RLAM manage just over 90% of our pension assets, and take their responsibilities as shareowners on our behalf seriously. Investing money responsibly is part of everyday business for RLAM, and you can see this when looking at their voting record or reading their latest stewardship report.
RLAM has a dedicated responsible investment (RI) team that oversees research and engagement on environmental, social and governance (ESG) issues. The RI team shares this expertise across RLAM’s wider investment teams, working closely with them to help ensure ESG issues are included in all decision-making processes.
Piers Hillier, Chief Investment Officer, explains how ESG is integral to the investment process at RLAM.
Why is responsible investment important?
For me, responsible investment is the heart of how we deliver better outcomes for our customers.
It's not a one off hype factor at this particular point in time. It's something fundamental to how we ensure we not only deliver great financial outcomes to our customers, but also benefits to society as a whole.
What drives our long term commitment to responsible investment?
To deliver good long-term outcomes and meet our customer’s expectations, we need to invest in a way that's sustainable into the future. We think that environmental, social, and governance factors in addition to the traditional financial metrics that we would use really do help us deliver those better outcomes to customers. So the E, S, and the G - the environmental, social and governance factors - are key to our thinking in terms of how we analyse companies and how we analyse the investments that we make to deliver those long-term outcomes.
To give you a real practical example of that, let's look at the energy sector. So traditionally a very carbon intensive sector, and it's an industry that wants to transition to carbon neutral to even carbon negative into the future. And so we'll work with those companies to look at how they deploy capital responsibly into the future to be able to deliver those goals, and hopefully deliver better financial outcomes for our customers to meet their long term needs.
What is ‘stewardship’, and how do we undertake our stewardship responsibilities?
Stewardship in the first instance is us being guardians of our customer’s capital. They've invested with us to deliver long-term financial outcomes, and it's (a question of) how do we deploy that capital in a responsible way to deliver, meet, and hopefully exceed their expectations?
To give you a couple of examples of this – the first one I'd like to use is Metro Bank. It's a bank that we've engaged with for a considerable period of time, and we were worried that what was a very visionary Chairman when the business was first created was now starting to be more of a “group-think” type organisation.
What we needed was greater diversity on the board, and we wrote to the board, consulted with the senior independent director in terms of how we might actually affect board change, and that's taken place. We hope now that with a more diversified board and more diversified thinking that Metro Bank will see a long-term successful future.
A second example of that is around voting. We vote over 15,000 resolutions on your behalf each year - just breaking that down, one example is with respect to executive pay. We engaged with over 80 companies last year about executive pay schemes to make sure they're aligned with the long-term interests of us and you as investors, and making sure that we don't over-reward management for factors that are necessarily beyond their control, and make sure that actually there's long-term alignment there for us, for you in terms of your financial outcomes, but also delivering better outcomes for society as a whole.
How do we ensure companies are addressing climate change?
Climate change is a really significant issue in terms of long-term investment, and it's one that we really take incredibly seriously here at Royal London.
To give you a good example, we engage with Climate Action 100+, which is a group that comes together to try and tackle the biggest greenhouse gas emitters in society. To give you a practical example of what that really means; we've done a recent analysis for our engagement with the gas utility sector in the UK, and what we're looking at is companies that really understand how we can target lower carbon emissions, and move to a carbon neutral/carbon negative future.
And what was interesting is that we found companies that really don't think that this is that significant, or they're not really committed to deploying capital into the future, and the one joy in some ways of fixed income is that we can actually allocate capital to new projects. So we're committed to allocating our capital to projects that are committing to a lower carbon footprint going forward.
Are there any areas that you won’t invest in?
Our passion here at Royal London is actually not to exclude.
We understand there are arguments for it, but ultimately we think the best thing to do is actually try and engage for change, and actually work with companies, and the investments that we make that actually improve the outcome for society, because we allow companies to transition effectively.
Ultimately we retain that sanction to sell. I think that's really, really important that we can vote with our capital - your capital - and take money away from businesses that don't think about the impact of responsible investment and what that means for society as a whole.
We're constantly allocating new capital to businesses, and we have the ability to have a more immediate impact in terms of where that capital is going. So when companies are looking to raise money to finance a new investment, they often come to the fixed income market to say, “Can I borrow some funds to actually build out this new project? And this is what I'm going to do with the capital.” And if we don't think they're acting in a way that's to our best benefit, we can engage and say, “We think this would be a better outcome.”
If ultimately they say “No, this is what we want to carry on doing,” then we can choose not to deploy capital to them. So is a really good sanction in the way we deploy our fixed income capital, and that's how we ensure we deliver better outcomes for you.
What are our plans for responsible investment in 2020 and beyond?
Responsible investment is something I've been really passionate about since I arrived at Royal London five years ago, how we incorporate it as part of our focus investment philosophy.
In 2019 we created a dedicated team of three. Over the last 18 months we've been investing into that team, the team is now nine and we've recruited in specialist data scientists to help us in terms of quantitative tools. We've brought in property expertise as well. So we're really committed to responsive investment in terms of how we can embed that as part of our investment proposition and hopefully deliver much better customer outcomes for the future.