Interest in Environmental, Social and Governance (ESG) investing has grown dramatically as asset managers have raced to market with new strategies and approaches. Asset owners face a different set of challenges and opportunities as they respond to increasing interest in ESG from both participants and providers, as Reino Ecklord from NEPC and Cambridge Associates’ Kelley Shepherd discussed at eVestment’s EI3 conference in Atlanta.
The Importance of Intent
The first step towards implementing ESG in a plan’s investments requires investors to think through the mission, or intent, of the plan. In the past, the participants noted, ESG integration often meant steering clear of certain sectors or stocks, but now entails a more holistic effort to integrate an organization’s mission into the plan’s asset allocation and investments.
“One of most interesting things in the last several years is the momentum of ESG across our client base,” Ecklord said. “Maybe ten years ago, ESG was something that the endowment and foundation community led the charge on. Now we’re seeing it across pensions, both public and corporate DC and DB, Taft Hartley and everything else under the umbrella.”
Defined contribution plans in particular, Ecklord added, “are driven by their constituents and constituents now have more of a voice in how plans should align to their mission and their goals by including impact-oriented strategies in the roster of potential options for a DC plan.”
Defining ESG at the Plan Level to Align Investments
Investors, and their consultants, can help frame ESG discussions with participants by providing different mission-related goals for their consideration, the panelists said. These can include company diversity and inclusion, climate change and other environmental concerns, expanding educational opportunities, and proxy voting/governance.
For Shepherd, an organization’s mission may also be tied to its location: “We often see investors looking for strategies that can benefit their organization’s home region. Examples include a private equity strategy focused on a certain region or a traditional long-only equity strategy that’s based out of the home region,” he said.
Asset owners, and their consultants, Shepherd added, should also consider expanding their horizons beyond the realm of long-established investment managers and firms. “Our clients have shown an increasing willingness to help seed strategies and work with portfolio managers/organizations that are young. We don’t want to say ‘Well, if you don’t have a three-year record, that’s just an end to it’ because then we’re not helping cultivate diverse talent and building the pipeline that our clients want to see.”
Once the goals and intents of participants are better understood, asset owners and their consultants face the task of implementing them into plan investments and offerings while balancing both the need for risk-adjusted returns and their role as fiduciaries.
Partnering with the Supply Side
As asset owners seek to respond to mission-related requests, a new generation of investment solutions may help. These strategies will represent a partnership between asset managers and their clients by encompassing a variety of themes, all of which help to achieve a plan-specific intent.
“How can we do more thematic, mission-aligned types of investing?” asked Ecklord. “We’re seeing more efforts to accomplish this goal, particularly in the private markets arena which is an easier way to target specific outcomes than with traditional equities.”
Shepherd agreed, noting that “as we get into the next generation of thematic products, you’ll start to see more and more solutions.”
Asset managers can help asset owners achieve their plan’s mission, said Ecklord, by looking within their own shops to identify their unique approach to ESG.
“The tough part for the investment management community is not being all things to everybody because everyone’s going to have their own views. It’s better to establish an ideology, stick to it, and explain why that’s good or bad for the plan’s portfolio,” Ecklord said.