Home / News / Don’t get keyed up on BFID – it won’t hurt ESG

Don’t get keyed up on BFID – it won’t hurt ESG


While the best financial interests’ duty (BFID) has seen some super funds think twice about ESG,
reconciling ESG and responsible investment with best financial interests’ duty isn’t the hurdle some think.

One of the more obtuse changes under Your Future Your Super (YFYS) was the insertion of the word “financial” into “best (financial) interests’ duty”. While the introduction of BFID was received with some bemusement from funds – they were under the impression that they already were managing money in the best financial interests of their members – there was also concern that it would prevent them pursuing ESG strategies for fear that they would be perceived as making ideological investments.

But Jennifer Sireklove, Parametric managing director for investment strategy, says that funds shouldn’t let a change in terminology change how they invest.

“If you read deeper beneath it, the basic intent and concept of fiduciary duty and the way that you think about investment outcomes hasn’t changed, even though the wording has changed,” Sireklove said. “There’s sometimes some hand wringing or trepidation depending on the wording, but there’s actually more consistency in what you’re trying to achieve all along regardless of some of the subtleties of the wordings that come up.”

Sireklove notes that the same changes have already occurred in the US. In 2015, the language was “very encouraging” for ESG, with the Department of Labour (DOL) saying that “ESG factors can be an integral part of portfolio construction.” In 2018, under the Trump Administration, the DOL took a more cautionary tone – and by 2020 it was warning that the investment decisions of pension funds must only be based on “pecuniary factors.” But Sireklove says that for many investors, the changes in language didn’t radically change their investment approach.

“It became a bit more cautionary, and some felt very concerned – but again, if you thought all along you were looking at economically relevant issues and risk and return, it doesn’t change how you’re operating,” Sireklove said. “… I think for investors who are always looking at it through the lens of financial materiality and risk/return, those language changes didn’t radically shift anything.”

“Investors who are keyed up on this concept of companies that are good ESG or bad ESG are maybe more thrown by those (different regulatory) periods.”

Still, that protracted period of regulatory volatility where ESG was in and out might give some investors pause for thought. While the newly-elected Labor Government is expected to take a more encouraging approach to ESG investment, Hostplus CIO Sam Sicilia recently noted that funds can’t afford to get on the wrong side of politics, saying that the “opposition of today is the government of tomorrow.”

“It does create a little bit of caution,” Sireklove said. “I think ideally – and this is from the US perspective – that creates a discipline around that decision making and how you document it and how you evaluate it after the fact …I think there are ways of coping with that uncertainty, but there are likely some plans and decision makers who are more reticent to go through that because they might not feel they have the coping mechanisms to be on the right side of it.”

Sireklove says that in Parametric’s experience, funds can improve their ESG characteristics without materially altering expected returns in a way that might attract the attention of government or regulators. And while the constraints of YFYS have made funds wary of making big bets that could come back to bite them, a team of researchers – including Sireklove – previously found that emissions reductions through ESG screening or integration were possible without taking on more than 50 basis points of tracking error.

“When considering these two portfolio construction techniques, how far funds are willing to venture above or below these levels will depend on their willingness to trade off risk for ESG outcomes,” Sireklove wrote in January.

“The capability to constrain risk through portfolio optimisation in particular may prove a powerful tool for funds navigating the YFYS performance test. In an integration approach, optimisation affords finer risk controls, meaning risk budgets can increase to accelerate ESG outcomes or tighten to stay within the limits of the performance test.”

Print Article

’60/40 is being resuscitated’: fixed income down but not out

Year-to-date, fixed income markets are about as bad as equities. But Michael Leithead, fixed income and senior portfolio manager at EFG Asset Management (EFGAM), is more positive than he’s been “in a long time.” “We’re at a point now where the market has priced in quite a lot of global policy tightening, and that restores…

Lachlan Maddock | 24th Jun 2022 | More
‘It’s a business about character’: Kudu hunts deals Down Under

New York-based Kudu Investment Management has returned to Australia in hopes of pulling off a repeat of its 2020 deal with Channel Capital. “The asset management business is an absolutely beautiful business, to the mind of anybody involved in it. It’s rock solid; it has high margins; and the people are interesting,” says Charlie Ruffel,…

Lachlan Maddock | 24th Jun 2022 | More
APRA grows concerned on consolidation, flags new standards

The wave of consolidation racing through the superannuation industry is now raising eyebrows at the prudential regulator. With the massive amounts of FUM being devoured, some funds are suffering indigestion. “This may manifest at the industry level at the point of transfer in a SFT, for example where an administrator has a backlog of transfers…

Lachlan Maddock | 24th Jun 2022 | More
News and OneVue go live with brightday
Investor Strategy News | 11th Jan 2015 | More
Perrignon off to HK with Credit Suisse
Investor Strategy News | 22nd Dec 2013 | More
Sports betting as a new asset class
Investor Strategy News | 3rd Jul 2016 | More
BlackRock ahead of consensus with bullish view
Investor Strategy News | 14th Jan 2017 | More
HSBC talks re-open old NAB wound
Lachlan Maddock | 9th Mar 2022 | More
Statewide seeds bespoke Apostle fund
Lachlan Maddock | 23rd Mar 2022 | More