Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
‘We’re going nowhere, really’: Why super’s staying quiet on ESG
After years of talking up their ESG and SRI bona fides, super funds have been brought crashing back to earth by a spate of greenwashing actions brought against them by the corporate regulator. Many funds have withdrawn sustainable and responsible investing claims on their websites, while external managers are no longer touting their ESG credentials with the same insistence they previously did.
“The greenwashing threat has definitely made people quiet down about it,” one asset consultant told ISN. “And it’s probably made people think a bit more dispassionately about the topic as opposed to trying to appeal to emotion. In terms of socially responsible investing, it’s also a question of whether you can get the returns, given the risk.”
“I think what happened was a lot of people made a lot of statements that were well-meaning and well-intentioned and probably genuine. But when they made those statements they didn’t really think about what it means to operationalise them… There’s a history of that; people made either marketing claims, or genuine but not well thought out and imprecise claims.”
Some regulatory actions stem from the vagueness of the ‘green’ claims that funds have made, while others result from technical oversights that are becoming more common as the industry rapidly grows and consolidates. Still others result from funds failing to effectively scrutinise the holdings of third-party managers.
“There are often practical difficulties in maintaining oversight, but it’s important to do the due diligence not just on what’s in the portfolio on the day you invest in it but also what the processes are, what their controls are, and then what sort of monitoring and oversight are you going to do? Often the problem isn’t that somebody’s doing the wrong thing systematically. It’s that there was a series of things that each individually made sense, but that when it came to the back end, didn’t.”
All of that has resulted in super funds largely withdrawing from the sustainable investing conversation as they more strongly scrutinise their own claims. But they haven’t abandoned the sustainable cause completely – they’re instead become much more interested in impact investments, which their proponents say do a lot more to decarbonise portfolios, and the economy, than swapping one stock for another.
“I’m seeing a lot of my trustees very interested in impact investing,” one asset consultant said.
“They’ve thrown down the gauntlet to their internal teams, in different asset classes, saying ‘Find us some impact investments, you’ve got the licence to do it now’. What they disclose to members etc is a different thing altogether. But they’re very interested in at least starting the journey and starting that journey of measurements.”
And their pursuit of companies that aren’t living up to ESG expectations continues unabated, even if it continues largely in the backrooms of power. “The G is being done”, says one asset consultant, through direct consultation with the board or through a manager but in a fashion that avoids shaming and blaming the target in the press.
And it’s more likely that the new silence represents a temporary pause in the conversation rather than its end. There is still substantial demand for sustainable investments from members – if there wasn’t, super funds probably wouldn’t have gone to quite so much trouble to meet it (or appear to) – and the quality and sustainable options will be a key differentiator for funds in the megafund era.
“I think a lot of the funds will be coming out with good news stories about how they’ve used their dollar to make a difference, and I think we’re going to see a lot more proactivity in terms of trying to tell a story, similar to what Aware and some other funds do; I think it’ll be part of their advertising and marketing – how they’re trying to change the world for the better.”
That doesn’t mean there aren’t real obstacles to further uptake. Few funds would (or can) argue with the logic of the Your Future Your Super performance test but that doesn’t mean it’s fit for purpose.
“The government have told the industry they’re not changing the benchmarks to be ex-carbon,” one asset owner said. “Until they wake up and smell the roses and understand that if they want funds to make commitments they have to be given allowances to adjust the benchmarks for low carbon benchmarks then we’re going nowhere, really.”
