A strong ESG strategy has gone from a nice thing to have, to being a key contributor to achieving better long-term, risk-adjusted returns for investors and pension scheme members
Environmental, social and governance (ESG) considerations have shot up the priority order for companies and investors alike in recent years. Once perceived as a box-ticking exercise, or even window-dressing, ESG is now approached for what it is: a core risk and opportunity, impacting businesses and the long-term returns of investors and pension scheme members.
High-profile campaigns such as ‘Black Lives Matter’, ‘Make My Money Matter’ and those by Sir David Attenborough have elevated the public consciousness around social and environmental issues, and consumers increasingly expect the brands they interact with to align with their own personal values. This realisation has contributed to a growing recognition that companies that pay more attention to ESG and embed it in their core business goals are more successful and less risky to invest in.
This heightened public awareness around ESG issues and campaigns has filtered firmly through to the investor agenda. Even if company leadership teams don’t recognise the importance of ESG, increasing engagement on the subject by asset managers and asset owners is forcing them to take it more seriously. Meanwhile, regulatory pressure, especially in the area of environmental sustainability, is making ESG a concept that businesses can’t ignore.
“ESG was previously not viewed as critical – it was a nice to have,” says Adrian Mitchell, chief investment officer of Aon’s fiduciary management business in Europe. “But it is now integrated in all investment decisions, certainly for the managers in which we invest. Investment strategies have evolved from purely looking at the ‘G’ of ESG - how companies are run, which has a big impact on the financials - to looking much more at the social and environmental factors as well. We’re also starting the gradual move towards fully sustainable products and we expect to see that accelerate due to net-zero commitments and regulatory pressure.
“First and foremost, we are still focused on hitting the right financial returns for our clients, but we have also fully integrated ESG into our processes and make sure we manage those risks associated with the transition to a low-carbon world. There is now a growing interest and acceptance that as long as we can continue to hit the investment objectives that clients set, then it is also very important to build some non-financial goals, particularly around ESG, into investment portfolios.”
Aon’s UK fiduciary business is a huge aggregator of pension scheme assets, working for more than 100 clients with a total in excess of £23bn of assets under management1. This scale gives Aon more opportunity than a typical pension scheme to engage on ESG issues with the underlying asset managers and, in turn, ensure they are engaging directly with companies to drive change.
Aon’s holistic approach to building portfolios focuses on integration, incorporating material ESG risk factors into investment analysis and decision-making through its asset allocation and reporting tools, and investment manager rating process. Aon’s engagement with the underlying asset managers seeks to ensure that their ESG plans align with Aon’s and it monitors metrics, particularly around climate, to be proactive in developing ESG solutions and funds.
In September 2020, Aon launched the Global Impact Fund, its first fund with non-financial sustainable development goals as well as the objective of outperforming the MSCI World Index. The fund, which invests in equities across the world, is up by more than 20% since its launch and has been an important demonstration for the market that funds can have non-financial goals without having to sacrifice financial performance.
Communication and education are also central to Aon’s ESG strategy. On the defined benefit pensions side, Aon runs a series of webinars, roadshows and trustee training on the importance of ESG in client portfolios. On the defined contribution (DC) pensions side, in which scheme members are typically younger, the company has noticed a willingness from clients to engage on ESG, which is particularly important given members will be contributing to their pensions over multiple decades.
“Providing transparency around how members’ savings are invested is important, as well as being upfront about some of the risks,” says Jo Sharples, chief investment officer for Aon’s DC solutions. “Environmental risk in particular does make a big difference to their investments, so we share information with members and show the steps we’re taking. The willingness to engage from DC members is partly because they can relate to the things they see in the media and online, but more importantly the returns we generate directly impact on what their retirement will be like.
“For DC pensions, a lot of the pension schemes have a young age profile. For someone entering the workforce now, aged 21, they are looking at possibly a 60-year investment timeframe, so these issues become really pertinent. Younger members, who are also more likely to be socially aware, want to know their money is invested in the right way. We often hear that people aren’t engaged with their pension, but if you show what their money is doing to drive social and environmental impact, they’ll engage more and perhaps even put more in. We’ll see more tools become available to help members understand in which companies their pension is invested and what is being done to manage some of these risks.”
Greenwashing, where companies make ESG claims they don’t fulfil, can be a challenge, but Aon works diligently to ensure it only invests in underlying asset managers that are ‘buy’ rated by its manager research teams. And once a company is buy rated, Aon continues to measure, through active engagement, whether the organisation’s actions are matching its commitments.
ESG will undoubtedly continue to shape the investment and asset management landscape in the years ahead, and Aon is dedicated to further building on its market-leading position in this area. That is likely to include evolving from its current focus on full integration toward a much more carbon neutral and sustainable portfolio, including impact strategies with non-financial goals.
“We’ll see the focus on ESG spread from equities to non-equity asset classes such as bonds,” says Mitchell. “Reflecting this, we will soon be launching a Sustainable Multi Asset Credit Fund. Additionally, as an aggregator of pension scheme assets with stewardship responsibility, Aon is in a better position than other asset owners to influence how the underlying asset managers integrate ESG into their processes and will continue to exercise our responsibilities in this area.”
For more information please visit aon.com/responsibleinvestment
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