The idea of using ESG to drive better quality investments and ‘futureproof’ portfolios is only increasing, and long-term pension fund schemes are beginning to realise this, according to Aviva Investors
Key trends such as the climate change transition, which is transforming the way some industries grow, means pension funds are keen to not miss out on a largescale economic shift and investment opportunity when it comes to ESG.
For asset managers, the key in ensuring such long-term investments stand the test of time in a portfolio for pension investors isn't just about ‘choosing' the right asset to invest in. In fact, as sustainability increasingly becomes the centre of the investment agenda, more work is being done after an investment has been made in terms of ongoing engagement and campaigning for change.
For example, once the investment is made, a constant process of engagement and improvement is necessary to ensure the assets continue to meet rigorous criteria. In real assets, this is particularly important since assets and liabilities tend to be long-term - sometimes as long as 50-60-years.
According to Aviva Investors' Ed Dixon this engagement is a key element of the transaction process. From his point of view, engagement is about delivering ongoing benefit, not just a short-term positive impact, and this means "really baking it into the very fabric of the transaction".
He gives an example of a transaction Aviva Investors conducted with a listed REIT, which involved three key performance indicators (KPIs) to incentivise the company to deliver on ESG targets by promising a cheaper cost of debt in return. He explains that "if they deliver all of those things after year one there's an opportunity to agree another set of KPIs which can become more aspirational and increase the ambition on both sides. Again, they would benefit from a cheaper interest rate."
