Measuring the impact of investments aligned with UN sustainability development goals is something all asset owners are struggling with, but progress is critical if  responsible investment is to evolve, says Rob Fowler, former head of investment execution at HESTA, the $52 billion superannuation fund.

“All of us are grappling with this,” he says, adding that most of the measurement used in investment circles is not impact but measuring portfolio exposures.

“That’s the biggest issue at the moment measuring exposure and calling it impact: because it’s not.”

He says meeting SDGs is about additionality. It’s not just about selling into a market, but having a direct positive impact on those who need to be helped by the SDGs. “Is the company actually focused on any of the 167 various targets underneath those 17 SDGs. Or, is it simply a service provider that is only roughly aligned with the SDG themes?

Fowler, who is retiring in August after a three-decade plus career in the investment industry with more than 15 years at HESTA, says impact measurement is relatively new globally but will become mainstream.

“It’s a cliche but it’s true that what gets measured gets done, so developing impact measurement is vital to continuing to evolve our approach to responsible investment. However, it’s also important that asset owners seek to measure impact to encourage the companies we invest in to also start to measure their impact as accurate and uniform data is a key challenge.”

“Finally, measurement is critical to enable the communication of what is being achieved!”

He should know. Fowler was one of the early pioneers in ESG integration and the development of active ownership by asset owners in Australia.

As CIO of HESTA, a position he held for  13  years, he pioneered the integration of ESG into mainstream investment mandates across all asset classes domestically and was a leader in global ESG integration by investment managers. He also led the implementation of total portfolio screens for tobacco and thermal coal at HESTA

He was a central figure in the establishment of engagement service provider Regnan, and sat on the board for more than eight years, and has been on the management committee of the Investor Group on Climate Change for more than a decade.

Fowler’s career spans the formative years of industry funds in Australia. When he joined HESTA, he was the second investments team member, the fund’s internal investment function now numbers more than 50 and is set to grow strongly in years ahead.

As Fowler looks to shift focus to a board or advisory role, he sees that globally, leading funds in responsible investment are evolving their approach, shifting from ESG integration to a focus on long-term stewardship and considering how they can amplify the positive impact they can have for members, including  aligning investments with the SDGs.

Dutch funds APG and PGGM are leading the pack with the €220 billion PGGM targeting a 10 per cent allocation to SDG-focused investments by 2020.

“The Dutch funds in particular really got stuck into thinking about integration and meeting SDGs when they were first released mid-2016,” he says.

Snail’s pace

Fowler is blunt about the progress made by Australian asset owners “I have to admit they [the Dutch funds} have put more thought into it and more effort into it by setting targets than any Aussie fund has and I would have to include HESTA in that.”

“We are working towards making investments that create real impact – but to be honest other than in climate change, it is still relatively early days in bringing that to life through investments.”

HESTA is looking globally at what approaches are emerging and is also gaining measurement insights from its innovative impact investment program. 

Fowler’s passion for ESG and responsible investment has not waned. Far from it. When he retires from HESTA, he will take his social concerns with him perhaps continuing the governance work in an advisory capacity. As he sees it, many of the world’s funds are progressing at a snail’s pace.

“Some funds in the world still think solely through an ethical investing lens. Some are still stuck in the world of ESG which is purely about mitigating investment risk, while the progressive players have moved into responsible investment,” he adds.

“Over the last 15 years, we’ve gone from managing risk to searching for opportunities with positive societal impact.

“We’ve also seen a big societal shift. Our members expect us to invest responsibly and to be a gutsy advocate pushing for long-term change that will benefit the society and environment in which they and their loved ones live and work.”

Follow the money

Fowler says while the investment industry has an important role it can play in terms of furthering the aims of the SDGs, getting the right return for the risk taken is still paramount.  Investments still have to stack up and earn an appropriate market-based return, along with shifting the dial on an SDG ambition.

“The thesis behind the SDGs from an investment point of view and from a financial returns point of view is you follow the money. You look at where government is seeking to deliver on the SDGs and are putting funding to work. That’s where funds can achieve scale.”

“We are seeing very little government funding and so, at the moment, to my mind, we are stuck in the existing impact investing model which still tends to be quite small rather than at scale.”

“Government’s role is providing capital that effectively reduces the risk which makes the achievable return acceptable for the risk you are taking relative to other investments.”

“That’s a key driver for us as to why we think the SDGs are important; it’s less about the returns – we have to get them –and more about creating a better world for our members to retire into.”

Looking back over 30 years in the industry, the biggest surprise to Fowler is the sheer size of Australia’s retirement savings pool. Back in 1996, when he was working as a portfolio manager at Suncorp Investments, predicting that the savings pool would reach a size where funds were forced to shop for a large proportion of their assets offshore, would have been a leap.

To him, it’s inevitable that scale will be the key driver of the industry over the coming years and he expects more mergers and a lot fewer industry funds. He thinks a greater level of internalisation is also inevitable given the prudential regulator’s focus on costs as opposed to net returns (which is what the regulator should be focussed on!)

But the most critical issue, he says, is the continued  acceleration of the artificial intelligence (AI) revolution as this that will shape the future of society as a whole, as well as investments.

While the impacts could be complex and wide-ranging at a portfolio level, there is also considerations for investment teams much closer to home, according to Fowler.

“If you go down the AI path you will have more quant people within your organisation and within investment and I think there is evidence of that already  – as funds get bigger they get ‘quantier’ in the way they cut and dice their portfolios and they think about portfolios in a much more granular and data driven way.

“My concern is that if everyone moves to being very ‘quanty’ and move to machine learning investments, you will see what you have seen in the past – a whole heap of similar processes leading to investment decisions, which leads to correlation, which in turn leads to much greater volatility rather than necessarily better outcomes ,” he says.

“It will be interesting at the end of the day to see whether a small group of qualitative people make their alpha out of using the volatility that the quant-based systems may well create.”



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