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.
A new network of investment professionals has backed the ESG integration trend among both asset owners and fund managers with a report which draws on the views of leading investors including the Future Fund and NZ Super.
Titled ‘Alpha with Impact’, the report was published last Friday (August 27) to coincide with the first member event of the Australia and New Zealand chapter of the Bloomberg Women’s Buy-side Network (BWBN). The local chapter, which has become the organisation’s fifth in the region, was formed in March this year.
The network was launched in Singapore in 2018. A sixth chapter, covering Brazil, was launched early August. It is open to women and men from big funds and managers, as well as professionals at other service provider companies. The term ‘buy-side’ stems from the days when many large institutions were both the buyers and sellers of broker and other investment research.
The integration of ESG principles with all investment activities is a strong trend among fund managers, largely driven by the market demand from institutional investors and, more recently, smaller and retail investors.
Sue Brake
According to Sue Brake, the CIO of the Future Fund, and a founding committee member of the ANZ chapter, investors should ensure that their ESG strategy is fully integrated across their portfolios and investment teams.
“This is best served by having dedicated ESG professionals who speak both ESG and investment language,” she said in relation to the report. “An ESG strategy also needs to be underpinned by excellent data, supported by robust frameworks and research.”
Philippa Thompson, head of Bloomberg’s buy-side enterprise sales, Asia Pacific, said: “ESG should be about more than just meeting evolving regulatory and customer needs. BWBN’s executive members feel that sustainable investing needs to be central to how all buy-side firms operate and understand their investments in the future. “And even though a true sustainable mindset requires a major re-wiring of how organisations approach their investments, the transformation is ultimately a necessary and rewarding journey.”
Key themes to emerge from the discussions which contributed to the report were:
Build a strong talent pipeline. As ESG consciousness continues to rise, the competition for talent has started to become a major issue. Companies are now looking to invest more in homegrown talent, looking within their home markets or business. Firms are even open to looking outside their traditional talent pool of finance to bring in diverse talent to enhance their ESG thinking.
Understand the value of ‘strategic interdependence thinking’. In terms of skillsets, strategic interdependence thinking is a key emerging element, as there will always be a larger web of stakeholders, domains and scale. While collaboration has always been emphasised, there now is awareness that external ecosystem collaboration is going to be critical.
Frameworks and disclosure. While the world is shifting towards a more ESG conscious future, firms are still concerned about the lack of a globally accepted consistent and comparable standard on ‘decision-useful’ sustainability disclosures. While this will improve, the current lack of comparability and fragmentation in ESG interpretation are creating some legal uncertainty. Many firms are aligning their internal investment programs around core ESG investment principles, devising their own strategic parameters.
Risk management capabilities at the fore. Firms have a duty to demonstrate both financial and non-financial outcomes underpinned by robust risk management practices. Failure to do this transparently and under robust governance procedures will risk the label of greenwashing. Materiality matters in sustainable investing, as firms need to demonstrate an integrated approach to long-term investment goals. In this environment, a firm can differentiate itself with its unique ESG risk management capabilities, potentially lifting its brand value.
Among other comments published in the report, Susan Buckley, head of liquid markets at QIC, emphasised the importance of diversity in the talent being attracted to investing within ESG principles.
She said: “We believe having a diverse investment team is a key element in attracting and retaining talent with the skills and experience needed to successfully develop and evolve our ESG investment framework. Also, while gender balance is seen as a material ESG investment risk factor, it is our view that to credibly engage with investee companies on this issue, we need to demonstrate that we are addressing gender balance within our own organisation and industry.”
Buckley also joined the BWBN’s webinar event as a panellist last Friday. The others on the panel were: Cassandra Crowe, v.p. at T. Rowe Price; Sonja Sawtell-Rickson, CIO at HESTA; Matt Whineray, chief executive of NZ Super; and, James Bell, the head of ANZ for Bloomberg.
The Future Fund’s Sue Brake says in the report that an ESG team needs people with both ESG and investment knowledge. “In the past, this role was too often covered by non-investment staff that didn’t speak the investment ‘language’. That’s no longer adequate,” she says.
“And from a data perspective, ESG data should not be separated from other investment themes. With investment managers piling onto the ESG bandwagon, customers are getting choice and only skilled teams that create strategies underpinned by good data, frameworks and research would attract the bulk of the capital.”
Virginie Maisonneuve
Virginie Maisonneuve, Singapore-based CIO for global equity at Allianz Global Investors and a founder of the BWBN, says in the report: “What has really changed over time is that people now have the passion for climate and sustainability.
“To be a good ESG practitioner, you need the passion to learn and need to be agile and adaptable as this is a field that’s developing each day. It’s also important to look at people with diverse backgrounds, not necessarily from finance, to bring in a holistic point of view to ESG talent.” Senior people from 18 firms and funds either based in the region or with substantial presences contributed to the report. They were: T. Rowe Price, New Zealand Superannuation, Future Fund, QIC, HESTA, Nikko Asset Management, AIA Group, Allianz Global Investors, Multiple Alternate Asset Management, Kotak Mahindra Asset Management, HDFC Life, Schroders, PIMCO, BlackRock, Aioi Nissay Dowa Insurance, Alliance Bernstein Japan and Bayview Asset Management.
Greg has worked in financial services-related media for more than 30 years. He has launched dozens of financial titles, including Super Review, Top1000Funds.com and Investor Strategy News, of which he is the former editor.
Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
Opening up early access to super for housing would have a negative effect on the balances of even those members that don’t dig into their savings, with funds forced to adopt more conservative investment strategies and hold more liquid assets.
The circa $88 billion industry fund for workers in health and community services reckons that alleviating the affordable housing crisis will boost its other investments by easing the cost of living and inflation.
