
Everyone from asset managers to large corporations is talking up their ESG credentials. How much of that reflects real change and how much is greenwashing?
We’re still in the phase where there is a bit of both. With some managers, you can see things are changing through their investment decisions; they are also more open to discussions on the issues. When we ask how they will align their allocations to our climate policy, they don’t look blankly at you. Intellectually, the conversation is in the right place.
There is variation between managers, and a lot of greenwashing out there
At the same time, there is a long way to go. There is variation between managers, and a lot of greenwashing out there. Some are putting a lot of spin on what they’ve done and trying to repackage it by claiming they’ve always integrated ESG issues into the portfolio construction process. But then, when you drill into the portfolios and ask them to explain why an investment is included on ESG grounds, it can be difficult to get a credible answer.
There is a need for manager accountability and transparency, and that’s where simple changes in regulation will be a helpful, and important, part of the equation.
What kind of regulatory changes could have that impact?
If you take the EU regulations, I support the aspirations they reflect. One area where I do have some challenges is the Sustainable Finance Reporting Disclosure Standards. There is a risk this could be counterproductive; you make it very difficult to be a sustainable investor by asking for data that doesn’t yet exist.
Transparency is one of our priorities, but I hear a lot of concerns from the investor community and business leaders about the time they will spend reporting relative to doing. We must get that balance right, so the information we’re asking for is what we need. Currently that balance is perhaps swinging slightly the wrong way. In time, hopefully we’ll see the development of data and infrastructure to make it less painful.
Is there still an issue proving ESG is a source of alpha as well as a useful input in managing risk?
I’ve never thought the focus should be on ESG as a source of alpha; for me, it’s how you should think about the investment process. If you look at performance in aggregate, many academic studies have shown companies with good processes around managing ESG risks tend to outperform.
The problem about trying to attribute performance to individual ESG factors is that it is hard to quantify what makes or breaks a company from a bottom-up perspective. There are many factors at play, of which ESG is one.
ESG is how you should think about the investment process
I think you can say with more certainty that ESG enriches the quality of an investment process rather than quantify it as a source of alpha. We also need to be careful of not conflating ESG with sustainability, and the drivers of what you’re trying to seek there as a potential source of alpha. There’s probably a stronger case in doing that with sustainable equity or impact strategies, where investors are deliberately targeting companies that are well placed to achieve a certain outcome. For those products, it would be easier to attribute performance than ESG as a broader term.
What are your key priorities right now?
I separate priorities into the thematic and operational. Thematically, climate risk is number one; social inequality is another key focus, and more specifically ethnic diversity within the asset management industry and the important work of the Diversity Project.
It’s particularly relevant for Brunel because our investments are 100 per cent outsourced; we don’t select companies, we select managers. How are those managers setting themselves up and how effective are they at finding the best and most diverse talent; are they missing a trick by inadvertently failing on D&I? We would argue many of them are, but I believe there is a recognition that the industry needs to step up on social inequality.
The focus on social inequality is long overdue
The focus on social inequality has increased significantly since the arrival of COVID-19 and the death of George Floyd, but it is long overdue. We were one of the few investors who had flagged engagement on the Parker Review but, along with many others, were probably too cautious. We want to be progressive, but sometimes it is difficult to know just how fast to push. I think it’s time to be more courageous with the ambition and encourage others to do the same.
Our stewardship manager Helen Price wrote an excellent blog on this topic. Many investors found it difficult to know what the right thing to do was and got bogged down worrying about causing offence. We’ve all been given more courage by working with the Diversity Project and industry leaders like Gavin Lewis, who was recently recognised for his work, including as co-creator of #talkaboutblack.
Transparency and accountability are other priorities, as we’ve touched on already. A major recent focus for us has been the Department for Work and Pensions’ consultation on the Task Force for Climate-related Financial Disclosures (TCFD) for large pension funds. Linked to this is a focus on audit quality, because it touches so many aspects of the investment chain. If you can get auditors to think about these broader risk issues at a corporate level, that can then roll up to how asset managers assess those risks, which ultimately should benefit end-investors.
Brunel represents the interests of ten schemes – how challenging has it been to agree consistent approaches on ESG issues?
Consistency is incredibly important, perhaps more so for an organisation like Brunel than a traditional asset manager. One of the premises of pooling was cost reduction and the assumption that if we could invest in a narrower group of products to achieve the investment goals of, in Brunel’s case, ten clients, that would be much more cost effective.
It’s critically important that we minimise the number of products while maximising the ability of each of our clients to achieve their investment objectives. It’s an interesting dynamic. Last year, we held climate workshops with all our clients and together agreed a ground-breaking climate change policy.
You lead on Brunel’s approach to engagement with asset managers – where have you seen most progress in the alignment of interests between client and managers? Where there is still room for improvement?
We set the engagement framework with managers. At Brunel, one of the advantages we have relative to predecessor organisations is large investment teams, and we work closely with them to give them the confidence to engage with and challenge asset managers. We are certainly having more productive conversations on key issues and getting less pushback from managers.
Even something like reporting back to us on progress was seen as a peculiar request by some managers not so long ago. Take diversity – we’ve got all this evidence diverse teams make better decisions, and we pay asset managers to make good investment decisions. So, it is perfectly rational for us to look at this KPI when assessing managers; it’s a useful proxy for how healthy the working environment is and how well they look after the investment team that run our portfolio. In short, it’s not just about what they invest in but their own practices and how they conduct themselves.
Diversity is a useful proxy for how healthy the working environment is and how well they look after the investment team that run our portfolio
For our clients, the fact that Brunel has a strong responsible investment resource has been a huge support for them, enabling them to fulfil long-held ambitions they’d been unable to achieve. We’re seeing a lot of progress with the clients in terms of their expectations, particularly around climate change. In some instances, their demands are beyond what’s currently available in the market, but asset managers have come a long way and are open to discussions around finding solutions. The overall dynamic feels a lot healthier, which will hopefully help us make progress faster.
How do you measure impact?
Most of the focus now is on climate change, not least because of TCFD. That’s the biggest environmental outcome metric we’re looking at in terms of intensity and exposure to those risks. Beyond that, there’s an ambition to be able to assess how we’re contributing to the Sustainable Development Goals.
One way we can do that is through investment strategies that are fundamentally aligned to more positive outcomes. Take our private market portfolios; although we’re not accumulating and measuring the impact from them, they are hugely focused on renewables and low-carbon outcomes. Even if you haven’t measured them, intuitively you know they will have a positive impact. With our cycle 1 private market portfolio, 35 per cent will be allocated to renewable infrastructure; in cycle 2, that will be over 50 per cent. It provides a strong steer towards dealing with these challenges.
We can get better at measuring outcomes, but it has to be in a way that doesn’t distract from the doing. The most important thing is to deploy the capital in the first instance.
What are your thoughts on strategies that specifically target a net zero outcome?
There is a clear message from our clients that they want to have the capacity to be net zero across every asset class, so we will have to find solutions. But in achieving the net zero target, we need to manage other investment and ESG risks at the same time.
Our clients want to have the capacity to be net zero across every asset class
If we take renewable infrastructure investments, they can carry associated sourcing and supply chain risks. So, while they are compatible with the net zero target, it is important to manage the supply chain risks; in terms of child labour, toxic chemicals and the raw materials used, whether that’s for solar panels or electric vehicles. Just because something is green, it doesn’t mean you can forget about managing the other risks.
Another area Brunel committed to in our climate change policy is the just transition; recognising there are social consequences to the transition to clean energy that need to be managed. Part of the responsibility sits with policymakers, who need to put in place a framework for the transition, but there are things we can do as investors to identify opportunities and work with asset managers who are thinking about all the issues and achieving the net zero outcome. You can’t separate the two if you want to be a responsible investor.
From an investment perspective, what are the biggest obstacles to a net zero future?
The most obvious is the policy environment. We need a framework that is more compatible with net zero, to help remove the obstacles. We still don’t have a price for carbon; we still have some esoteric pricing and taxations that result in peculiarities in how you might finance deals.
One area we are starting a debate is around benchmarks. If you are going to base your entire financial system on market-cap weighted indices, it will fundamentally underpin your risk processes and your investment universe. But that is flawed; it is taking us to 3.5 to four degrees [of temperature rises above pre-industrial levels]. With no price on carbon, that fact isn't reflected in the benchmark index - it's a huge market failure.
There are some pessimistic forecasts by energy analysts that suggest achieving net zero by 2050 is more of a stretch target than a deliverable. What’s your perspective?
I am an optimist; I believe getting below 2°C is achievable and to do that we must aim for well below 2°C. We are heavily involved with the International Investors Group on Climate Change and its net zero investment framework. That has demonstrated the impact small changes can have; if we start taking more of these small changes now - including shifting where capital is allocated - the cumulative effect can be significant. It’s not about waiting for the big transformational development. The longer we wait, the more difficult and expensive it will become.
Societally, we need to make shifts in terms of our consumption. One knock-on effect of the economic shutdown was improved air quality and there is growing awareness in society that we need to recalibrate how we consume and how we travel.
We don’t believe divestment will produce the real-world change needed
There is a strong interconnectedness between the climate change debate and the circular economy: we need to be mindful of how we’re using finite resources. We need to change the real economy, not just how we run portfolios. It’s for that reason our policy is not for wholesale divestment; we don’t believe that will produce the real-world change needed. That’s not to say that we don’t encourage divestment for fossil fuel companies – we do – but it is selective. The situation is more nuanced.
The Indonesian government recently passed a bill that would reduce workers’ rights and protection for the rainforest. We see a lot of stories like this – what can investors do about it?
We have seen similar steps in India and Brazil. These are concerning: if you don’t think these kinds of issues will have any impact you are naïve. If we destroy that biodiversity, it is lost forever; the impact on the climate will increase the physical risks in your portfolio.
What we can do about it is a different challenge; we haven’t engaged with the Indonesian government, but we were part of a coalition that engaged in Brazil and succeeded in getting a 90-day cessation on deforestation. That engagement is continuing.
Never underestimate what a coalition of investors can achieve. Beyond engagement, we also have to send the right message in terms of how and where we deploy our capital.
Never underestimate what a coalition of investors can achieve
Domestically, we are actively communicating our expectations on the UK’s recovery. The social and economic consequences of COVID are severe, but the same is true of climate change if they are not managed collectively. We’ve seen a lot of calls in Europe and the UK for a green recovery from COVID – that is critical, otherwise we will just fall from one crisis to another.
What should the industry focus on to address the challenges we face in the coming years?
The financial system is not fit for purpose and, collectively, we have got to agree change is needed. Using the same systems and processes as we have done historically is not a viable option – it isn’t designed in such a way that will get us to where we need, so we have to go back to the drawing board on key aspects of how the industry works. We have to work together to solve these big challenges. If we do this in a collegiate way, we will have greater chance of success.