Lane Clark & Peacock (LCP) has launched a new responsible investment philosophy to focus on engagement and action.
The investment consultant said asset owners and managers need to focus on concrete activity when implementing sustainable investment principles.
LCP investment partner Dan Mikulskis said: "While the industry has built good policy foundations, now is the time to start having in-depth conversations with the people managing assets on behalf of our clients."
The consultant's new approach recognises that LCP's clients own a representative slice of the whole economy through their investments. Mikulskis said: "Asset owners are exposed to systemic risk which needs strong stewardship to mitigate."
LCP partner and head of responsible investment Claire Jones said: "Systemic risks like climate change, biodiversity loss and inequality pose real threats to our clients' long-term investment objectives."
Jones said LCP wants to help its clients invest in a way that helps to alleviate these risks rather than exacerbate them, by placing greater emphasis on the real-world impacts of their investment decisions.
Partner and head of responsible investment delivery Ken Willis added: "This is a clear statement of intent so you should expect to see changes to how we advise. It's time to provide bold advice to our clients and strong engagement with asset managers."
LCP states it was the first investment consultant to require asset managers to be signed up to the net zero asset managers initiative in order to be buy rated but says it will now also ask asset managers to use specific and relevant company case studies as well as suggest new products and ideas to enable asset owners to invest with greater impact.
Mikulskis said: "We need asset managers to be much more specific about the systemic ESG risks for our clients' priorities and to talk about their approaches to individual stocks and sectors."
He added there also needs to be more collaboration among asset managers and greater contribution to common ESG principles rather than relying on proprietary definitions.
An all client approach
Willis said: "While institutional investors can have very different investment portfolios - closed defined benefit (DB)schemes hold high levels of fixed income, for example - we will apply these principles to all clients."
There is more to effective engagement than how equity votes should be cast. "Asset owners should ask the same questions when making a loan as when investing in equities," said Willis.
All too often responsible investment is treated as a compliance exercise by closed defined benefit schemes. Willis said: "Yet these pensions can make difference in their growth asset and corporate bond portfolios."
Jones said: "There is a common misconception that it is hard to be an effective steward if you are not invested in equities but that's not the case. It's about focusing on the parts of the portfolio which are most material."
Nor should closed DB schemes ignore their allocation to UK sovereign bonds.
Jones said: "One of the most important factors in delivering members DB benefits is the health of the UK economy. It makes sense to engage with the government on net zero planning and giving clear signals about the transition needed."
Stewardship priorities
As pension schemes select their stewardship priorities to comply with DWP guidance, LCP recommends trustees chose three with each one representing an environmental, social and governance (ESG) characteristic.
Jones explained: "We suggest schemes select from climate, biodiversity loss, human rights, diversity and inclusion, business ethics or corporate transparency."
Once pension schemes have picked three priorities, these will then be communicated to their asset managers.
Mikulskis said: "There will be an expectation for managers to come back with an engagement strategy which is tailored towards our clients' priorities."
For example, an auto-enrolled pension scheme might have climate as one of its stewardship priorities. It would ask its passive equity manager to identify those companies which have the biggest impact on climate and ask them what their engagement strategy would be to mitigate that affect.
Jones said: "The stewardship priorities are a useful tool to drill into the specifics of what a manager is doing. It helps asset owners to see if there is substance to manager's sustainable strategy."
These priorities are a way for trustees to get sufficient information to then decide what they want to do next, she added.
The trustees can then decide if they are happy with the steps the manager is taking on their behalf. Jones said: "The trustee might then ask the manager to improve the way they manage these risks on their behalf or decide to switch manager."
Charlotte Moore is a freelance journalist
