Exclusive: ‘Asset owners must take managers’ stories with a pinch of salt’

At the annual PSLA conference, which took place earlier this week in Edinburgh, much was said about the relationship between UK pension funds, which make some of Europe's biggest asset owners, and the investment managers that serve them.

In addition, investment opportunities in renewables, looming market risks, sustainability concerns and alignment, as well as the emergence of new tech were some of the event's hottest topics.

To reflect on this week's conference, Net Zero Investor sits down with Paul Lee, head of stewardship and sustainable investment at investment consultancy Redington, which serves some of Britain's largest pension funds.

The former Hermes and Aberdeen AM exec, who is based in London, is also a member of the Endorsement Board, responsible for endorsing and adopting new or amended IFRS accounting standards for use by UK companies.

To engage or not to engage, that seemed to be the question for many pension funds at this week’s conference in Edinburgh, with quite a few quite reluctant to meddle in the affairs of the companies they invest in. 

Yes, most asset owners will not be engaging directly with investee companies. Only the largest and most heavily resourced can or should do so. Rather, for most, the asset owner’s role is to hold their fund managers to account; to capture what they have done by way of stewardship, assess whether it reflects expectations and is good enough, and to challenge them to do better if not.

So how do you help asset owners to find the right balance?

Stewardship’s an odd word. It comes from the old job of the steward, looking after the lord’s estate when they went away. The role of stewardship is no longer about trees and animals on an agricultural estate, but about the assets long-term investors are exposed to through their investments. But the mindset of preserving and enhancing value for the long-term, trying to avoid the loss of long-term value for short-term reasons, and the role of standing in another’s shoes with responsibility to them, apply just as much in the modern world as they did in earlier days.

How do you assess fund managers and seek enhanced stewardship by them?

It’s hard. To truly take ownership, asset owners must take the stories that managers want to tell with a pinch of salt, instead framing the discussion with what matters to them. This means thinking about the largest exposures, both in terms of financial value and risk - be that carbon emissions or transition alignment, or some other area of risk. 

It also means identifying themes that matter particularly to the pension fund. Not as an assessment that these are the most financially material issues, fund managers should have those covered as a matter of course, but as a lens to make sense of the large scope of stewardship data and focus in areas that deserve attention by the trustees or beneficiaries.

Shaping the material from fund managers in this way allows a clearer assessment of whether they are delivering what’s expected of them, and a basis to hold them to account and challenge for better.

How do you shape your stewardship policy?

Our stewardship policy is all around delivering the tools that asset owners need to hold their managers to account. We’ve built technology that makes sense of the vast weight of voting data and turn it into useful information framed by what is significant to a particular client. We’ve also developed approaches that enable clients to assess the delivery of their managers in terms of engagement, across the full range of asset classes.

Also read
PLSA exclusive: LGIM bets big on ‘engagement with consequences’

Many asset owners aren’t used to thinking about investment at an individual asset level, but assessing stewardship requires a granular assessment, thinking about individual companies in which they are invested. It’s a different level of focus, but a necessary one if fund managers are to be held appropriately to account.

So by holding them to account, do you think asset owners should take the lead when it comes to influencing or setting the net zero investment agenda?

Investors essentially have three levers to deliver impacts in the real world: exclusion, investment and stewardship. All three will be relevant to the net zero agenda as it will be the biggest transformation of the global economic system any of us will experience.

Our clients’ appetite to press those who invest on their behalf to move forwards into the future decarbonised economy is clear. Our role is to support them in doing so, providing them with the tools that they need to carry forward their intentions.

Finally, you told me you are also charged with delivering our own firm's promise of net zero climate investment across your client base? Tell us a bit about that.

We committed in early 2021 to all default client advice being net zero aligned. We’ve since reinforced that through our membership of the Net Zero Investment Consultants’ Initiative (NZICI), our industry’s contribution to the Glasgow Financial Alliance for Net Zero (GFANZ). As ever, all advice is tailored to the needs and thinking of individual clients. But we make sure that we have the tools ready to assist clients to think through the climate challenge and to prepare for net zero investment.

Investment can’t move too far ahead of the real economy: institutions cannot decouple themselves from what is actually going on in the real world. But unless we all start to move, the gravitational pull of business as usual will slow the necessary transition to a lower carbon world. We help clients see the steps that they can take now that will both deliver on their financial commitments to their beneficiaries and help support progress towards net zero, while seeking to preserve and enhance value through time.

Also read
PLSA exclusive: Why BT pension’s investment guardian takes ‘a pragmatic, evolving approach’