Advising on SRI change and growing complexityJune 2010
Pension fund advisor Towers Watson has stepped into the breach created by some of the structural shifts occurring in responsible investing. Mike Scott speaks to Emma Hunt, head of sustainable investment
Investing is an arena that has become increasingly complex over the past 10-15 years, particularly when it comes to sustainability, says Emma Hunt of the sustainable investment team at Towers Watson, the professional services firm that advises pension funds on investment issues.
Pension funds ‘need to know how these issues will affect them in terms of their mandate structures’, according to Hunt. ‘How might these mega-issues that cross asset classes and geographies affect their asset allocation?
‘What sort of data might you need? What decision-making frameworks do you need to put in place to deal with these uncertain areas of risk and opportunity? These are the sorts of questions they need to answer.’
Hunt sees Towers Watson’s role as helping clients identify investment opportunities that are arising from the big structural shifts sustainability issues are provoking. ‘There is a very compelling investment thesis in the shift to a low-carbon economy. There are new technologies, new companies and new investment opportunities. Literally hundreds of funds catering for this area have come on to the market over the last few years. Our clients need to understand the investment thesis behind these opportunities and where the risks lie.’
While the company retains a focus on traditional corporate governance issues such as board structures and pay, environmental issues have inevitably risen up the agenda. ‘We recognise climate change is the major issue but we look beyond that to focus on issues such as natural resource and water scarcity and the ability of ecosystems to absorb pollution.’
Hunt believes that businesses are more receptive to concerns over CSR issues than in the past, partly because of their own experience. ‘Many companies have felt the impact of sustainability issues on their own business models and are transferring what they have learnt from their core business to their pension funds.’
The concept of how the ‘Prudent Man’ would behave is very important in the pensions world, she adds. ‘A decade ago, the Prudent Man would not have considered environmental, social and governance issues, but now he would, which gives funds much more confidence in doing the same.’
Even so, it is important to recognise that SRI has a number of uncertainties involved and, given the speed of developments in many sustainability issues, ‘you cannot look at past return characteristics to predict what will happen in future’. As a result, traditional models are not very helpful – and this is where companies such as Towers Watson come in. ‘We can work with pension funds to help them understand what their working beliefs are and what that means for their business in future. They may feel that CSR factors will have a material impact on their investments but not have the data to back that up, so we can help them to develop a set of working assumptions.
‘If they think that sustainability and the shift to a low-carbon economy might lead to strong opportunities, it gives them greater confidence to allocate assets to sustainability-targeted mandates,’ she adds.
CSR is unlikely ever to be at the top of investors’ priorities, Hunt asserts. ‘We see this as a difficult-to-pin-down cross-disciplinary investment topic that has more than its fair share of uncertainty. But it is an issue that won’t go away.’
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