Only a small minority of institutional investors have largely or fully implemented an environmental, social and governance (ESG) investment strategy, going by an audience poll at a virtual conference hosted in the UK yesterday. Just 13% fell into that category, while the majority (56%) said they had just started work on such a project.

British insurer Wesleyan, meanwhile, is among the 31% that have an agreed ESG investment strategy but are some months away from fully implementing it.

Progress in this area is certainly less advanced in Asia, at least partly down to the faster development of regulations around ESG in Europe. But the global direction of travel among insurers and pension funds – and the expectations of their customers and members – is clear: towards more sustainable investment.

Trevor Harris, Wesleyan

It takes a lot of time and effort to do properly, however.

Wesleyan has already spent some 18 months developing an ESG framework, but it is likely to take years fully to put it in place, said head of financial risk Trevor Harris. He was speaking on Thursday (September 10) at the Institutional ESG Investment Summit hosted by Clear Path Analysis.

“The biggest challenge was: where do we start?” he remarked. “Our documented investment beliefs were consistent with sustainable investing, but they weren't specific enough. So we had no red lines, no areas that we couldn't invest in, other than direct investment in tobacco stocks.”

SETTING PRINCIPLES

It’s not easy finding the necessary guidance, said Harris.

“A lot of advice is available on ESG investing, managing climate risk, regulatory disclosures, measuring carbon footprint, et cetera. But no one seems to be thinking holistically about how sustainability decisions could impact business performance or reputational risk with customers. There was no sort of overall strategic advice that consultants were able to provide.”

Nonetheless Wesleyan proceeded to put together a framework for its £8 billion ($10.1 billion) portfolio, with eight sustainability principles and one overarching principle: “to do the right thing for our customers, staff and the community”.

In respect of the eight underlying principles, one states that when the firm invests in and lends to companies, it will aim to improve the sustainability of its asset portfolios. “And we will engage with and challenge investee businesses to become more sustainable, where we believe we can make a positive difference,” Harris added.

When it came to more specific areas of the strategy, a big question was whether Wesleyan needed to run separate ESG funds, or should class all of its funds as ESG investments.

“In the end, given the context of our overall sustainability strategy and doing the right thing for our customers, we decided that minimum ESG standards should apply to all Wesleyan’s internally managed funds,” said Harris.

“For our customers who have specific ethical preferences, we will offer externally managed SRI [socially responsible investment] funds,” he added.

"WOOLLY" ESG PROMISES

It is all too common these days for fund providers to jump on the green bandwagon with vague promises of a focus on sustainable investments, a practice known as greenwashing.

“We noticed the rather woolly ESG statements that other fund providers are using in their marketing material,” he said. “We wanted our ESG statements to be more specific than just saying that we take account of ESG factors.”

Setting an ESG benchmark against other funds, however, is not practical, said Harris. “Our aim is to target an average ESG rating for each Wesleyan fund, and within each industry sector within that fund, that's higher or more sustainable than the average in the markets in which we invest.”

That’s a difficult concept to communicate to customers, he pointed out. “In effect, we're saying we want to be first- or second-quartile in our ESG performance when we benchmark against the markets that we invest in.”

As for the widely considered question of whether ESG frameworks constrain performance, Harris conceded that this had raised a challenge for Wesleyan.

“When we started the investment team, we felt that any constraints on our investments were a bad thing, so we traditionally gave the team a lot of flexibility.”

The firm has overcome the challenge in two ways, Harris said. “Firstly, our sustainability strategy and our ethical beliefs and our business is more important [than retaining the previous level of flexibility].”

“And secondly, like most people attending this conference, we believe that there isn't a conflict. If you're a long-term investor, you should be investing sustainably anyway.”