Exclusive: ‘Asset owners face an intimidating to-do list’, says WTW’s green investment chief

Everyone who manages or looks after pension funds’ capital was up in Scotland two weeks ago for the investment conference of the Pensions and Lifetime Savings Association (PLSA), which took place in Edinburgh 6-8 June.

Also present at the event was Adam Gillett, head of sustainable investment at insurance behemoth Willis Towers Watson. 

Following the conference in Scotland, Net Zero Investor caught up with the former KPMG'er to get his views on net zero investment opportunities, the role of pension funds in pushing the transition agenda and when and how asset owners should apply pressure on the companies they invest in. 

One key takeaway from half a dozen panel discussions and breakout sessions at the PLSA event two weeks ago was that biodiversity and renewables are increasingly seen as the next frontier in the net zero investment space. Do you share that view?

Climate, and the transition to net zero, has always been about risks and opportunities. We spend a lot of time trying to best understand – and quantify – the risks that climate presents to investors, for example through our work on Climate Transition Value-at-Risk. But there are also opportunities for investors, from areas such as renewables and electrification, to sustainable agriculture and forestry, and we’ve found compelling investments in all of those areas and put capital to work.

Biodiversity is a critical systemic risk, and like climate, presents highly material risks and opportunities for investors. The upcoming planned release of the TNFD is a key moment for the investment industry – and others, to galvanise their current efforts on biodiversity. We need to apply the lessons from our experience with climate over the last few years, so that we can fast-track progress on biodiversity knowledge, understanding, data, and solutions. 

The truth is that the transition to net zero is not one, simple, single-issue transition, and therefore we cannot hope to tackle net zero in isolation from other critical environmental, social and governance issue, chief amongst them, biodiversity loss.

Since it's such a complex process, how do you see the role of pension funds and, more generally, asset owners in influencing or even driving the net zero agenda?

Asset owners certainly can and should be influencing the net zero agenda, collectively they have a unique role to play, not least due to the size of assets they manage, their typical long-term investment horizons and the number of underlying investors they represent. However, whilst it’s somewhat a cliché, the world of climate and net zero is complex and ever-evolving, and that makes for a significant challenge for anyone trying to influence or steer the agenda alone. The truth is we all have an important role to play in stewarding this transition to a net zero and resilient future. And it will take all of us, contributing as best we can, to meet our shared societal goals. 

And how do you see our own role?

From our point of view, our role fundamentally is to provide the best possible advice and solutions to asset owners across all aspects of investment, and we’ve committed that net zero is an integral part of that by our membership of the Net Zero Investment Consultants Initiative. Through that, we can support asset owners to be as influential and effective as possible. Another industry initiative helping asset owners to shape the net zero agenda is the UN-convened Net Zero Asset Owners Alliance, which is a great example of the influence that collaborative work can have.

Speaking of stewardship, more and more asset owners are taking a pro-active or even a slightly aggressive approach.

Effective stewardship is one of the most powerful tools that investors have to protect and enhance the value of their investments and have an impact in driving real-world change. However, we also know that across the industry resources are stretched, the breadth and depth of the stewardship challenge is vast, and asset owners face an intimidating to-do list more widely.

So what does that mean in practice, how to find the right balance?

It’s therefore about ‘right-sizing’. It’s about matching resourcing and efforts with your ambitions, and really focusing on your key points of leverage, where you can be most effective and make a difference. For many asset owners that will be centred around engaging with their managers and advisors, for some it may be a focus on specific topics or high profile corporate engagements, for some it will be contributing to collaborative initiatives to amplify their voice, and for others it will be public policy engagement and advocacy. There is no one-size-fits-all answer when it comes to stewardship.

So how do you go about assessing funds as well as managers?

This is a real focus area for us in our manager research, and a place where we think the leading managers can show differentiation and value-add to their clients. It must be said though that across the industry on average, stewardship is currently under-powered, under-resourced, and not living up to its potential. We’ve engaged a lot with the asset management community to try and address this.

As with asset owners, there is no one-size-fits-all answer for managers. Instead it is about aligning stewardship efforts with the strategy in question – be that a concentrated active equity strategy, a buy-and-hold credit strategy, or a commercial real estate portfolio, for example. The connection between stewardship and capital allocation decisions is important too – insights garnered through stewardship can shape allocations, and stewardship should attend to material risks and opportunities that flow from allocations.

One area where we have also advocated for greater progress is on public policy engagement and collaboration. We face several systemic sustainability challenges – climate, biodiversity and inequality to name three – and these require the investment industry to step up on system-level stewardship. It is in all of our interests that we have a well-functioning investment system and that we play our part in tackling the defining systemic issues of our time, so we must all do what we can with what we have.

So in order to do that, how do you shape your stewardship policy?

Our policy is shaped around our investment beliefs and priorities, but is also focused where we can have greatest influence and be most effective in our activities. Two examples to illustrate the first point are our focus on climate and collaborative initiatives. We believe climate is a systemic and urgent challenge and so have elevated it as a stewardship priority – that flows into our engagement with managers, with industry bodies, and with our asset owner clients. 

We also believe that collaborative initiatives are important to give the investment industry a stronger voice and improve investment outcomes for all participants. Therefore we are an active participant in several key initiatives, but have also founded several ourselves where we thought there was a gap that needed addressing – for example our Thinking Ahead Institute and the WTW Research Network.

On the second issue of focusing on points of influence and leverage, that means for example that we spend a great deal of time working with the asset management community. But we also partner with groups such as EOS at Federated Hermes, a specialist stewardship provider, to bolster the engagement and voting activities across a range of our fund solutions.

Finally, last week there was a lot of attention for three new EU reports on greenwashing and greenhushing, increasingly seen as an urgent issue many corporates are guilty of and asset owners are faced with. How do you build in checks and balances?

It is important to recognise that the intense scrutiny and interrogation of sustainability is our current reality, which will likely continue for the foreseeable future. And whilst that can add to the burdens and stresses on already stretched resource, we must embrace this reality and fight for the positives that it can bring. It can bring increased transparency, accountability and trust to our work, and all of those will be vital in the coming years and decades. 

Put simply, greenwashing has no place in our industry, and so we must all work to eradicate it. That comes through individuals and organisations working with integrity, applying internal checks and good governance to what they do. It also means those providing assessments and advice to do high quality due diligence.

But it’s unlikely to be the right long-term answer. No-one can please everybody all the time. Organisations are unavoidably faced with different stakeholders wanting different – and occasionally opposing – things. The way forward is founded on conviction about what you do, why you do it, and how you will deliver it to your end client. That conviction must be twinned with clarity of communication – internally and externally. It is a difficult environment to operate in, but the sustainability issues we are confronting are too important to back away from. Therefore we must all double down on our conviction, and on the clarity with which we tell people the what, why and how of delivering better outcomes for our end savers.

Anything else you'd like to share with our readers?

An interesting development to observe in the industry in the last few years has been the impact the Financial Reporting Council’s UK Stewardship Code has had since it was revised in 2020. It is designed to set high stewardship standards for asset owners, asset managers and service providers, and in many ways it has done. In order to become and stay a signatory, you must report annually on how you are meeting all the principles of the Code, evidencing exactly what you are doing and how you are doing it, there is a real emphasis on reporting activities and outcomes.

The FRC is looking for examples, case studies and evidence of progress year on year. This has really shone a light on the importance of stewardship and the influence it can have – if done well. There are some great examples of what investors are doing through the UK Stewardship Code reporting. It has raised the bar for good practice and see it as a really positive development for our industry to engage with.