A framework for top-level decision-making on investment impacts, with particular regard to environmental, social and governance (ESG) investment, is in development by Media Super chief investment officer, Jon Glass.
“It’s a way to help trustees think through ESG issues, and to evaluate whether they should make decisions that will then have an impact on the portfolio,” he said.
Introducing the framework at the Australian Council of Superannuation Investors conference on ESG investment earlier this month, Glass has termed it “point of decision, point of impact”, or PODPOI, designed to assist in investment decisions and the impact they are likely to have on a portfolio.
Glass said a PODPOI decision could be, for example, to take a view on climate change in general or, more specifically, a view on the future of fossil fuels.
“Then you would make a decision to implement that somewhere in your portfolio through your equity or the bond holdings, and that to me is a decision, and that will have an impact.”
Glass said funds should have a much greater level of awareness of the potential volatility in asset valuation and the risk of mispricing on the buy and sell sides.
He warned funds should be prepared for a negative outcome if they haven’t considered externalities in assessing long-term investment risk.
“People are slowly becoming aware that when you make investment decisions, you have to think through how you’ll react to the consequences of those decisions.
Actions, not words
“There’s a benign theory that says, every decision you make will be good for the fund. We know that can’t possibly be right. It’s almost as if you have to gear yourself up for a bad outcome. I call that a pre-mortem.”
Media Super, a $3.2-billion fund, signed up to the United Nations-backed Principles of Responsible Investment two years ago, and Glass said the fund’s engagement with ESG investment is a work in progress.
“You want to move slowly and deliberately, not quickly. You want to make sure that your PODPOI is based on an economic thesis that will play itself out in terms of delivering returns to your members.
“Does that mean you are prevented from making certain decisions? Not at all. But I’m saying the economic thesis is paramount, because we’re here to deliver returns to members.”
“Being a signatory to UNPRI and having a written ESG policy in an investor policy statement are useful, but not enough,” added Glass.
“I’m sure there are individual funds that are doing wonderful things… but as an industry, we have yet to rise to the challenge.
“I believe that the members of super funds would be comfortable for us to make these PODPOI decisions as long as we explain what we’re doing and why, monitor the impact and report back to them.”
However, Glass said a major challenge for chief investment officers is coping with the “information tsunami”.
“Any fund is going to have a lot of investment managers working for them, and they churn out thoughts and research… How do you assimilate it, absorb it, make use out of it?”