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ESG, Data, Re-insourcing: Pension funds bring their unique investment perspective to the table
ESG, Data, Re-insourcing: Pension funds bring their unique investment perspective to the table

ESG, Data, Re-insourcing: Pension funds bring their unique investment perspective to the table


On 24 February, BNP Paribas Securities Services hosted a panel session to discuss its new report, "Governance, Cost and Sustainable Investing", written in conjunction with the Economist Intelligence Unit (EIU)

Among the panellists were The Pensions Trust and Schroders alongside two of the UK’s largest pension funds: Universities Superannuation Scheme (USS) and Railpen – both of whom manage a large portion of their assets internally. The panel was moderated by the EIU.

The aim of the session was to dig further into some of the findings of the report – entitled Governance, cost and sustainable investing: asset owners rethink their strategies.

Integrating ESG

Many UK pension funds are integrating ESG into their investment decision-making framework.  There are many different approaches to this, The investment team of The  Pensions Trust (a £7 billion fund which is entirely outsourced) are moving away from the traditional manager beauty parade in favour of using external ESG ratings as part of their initial screening.  Asset managers are rated based on their integration of ESG factors and active ownership , to which Pensions Trust apply their own internally-developed manager ratings.

Data challenges

A frequently cited challenge during the discussion was data – specifically obtaining reliable data and managing the huge volume produced. This was identified as a particular challenge in the context of ESG as the sources of data and its quality and consistency varied widely.

This matters for two key reasons:

  • ESG is a classic area where the pension fund might have risks that are not being monitored
  • The challenge of measuring the added value that an ESG approach brings

 Specific obstacles for panellists were:

  • Obtaining data for certain asset classes can be particularly difficult – for example property and infrastructure
  • Ascertaining the carbon footprint of portfolios
  • Data aggregation - an issue in general where multiple managers are used

These issues are aggravated by the combination of a lack of data at the company (investee) level and the issue of multiple data sources. As a result data is patchy.

Pension funds – a different investment perspective

As asset owners with long-term liabilities, the investment nature of pension fund mandates is buy and maintain. Pension funds are also unique in their ability to manage illiquidity. They are rarely forced sellers in a volatile market and are therefore even able to benefit from market dislocations.

USS’ 130 strong investment team manage approximately 80% of the fund’s assets in-house. The size of the team allows USS to invest beyond equities and bonds so for example in private equity and direct lending. In 2015 USS acquired a 100% stake in Moto Hospitality (UK’s largest motorway service station operator in 2015). But direct investments come with challenges – USS owns assets all over the world (forests, toll roads) – but recognises the reputational risk it faces as a pension fund – and therefore looks to buy and manage (including reputational risk) not just buy and maintain.

The Journey To Reinsourcing

Railpen CEO, Chris Hitchen, described the company as “High cost but excellent value. Having recently undertaken a journey to reinsourcing, Railpen ismoving away from its outsourced model to internal asset management model. The driver was the post 2008 low rate environment, which led to a focus on cost reduction which included a greater focus on the drivers of returns and how to obtain those returns efficiently. Having implemented their Investment Transformation Programme (ITP), Railpen is now predominantly insourced but keen to outsource where it makes sense  - such as global credit.

The benefits of managing in-house

Managing assets in-house arguably brings benefits not least an alignment with long-term decisions. One panellist highlighted that in-house portfolio managers are compensated based on long-term performance, whereas external managers are focused on short-term performance and may even be ‘distracted’ by tasks other than investment management (such as sales and marketing). Naturally cost was also cited with internal asset management cited as cheaper depending on the asset class (notably direct investments).


To read the full report, click here.

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