The UK’s £36 billion ($48 billion; €43 billion) Pension Protection Fund is making its investment decisions contingent on the ESG performance data it receives from fund managers, said the PPF’s head of ESG Claire Curtin.
“We have had to increase the hurdle a bit more now and say we won’t deploy any more money if we’ve got an existing manager and they’re really lagging compared to where the rest of our managers are moving to. [We say:] ‘We won’t be re-upping with you until you really improve the practices a bit more,’” Curtin told delegates at affiliate publication Infrastructure Investor’s Global Summit in Berlin on Monday.
“A lot of the reporting we’re asking for now is evidence based. It’s not just box-ticking or close-ended questions anymore. It’s ‘In this last quarter, give me an example of where you’ve had to actively apply stewardship practices or where you’ve initiated a particular policy somewhere’. And on an annual basis, it’s carbon-related information,” said Curtin.
“In RFP [request for proposal] processes, we have a pass-fail requirement so [managers] won’t even get to the presentation round unless” their general counsel has committed to providing certain ESG data, Curtin continued.
“We have had to walk away from a couple of situations where we’ve said, ‘No, you haven’t got to the level we need to.’ And then the manager comes back in a year’s time and says ‘We’ve got our head of ESG in place now and we’ve got a policy. Can we start the conversation again?’ We say ‘Of course.’”
“It’s not that we would never consider them, it’s just any way to influence that moving up the agenda,” Curtin added.
Stafford Capital Partners, an $8 billion-AUM fund of funds manager, uses fund managers’ PRI scores to evaluate their ESG performance.
“It is a consistent way of getting information on the efforts of our managers – their policies, their processes. It allows you to identify the leaders and laggards,” said Silva Deželan, ESG director at Stafford and a fellow panellist.
“We typically focus on the laggards. [We] see the questions and indicators as reflections of best practices in the market,” so lower scores help Stafford identify where managers are lagging on ESG, said Deželan. “This kind of approach does not give you asset level-specific data,” Deželan added, so Stafford also reaches out to managers directly for assets’ carbon emissions data, as well as using proxies and estimates.
What does PPF use this data for?
PPF has two main purposes for the data it collects, said Curtin. The first is “to make sure that the asset manager is doing their job with the underlying assets”.
She continued: “I spend most of my time on that engagement at the manager level rather than at the underlying asset level. But that really is just to make sure our managers are not just ticking the ‘Yes, we have an ESG policy’ box.”
“And then the second part is our external reporting. We very much have to be guided by the different regulations – the DWP [Department of Work and Pensions] in the UK wants us to show portfolio alignment.”
Diversity data drag
PPF is starting to collect annual diversity data for its managers’ investment teams. “But it’s challenging regionally because of the different legislations or legal restrictions around what you can and can’t ask for,” said Curtin. “We’d love to go further than gender – we’d love to go into ethnicity as well, but it’s still early days.”
Curtin said PPF is more focused on managers’ “intent than really honing in on a precise percentage” for diversity. Curtin added that PPF is encouraging its own employees to disclose their personal characteristics to achieve diversity data, but “that’s hard… to encourage people to fill in their sensitive data. If people want to measure progress, you have to have the data first to do that.”
On diversity data of boards at the underlying asset level, Curtin said: “We’re probably still at the earlier stages of trying to consume that information.”