New Parametric research clears a path towards responsible investing

From

Raewyn Williams

New research from Parametric, the global implementation specialist manager, lists five ways in which funds can adopt responsible investing, even where in the past funds may have held off for fear of short-term underperformance compared with their peers.

Raewyn Williams, Parametric’s Managing Director, Research, says “Without a critical mass of super funds adopting responsible investing and setting a standard for responsible investing implementation, any super fund using its capital to express responsible-investing beliefs could face the risk of short-term underperformance relative to its peers.”

The research paper, Responsible Investing in a Peer Sensitive World, which was co-authored with Jennifer Sireklove, the Seattle-based director of responsible investing for Parametric, shows that not only could there be there little-or-no loss even to short-term returns from embracing responsible investing; it also offers up some tips for return enhancement through the process.

The research is based on an evaluation of Parametric’s experiences implementing responsible investing portfolios for clients in Australia and the United States, and addresses concerns and debunks the myths that may lead super funds to abandon or dilute their responsible-investing ideals because of peer-risk concerns.

Williams explains “We offer five suggestions about how superannuation funds can address peer-risk concerns as they head down the path towards responsible investing.

“In an ideal world, each super fund would be free to implement its best responsible investing ideas and convictions which, in the trustees’ considered views, serve the interests of its members and model best fiduciary practice. In the real world, however, peer-risk rears its ugly head, just as it does for many ideas and initiatives the fund may consider valid.”

Speaking about the five suggestions, Williams says “First, we encourage super funds to work with a responsible investing implementation manager to carefully research how much a responsible investing idea will really impact performance, noting that super funds are sometimes surprised to find the performance impact negligible.

“Second, we show that as a matter of portfolio construction, risk gaps created by a responsible investing approach can be refilled by a responsible investing manager with quantitative skills. The portfolio can be re-optimised by finding other acceptable securities with similar risk characteristics to those securities that were screened out.

“Third, we remind super funds that portfolio construction is only one way that super funds can potentially promote responsible investing. Active ownership has the attraction, in a peer universe of performance outcomes, of avoiding potential performance drag and only delivering on the upside. Of course, peers as ‘free riders’ may also benefit from the fruits of other funds’ voting and engagement endeavours.

“Fourth, we suggest that super funds with the capacity for innovative thinking and a conviction around responsible investing are the super funds that will also have a store of good ideas about how to refill any potential (short-term) return gap left by some responsible investing approaches. We list some ideas in our research.

“Fifth, our pragmatic observation is that super fund trustees who feel constrained by peer risk in relation to their default MySuper options may feel less peer-sensitive in relation to their Choice options. This can make Choice options feel like a ‘safe’ place to pursue responsible investing and test the fund’s theses about its impact on performance.

“Longer term, there is an opportunity for super funds to consider how to free themselves altogether from peer sensitivity and short-termism, which works against true member-centricity and can constrain funds from implementing good ideas,” notes Williams.

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