How asset owners can drive sustainability
19 November 2019
Someone’s sitting in the shade today because someone planted a tree a long time ago.
David Sheasby, Head of Stewardship and ESG, looks at why asset owners must drive forward ESG and sustainability factors if they are to generate long-term returns.
- Asset owners sit at the top of the investment
chain, often with very long-term investment
- A clear mission statement and set of
investment beliefs establish a framework
for investment strategy, asset allocation and
- Long-termism is an important contributor to
- Environmental, social and governance (ESG)
factors are sources of long-term (as well as
shorter-term) risk and opportunity.
- Stewardship adds value by protecting and
improving both investment returns and
company sustainability practices.
- Sustainability goes hand in hand with long-termism, but is distinct from it.
- Asset owners can drive sustainability and
ESG forward, and it is their responsibility to
Asset owners sit at the top of the investment
chain – often with very long-term investment
goals, such as funding liabilities, building an
endowment for perpetuity, or providing for
How asset owners consider long-term material risks and
opportunities will therefore have a significant impact on
the overall investment system. As such, they are in a
strong position to communicate to managers and other
stakeholders how sustainability and ESG factors are
critical in generating long-term returns and in
addressing multi-decade, systemic risks such as climate
We are all on a journey across this fast-changing
landscape and our industry’s well-intentioned efforts
can be confusing and counterproductive. Based on our
experience, we have set out our learnings below –
ultimately asset owners are the ones who have to set
It starts with a mission
A crucial element is for asset owners to set
out a mission statement – effectively its
‘reason for being’. This captures how the
organisation will serve its stakeholders (for
example, its beneficiaries, employees, or
society as a whole), as well as – where
competing for assets – it can differentiate
itself from its peers.
A second element is the asset owners’ view of the
future, which may reflect broad economic or
demographic trends and systemic challenges and
With the need to balance multiple stakeholder
objectives, setting out a mission statement is
challenging, requiring it to be:
- Broad enough to be relevant in an ever-changing
environment, but also sufficiently specific to allow
necessary differentiation from competitors.
- Enduring enough over the long term to be a useful
navigation aid for long-term investment objectives,
while allowing for adaptation when circumstances
change, or the organisation evolves.
- Practical and achievable, but also aspirational enough
to appeal to individuals, teams, customers and other
However, each asset owner is unique with its own
specific investment objectives, linked to liabilities or to
deliver attractive outcomes for a given level of risk. In
order to achieve these objectives, asset owners will
diversify their investments across a range of asset
classes, risk factors, themes, strategies and time
We are all on a journey across this fast-changing
landscape and our industry’s well-intentioned efforts can
be confusing and counterproductive.
Setting out investment beliefs
Having defined its mission statement, an asset
owner needs to support it with a set of more
specific investment principles or investment
beliefs. These should be a set of clear, impactful
statements that will help select the investment
strategy, inform asset allocation and align all
Investment beliefs are ‘assertions about investments and
the way the investment world works which, when
developed and shared, help with investment decision
By definition, because investment beliefs are the
views held by a particular institution, they can not be
imposed from outside. They represent explicit and codified
expressions of the assumptions an institution makes about
how it should invest, and the principles it follows as a result.
They are framed by the view of fiduciary duty and guided
by the answers to the questions set out below:
- How broad is the fiduciary duty beyond strictly financial
benefits for stakeholders? For example, is there a wider
consideration of the investment impact on people and
planet? How is this translated into investment decisions?
- To what extent are ESG factors viewed as material to
investment returns (through risk or opportunity)?
- Will ESG be incorporated into investment decision
making? If so, what degree of ESG consideration will be
applied, from basic norms-based screening all the way
through to integrating active ownership and ESG factors
within traditional investment decision-making criteria?
- Are there particular sectors/industries or companies
that will be screened regardless of their financial
However, in our experience one key driver is the views on
long-term investment and sustainability. These focus on the
extent to which:
- long-termism is viewed as conducive to value creation
by companies and in the wider economy.
- ESG issues are considered sources of long-term (as well
as shorter-term) risk and opportunity; and
- stewardship adds value by protecting and improving
returns and company sustainability practices.
Driving ESG and sustainability and Forward
The process of developing investment beliefs
requires buy-in from different stakeholders
and, as such, the process can take time as the
board/investment committee debates and
fleshes out these beliefs.
A good articulation of this process is demonstrated by
the US pension fund, the California State Teachers’
Retirement System ‘CalSTRS’. The timeline for this
process was about two and a half years and
encompassed a peer review, leveraging external experts
and consultants and extensive discussions.
Links to some strong examples of investment beliefs
from asset owners such as New York State, CalSTRS,
APG, HESTA, USS and Brunel are provided at the end
of this document.
Common themes of all of these examples include: a
focus on the long term, the influence of strategic asset
allocation, the benefits of diversification and the
importance of responsible investment considerations.
Armed with clear investment beliefs, an asset owner is
therefore able to identify managers who are aligned to
their approach to investment. As such, the contracts or
‘mandates’, where the asset owners set out their
requirements and expectations are one of the most
important elements in ensuring that institutional
investor partnerships fulfil long-term objectives. Equally,
in setting out these mandates, the asset owners can
clearly drive sustainability and ESG forward.
Long-Term and sustainable investment
There has been extensive research produced
looking at the benefits of long-termism –
notably the work done by the initiative
Focusing Capital on the Long term (FCLT).
In addition, there is a growing body of evidence
showing that businesses which adopt effective
sustainable business practices, specifically through
consideration of ESG factors, enhance their competitive
advantage, increase operational effectiveness, and
ultimately improve their long-term financial performance.
We wrote about this extensively in a paper produced last
year called, The Value of ESG here
As such, one robust approach that some leading asset
owners have chosen to adopt is to focus on long-term
sustainable investment – essentially targeting long-term
value creation by companies and the economy as a
It is important to note that long-termism and
sustainability are two distinct concepts. Not all
investment that is long-term is necessarily sustainable.
Equally, investment does not need to be long-term in
order for sustainability factors to be relevant – ESG
factors can have a material impact on a business in both
the near and the long term. However, the two concepts
are complementary for an asset owner in its search to
maximise long-term value creation.
It is important to note that long-termism and sustainability
are two distinct concepts. Not all investment that is longterm is necessarily sustainable.
Manager selection - what to look for - Types of questions
Once investment beliefs are in place they can
then be built into the investment strategy and
One of the key aspects of manager selection will be an
alignment of values and beliefs. In examining the
process for manager selection, it is interesting to look
at the example set out by the Environment Agency
Pension Fund (EAPF) in the UK (now part of the Brunel
pension pool). It developed the following high-level
checklist for long-term asset owners in seeking an
- Integrate your investment beliefs into your manager
selection criteria, especially when looking at
investment process and organisational qualities.
- Ensure you explicitly evaluate managers on their
stewardship and governance capabilities – their
involvement in voting and engaging with the
companies they invest in.
- Pay little attention to short-term performance ‘past
performance is no guide to future performance’ –
focus on the process; if you must consider
performance, look long term.
- Ensure your contractual relationships don’t create
inadvertent short-term pressures.
- Ensure reporting is relevant to a long-term mandate
and to your needs.
- Monitor your managers – but not by looking at short-term market performance: look for idea generation,
strategic insight, team renewal, and real indicators of
business performance of the underlying companies.
Think like a manager of an industrial holding
- Communicate with your managers regularly,
particularly sharing your expectations of them, and
your own pressures and concerns – consider a
covenant or similar.2
Equally, with a belief in the value of incorporating ESG,
it looked at the following areas to explore with the
- Seeking good examples and case studies.
- Asking the fund manager (not the RI/ESG specialists)
the ESG questions – to evidence whether the fund
manager is serious about ESG.
- Challenging on whether they are ahead of the
market in understanding the impact and financial
consequences of ESG factors.
- Exploring the links between stewardship and
investment process and whether they feed off each
- Using UNPRI transparency reports and assessment
to reduce questions and enhance due diligence.3
Monitor your managers – but not by looking at short-term
market performance: look for idea generation, strategic
insight, team renewal, and real indicators of business
performance of the underlying companies.
Incorporation into mandates
One key way to set out expectations as an
asset owner is through the investment
An investment mandate sets the parameters of the
investment relationship and defines the incentives that
will guide the asset manager. As such, it is developed to
meet the long-term needs of the particular asset owner.
This will include careful consideration of the benchmark,
the risk targets and control measures, and the fee and
Stewardship is also a crucial element of the relationship
and an opportunity to enhance the long-term
sustainability of the businesses invested in. Unless an
asset owner chooses to conduct engagement
themselves, they will expect their asset managers to
engage with companies on material sustainability or
ESG matters, and to thoughtfully vote at all company
meetings unless there are overriding reasons not to do
Once appointed, it is then crucial for asset owners to
monitor and engage with managers on their
stewardship activities. This then also serves as a key
tool to drive long-termism and incorporation of
sustainability. The reporting by asset managers should
explain their stewardship activities and illustrate the
outcomes of stewardship. This may include, for example
the companies with which engagement has been
conducted and sustainability quality metrics such as
CO2 intensity, carbon footprint or ESG ratings.
With often very long-term goals and in some
cases very substantial funds under their
control, asset owners are in a prime position
to drive sustainability, ESG and long-term
By clearly understanding their own mission and setting
out a set of clear investment beliefs there is the
opportunity to identify asset managers who are aligned
and able to deliver on their desired outcomes. The role
of stewardship and reporting to the asset owners is key
and offers the opportunity for an asset manager to
demonstrate long-term value creation and help the
asset owners deliver the outcomes required.
The importance of sustainability in aligning the
relationship between the owners and users of capital is
best encapsulated by the statement from the
International Corporate Governance Network:
‘Sustainability implies that the company must manage
effectively the governance, social and environmental
aspects of its activities as well as its financial operations.
In doing so, companies should aspire to meet the cost
of capital invested and generate a return over and
above such capital. This is achievable sustainably only if
the focus on economic returns and strategic planning
includes the effective management of company
relationships with stakeholders such as employees,
suppliers, customers, local communities and the
environment as a whole4.’
1Source: University of Cambridge Institute for Sustainability Leadership (CISL). (2016, May). Taking the long view: A toolkit for long-term, sustainable investment mandates. Cambridge, UK: Cambridge Institute for Sustainability Leadership.
2Source: Environment Agency Pension Fund. ‘Being a Long-term Investor’ (December 2016).
3Source: Environment Agency Pension Fund. ‘Observations form our search and tender’ (July 2015).
4Source: International Corporate Governance Network. ICGN Global Governance Principles.
Good examples of investment beliefs from asset owners:
CALSTRS – https://www.calstrs.com/sites/main/files/file-attachments/calstrs_investment_beliefs.pdf
APG – https://www.apg.nl/en/asset-management/our-beliefs
HESTA – https://www.hesta.com.au/content/dam/hesta/Documents/Core-investment-beliefs.pdf
USS – https://www.uss.co.uk/how-uss-invests/investment-approach/investment-beliefs-and-principles
Brunel – https://www.brunelpensionpartnership.org/wp-content/uploads/2018/07/Our-Investment-Principles.pdf
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