Mike Fox, head of sustainable investments at Royal London Asset Management (RLAM), explains why environmental, social and governance considerations are core to the asset manager's philosophy and approach
How has RLAM been helping its insurer clients manage their portfolios during Covid-19?
The Covid-19 environment of 2020 was highly challenging for our insurance clients, with material drawdowns in asset values, a significant reduction in market liquidity and stresses to investment and wider business operating models.
To support our clients during this stressed period we maintained close contact to provide updates on market developments, monitored and regularly reported back on their market positions, and helped them to understand future exposures (for example, using stress testing).
There are two main ways we are supporting our insurance clients in increasing their returns:
- Optimising investment strategies – for example, we can introduce diversifying fixed income strategies, such as short duration high yield, secured credit and absolute return bonds into portfolios with the aim of increasing return on capital and maximising risk-adjusted returns.
- In addition, in an ultra-low / negative yield environment, the benefits of superior active management become even more apparent. The majority of our active strategies have outperformed their benchmarks over the past three years to the benefit of our clients*.
What trends does RLAM see in the ESG and insurance asset management space?
Insurance companies are subjected to increasing requirements and expectations around integrating environmental, social and governance (ESG) considerations – particularly climate change risks – into their investment decisions.
We see this being done in two main ways: firstly by more effectively integrating ESG criteria into core mandates; and secondly by having more specific sustainability focused mandates.
At RLAM we can support both areas, as we incorporate ESG criteria into all our portfolio management approaches by default.
We also have a dedicated range of sustainability funds that invest only in those companies we expect to have a positive impact on society and have strong ESG credentials.
Whilst we view this trend towards increased ESG investing as beneficial for society, we do have concerns that some investors are compromising investment returns through their implementation approach.
This includes potential issues around the ESG data quality and coverage, (for example, carbon intensity) for individual issues; "greenwashing"; and an over-reliance on standard ESG ratings.
We therefore prefer to rely on our own proprietary research around ESG to make investment decisions, of which external data and ratings are only one part of the inputs.
What is RLAM's investment philosophy within its sustainable team?
Significant owners of capital, such as insurers, as well as their investment managers, play a strong role as a catalyst for positive social and environmental change through determining who they provide capital to (and who they do not) and then, post-investment, through active engagement.
Our approach to sustainable investing focuses on an exploitable market inefficiency. That means through a focus on socially and environmentally beneficial products and services, as well as standards of ESG management within a company, we can identify investment insights others may miss.
This has, over time, allowed us to make differentiated investment decisions which have resulted in financial outperformance, whilst positively contributing to society and the environment.
At RLAM, we have been investing heavily in our sustainability capabilities for a number of years and have the track record to back this up.
We have one of the longest-running and most experienced teams in the field of sustainable investing. For example, as our lead manager, I have been managing sustainability focused mandates since 2003.
We have significant resources allocated to our sustainability proposition: a dedicated sustainable investing team; a separate responsible investment team of nine individuals who have individual specialisms; and an external advisory committee.
There is a very strong track record across the RLAM sustainable range. All our underlying sustainable funds with a qualifying inception date have materially outperformed their market benchmarks and peer group averages over 2020 and the last three and five years.
The success of our sustainability proposition has led to us now managing over £8bn across our sustainable fund range.
*Source RLAM. Data based on size weighted performance versus respective benchmarks for all RLAM portfolios for the three years to 31 December 2020, gross of fees.
The views expressed are the author's own and do not constitute investment advice. Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.
