ENVIRONMENTAL, SOCIAL & GOVERNANCE INVESTING

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1 ENVIRONMENTAL, SOCIAL & GOVERNANCE INVESTING Published by APRIL 2016 Considering the challenges faced by investors in integrating ESG strategies for real impact as they evolve from add-on to value-add cultures Lead Sponsor Download the full report at

2 Sponsors Standard Life Investments is a leading asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive Focus on Change investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. As active managers, we place significant emphasis on rigorous research and a strong collaborative ethos. We constantly think ahead and strive to anticipate change before it happens, ensuring that our clients can look to the future with confidence. Standard Life Investments manages billion* on behalf of clients worldwide. Our investment capabilities span equities, bonds, real estate, private equity, multi-asset solutions, fund-of-funds and absolute return strategies. *assets under management as at 30/06/2015 Clear Path Analysis is a media company that specialises in the publishing of high quality, online reports and events in the financial services and investments sector. FOR MORE INFORMATION: W: T: +44 (0) E: marketing@clearpathanalysis.com TELL US WHAT YOU THINK We value your interest as without our readers there would be no reports. Please fill out our short survey to give your feedback. The survey will take approximately 3 minutes and all feedback is anonymous. Click HERE to access the survey. Thank you for helping our reports be the best they can be. 2

3 1.2 WHITE PAPER What is your carbon risk-adjusted return? Carbon pricing and value protection Berit Lindholdt- Lauridsen Climate Finance Specialist, International Finance Corporation Tom Kerr Principal Climate Policy Officer, International Finance Corporation The Paris Agreement The adoption of the Paris Agreement at the 21st Conference of Parties (COP21) in December by 195 governments is a major turning point in the global fight against climate change. The world s nations agreed to limit the global average temperature rise to well below 2 C above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5 C above pre-industrial levels1. Over 180 countries also submitted national strategies, known as nationally determined contributions (NDCs), to deliver on their collective target; with nearly half of them establishing carbon markets that will put a price on carbon. Financing needs to meet the 2 C target are $16.5 trillion over the next 15 years. Although global climate finance is growing the latest figures stand at $391 billion in annual flows it is not enough to meet the $1 trillion that is needed annually2. It will be private, not public capital that will be critical to tackle climate change. At the Investor Summit on Climate Risks in New York in January, United Nations Secretary- General Ban Ki-moon challenged investors to double their clean energy investments by He called on pension funds, the banking sector and the insurance industry to act now to ensure that the national climate plans are financed and the Paris aspirations are met. Why a carbon price? In order for private finance to flow, national climate plans need to be converted into investment blueprints. A key tool to provide investors with long-term certainty is getting the incentives right through the use of carbon pricing and the removal of fossil fuel subsidies. A carbon price will improve the returns of low-carbon energy, energy efficiency and carbon-efficient companies, while it will have a negative impact on the returns of carbon-intensive companies. It will speed up the shift from fossil fuel and other carbon-intensive industries to more carbon-efficient investments and reduce the risk of stranded assets. Getting the prices right will open the door to investors playing a more progressive role in financing innovations in clean energy and other climate solutions, and give companies and investors the predictability and incentives they need to shift their business models. In order for carbon pricing policies to be effective in sending a signal to companies, they need to be transparent, predictable, equitable and send a long-term signal to the market that carbon emissions have a real cost3. What is carbon pricing?4 A price on carbon helps shift the burden for damage caused by emissions back to those who are responsible for it and who can reduce it. The two main types of explicit carbon pricing are: An emissions trading system (ETS): involves a government mandated emissions cap for the total level of GHG emissions. Industries with low emissions can sell extra allowances to larger emitters; this helps create a market price for GHG emissions; the cap ensures that emissions reductions continue to happen. An ETS provides certainty on the amount of emissions reductions that will occur, and lets the market decide the price. A carbon tax: sets a price on carbon by defining a tax rate on GHG emissions or the carbon content of fossil fuels. Taxes provide certainty on the price, but the amount of emissions reductions that result will not be known with certainty. Carbon pricing is gaining momentum According to the World Bank Group s annual State and Trends of Carbon Pricing report, about 40 countries and more than 23 cities, states, and provinces that comprise 12 percent of global GHG emissions and an aggregate market value of almost $50 billion, use carbon pricing or plan to do so5. This includes major economies like the European Union, China, California, Mexico, South Africa, Korea and Chile. 1. The Agreement is available on 2. Climate Policy Initiative: Global Landscape of Climate Finance 2015, November See approach-based-initial-experience. 4. For more information, visit 3

4 What is your carbon risk-adjusted return? Carbon pricing and value protection Currently over 1,000 businesses globally use an internal carbon price, or plan to do so in the next two years. This is a large increase from just 150 companies that reported using a carbon price just over a year ago. Companies as diverse as Microsoft, banking giant Société Générale, chemical company Royal DSM and Shell use internal carbon pricing as a way to evaluate the current or potential impact of a mandated carbon price on business operations. This allows them to shape their investment strategy to better identify and value cost savings and revenue opportunities in lowcarbon investments. The most rapid growth in corporate carbon pricing is happening in Asia and in Europe where government carbon pricing policies are in place or planned. These progressive companies are climate proofing their business models to be first movers in providing cleaner solutions. Most carbon pricing systems currently have prices lower than $10/ton CO2. We can expect to see gradual progress upward to the price that is estimated to be the real price to achieve the 2 C scenario. Analysts indicate that a global average carbon price of between $80 and $120 in 2030 would be consistent with the goal of the Paris Agreement limiting the global warming to 2 C6. How a carbon price can protect portfolio value Long-term investors are beginning to realize that climate change can undermine the financial returns of their portfolio and have started rethinking their investment strategies and practices. Consulting firm Mercer s recent study Investing in a Time of Climate Change confirms that climate change will inevitably affect retirees and that prudent investors could realize net gains by positioning across and within sectors and asset classes.7 Long-term investors can use carbon pricing and the use of corporate internal carbon pricing to help them analyze the potential impact of climate change on their investment portfolios, allowing them to reassess investment strategies and reallocate capital toward low-carbon or climate-smart activities. Carbon pricing will be of interest to investors because it affects the valuation of assets. Investors need to assess portfolio risks, including the risk of stranded assets, in a fast-changing landscape of climate risks and opportunities. Even though investors may not know the exact size of their footprint, it is clear that the expected increase in the carbon price will impact their risk-adjusted returns. Carbon emissions data is insufficient to accurately estimate an investment portfolio s carbon footprint. However, a number of major financial institutions are developing methods to assess the climate risk associated with Even though investors may not know the exact size of their footprint, it is clear that the expected increase in the carbon price will impact their risk-adjusted returns. their portfolios, including in particular, French financial institutions, which are required under Article 48 of the 2015 French Energy Transition law to stress test their portfolios for climate risk. This law will almost certainly have impacts beyond France. To accelerate and consolidate action in this area, Mark Carney, the Chairman of the Financial Stability Board and Governor of the Bank of England, launched an industry-led disclosure task force on climate-related financial risks at the Paris Climate Conference. This task force will develop voluntary, consistent climate-related financial risk disclosure procedures for use by companies in providing information to lenders, insurers, and investors to help financial market participants understand their climaterelated risks. The task force is to make its recommendations by the end of Three easy steps to reduce climate risk and maximise value: Engage measure decarbonise Given all of this, we are seeing growing investor support for carbon pricing. Over 400 investors representing over $24 trillion in assets under management have urged governments to provide stable, reliable and economically meaningful carbon pricing that helps redirect investment commensurate with the scale of the climate change challenge.9 A carbon price will impact the portfolio value as well as the risk return, and therefore investors need to begin to take a carbon price into consideration when stress-testing their portfolio for a future in which global warming is limited to 2 C. Carbon pricing is working in many markets and the use of carbon pricing is likely to grow. While we are also seeing markets begin to link to one another California, Quebec and Ontario Provinces have done this a globally linked carbon market will take some time to develop. Therefore, understanding the rules in each jurisdiction is important. With government and business support growing, investors need to understand how well companies are positioned for associated risks and opportunities. 5. World Bank Group: State and Trends of Carbon Pricing, September World Bank Group: State and Trends of Carbon Pricing, September See 4

5 What is your carbon risk-adjusted return? Carbon pricing and value protection Investors should engage with the companies they own by advocating for improvements in management and disclosure of climate risks and opportunities. Investors should ask companies how they plan to assess their risk exposure to the impacts of climate change and if they are actively pricing carbon internally as part of their risk management approach. Investors should also ask companies if they support effective government pricing policies. An increasing number of investors measure their carbon footprint as a way to assess the exposure of their investment portfolio to climate change risk. More than 100 investors representing $10.3 trillion have signed the Montreal Pledge, a commitment to measure and publicly disclose the carbon footprint of their investment portfolios on an annual basis. They measure the level of emissions in the portfolio, holdings of emissions intensive companies, holdings of fossil fuel reserves, and assess current and potential climate change impacts on assets in the portfolio and related investment risks10. Measuring emissions and climate risks in the portfolio allows investors to establish a base of data from which to examine investment assumptions and test investment processes. Some investors have taken it one step further. The Portfolio Decarbonization Coalition currently counting 25 investors has committed to decarbonise $600 billion of their total portfolio.11 Decarbonisation is the process through which investors reduce portfolio exposure to GHG emissions and align their portfolios with the climate economy of the future. There are different approaches to portfolio decarbonisation, from engagement with companies, shifting portfolio Investors should ask companies how they plan to assess their risk exposure to the impacts of climate change and if they are actively pricing carbon internally as part of their risk management approach towards green investing, and carbon-tilting techniques to divestment. One important investment tool is carbon-efficient indices that tilt a standard index towards more carbon- efficient companies and can help hedge climate risk. Carbon-efficient indices allow long-term passive investors comprising pension funds, insurance and reinsurance companies and sovereign wealth funds to hedge climate risk by reducing their carbon footprint exposure while minimising the risk of sacrificing financial returns. By investing in such an index, investors are, in effect, establishing a shadow price on carbon by holding a free option on carbon. As long as there are not significant limits on GHG emissions they are able to obtain the same returns as they would on a benchmark index. However, when emissions are eventually priced, the low-carbon index will outperform the benchmark. What is your carbon-risk-adjusted return? Investors can no longer ignore the implications posed by the changing climate on their portfolios. While we are not likely to see a global carbon market with one carbon price in the near future, investors will see increasing carbon prices which will impact the value of their portfolio. That is why the incorporation of climate-related risk factors into investment strategies and risk management should be standard practice for investors, and investors should ask themselves what their carbon-risk-adjusted return is likely to be. 8. More information is available on 9. The Global Investor Statement on Climate Change is available on This figure represents the total assets under management of signatories to the Pledge, not the total amount being footprinted. 11 For more information on the Portfolio Decarbonization Coalition, visit 5

6 2.3 INTERVIEW How to engage with your managers Interviewer Zoi Fletcher Publisher, Clear Path Analysis Interviewee Mike Everett Governance and Stewardship Director, Standard Life Investments Zoi Fletcher: What should asset owners be asking their managers about how they are implementing their ESG strategies? Mike Everett: We believe that asset managers should be held to account by asset owners and this is best done through conversations with their managers. Currently our experience is that owners do go through a process to assess what ESG strategies are in place, often involving simply reviewing the answers to a questionnaire and not asking follow up questions or entering a more detailed discussion on the topic. In order to get some colour from the managers on this, it would be better if there was a conversation that went on around how stewardship ESG plays a part in the investment process In the U.K., the Stewardship Code offers a good structure through which the level of adherence to the defined principles can be assessed. All signatories to the Stewardship Code will have details on their website of how they meet the principles. Using these disclosures as the basis for analysis would give a bit more colour and help asset owners understand how their managers are really implementing the principles and how integrated the ESG strategies are into their investment process. Zoi: Are there any particular areas that asset owners should be looking out for when they make their initial assessments about how well asset managers are integrating ESG? Mike: It is always useful to try and get managers to explain some examples of ESG engagements or particular voting outcomes. Another useful tool is the self-assessment exercise managed by the Pensions and Lifetime Savings Association (PLSA), formerly known as the NAPF, by which managers assess their delivery of the Stewardship Code principles. As well as being a good exercise for managers, this can be used by asset owners to question asset managers on where they have placed themselves in the PLSA scoring mechanism. Zoi: How do asset owners know if their managers are really communicating their implementation process? Mike: I believe that the level of transparency will give you a good feel for the level of activity. There are a suite of mechanisms which managers can use to communicate their implementation. We endeavour to make the majority of our disclosure publicly available. Asset owners can use managers websites to seek disclosure of their voting outcomes. Assessing the detail that is publicly disclosed, including voting rationales will provide an insight into the voting process and analysis of the manager. Owners can also see if there is any regular public disclosure on managers engagements with companies. On a quarterly basis we put details of our key engagements and the topics discussed on our website. In addition to this more frequent reporting, we also publish a governance and stewardship annual review, which provides a broader analysis of our activities and detail on specific examples of key engagements and voting. Although these elements tend to give a fair amount of information, larger asset owners should seek to get more detail from their managers on what they have done from an engagement and a voting perspective. We provide more detailed reporting to our largest asset owners who have separate portfolios that we manage for them. In addition to reporting on voting and engagement activities, managers should also be seen to be driving higher standards and analysing ESG themes. Therefore, in addition to the normal asset management commentary on market and economic trends, it would be worthwhile for asset owners to gauge whether asset managers are publishing details of their involvement in influencing standards and making comment on relevant themes. I wonder whether the level of reporting leads to the level of challenge and discussions that I would expect from asset owners. Usually clients, particularly the larger pension ones, will meet with us as asset managers on a quarterly basis. These discussions tend to focus on performance, stock selection and attribution analysis. There is an opportunity for managers and asset owners to bring more focus on stewardship and ESG matters in these quarterly meetings. I believe that this will encourage asset managers to better demonstrate the integration of ESG factors into their investment processes. Zoi: Could you give some examples of the kinds of insights that asset owners can get from seeing voting outcomes and key engagements and perhaps the sorts of questions that might be answered by the information 6

7 How to engage with your managers that asset managers are disclosing publicly? Mike: We integrate ESG analysis into our investment process because we believe that it provides more insight and can lead to better investment decisions. In addition, the use of engagement and voting to influence improvements in how companies manage ESG risks can lead to more sustainable companies delivering value over the long term. The disclosure that we provide is designed to demonstrate to asset owners that actions are being undertaken and to allow them to understand in more detail the decisions we take. Asset manager reporting therefore needs to be granular enough for asset owners to understand particular situations and the judgements taken by the manager in order to address specific issues. This would include sufficiently informative rationales for votes against management and controversial resolutions and also sufficiently detailed descriptions of specific company engagements so that owners can understand the issues identified, the action taken and the outcomes achieved. Zoi: Do you have any examples of questions that you have had from asset owners about your investment decisions? Mike: As I indicated earlier, our current experience is that the majority of asset owners are yet to really challenge managers in depth on the integration of ESG into their investment processes. We are beginning to get more detailed questions about how we are handling specific corporate issues or industryand market-wide themes. Examples of this would include enquiries about how we voted on the remuneration policy of a particular company or how we are engaging with companies about their implementation of the Modern Slavery Act. Although not yet widespread across the whole of our client base, these enquiries are increasing, often led by overseas clients from countries where ESG aspects of investment may have developed faster. One of the challenges we are looking to address going forward, is how best to articulate and demonstrate the process of integrating ESG factors into our investment decisions. We will seek to further develop our disclosure and client interactions so that we can better display the outcomes of this integration in relation to the decisions we make in managing our clients money and delivering long-term sustainable value in their portfolios and the companies in which we invest. Zoi: Where an asset owner has spotted some high ESG risk in a particular investment, have you ever responded by changing your valuations based on questioning from them? I believe that asset owners and asset managers could help to drive increased dialogue on the topic of ESG integration. Mike: I can t recollect a situation where a client has raised an ESG risk which we hadn t identified, but it is useful for us when clients come to us with a particular concern about a company or ESG issue. This gives us a feel for our clients views on specific issues. Risks introduced by ESG factors tend to be qualitative in nature and therefore tend to be informational and require a judgemental response when assessing their impact. What is important, is that asset managers are able to explain how they have used ESG factors in their investment decisions. Zoi: Are asset owners demanding enough communication on ESG issues and are they getting as much information on them as they are with other more overall aspects related to portfolio composition? Mike: Their thinking in this area is developing in the same way as the whole conversation in the industry is. Many more are becoming interested in ESG factors and how they impact portfolios and we are getting more questions on the subject. We include ESG factors because we feel it delivers a better investment decision and therefore using our meetings with clients to provide more insight into how this occurs would be beneficial. I believe that asset owners and asset managers could help to drive increased dialogue on the topic of ESG integration. The demands of asset owners do influence the service provided by asset managers and the reporting of asset managers can influence the dialogue they have with their clients. The willingness of asset managers to discuss and disclose their ESG activities will give asset owners a real feel for how embedded it is in the investment process. Currently the disclosure by asset managers is patchy, with some providing significant detail on voting, engagement and key ESG themes, while others provide little or no information. As the lack of reporting has appeared to have little impact on the selection of managers by asset owners, there has not been significant incentive for managers to produce more. As I have mentioned before, portfolio reporting generally focuses on performance, stock selection and attribution. The levels of information regarding the use of ESG factors have generally been lower than what we would like. There are various developments on trying to improve the standards of transparency and asset managers should develop more reporting in this area. Annual reviews and reporting on voting rationales should both become more 7

8 How to engage with your managers commonplace going forward. This should come both from asset owners asking for it, and from asset managers being willing to develop this reporting in a way that gives clients as well as the broader public more information about how they are using ESG factors. Large asset owners are often able to work with managers in designing particular mandates which use ESG factors in different ways. Zoi: How should owners engage with their asset managers to find the right products and get even better results by moving the conversation onto product development? Mike: ESG factors can be used in a number of ways when managing a portfolio. They can form part of an exclusion screen, which alters the universe of companies from which a manager can chose. This is often used in ethical and SRI type funds. They can be used as an integral part of the investment decision-making process so that stock selections are informed accordingly. And more recently asset owners and managers have been looking at the use of ESG factors to only invest in companies that have positive impacts on the environment or society. Asset managers continually seek out changes to the demands of clients and so there has been some investigation into delivering new impact investing funds. Large asset owners are often able to work with managers in designing particular mandates which use ESG factors in different ways. And managers are becoming more willing and able to enter into such discussions, as wider demand seems to be developing for these types of products and the skills and processes needed to operate them. Zoi: Thank you for sharing your thoughts on this topic. 8

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10 4.3 INTERVIEW What is the impact of the variability of knowledge and experience amongst pension fund trustees on decision-making? Interviewer Zoi Fletcher Publisher, Clear Path Analysis Interviewee Euan Stirling Head of Stewardship and ESG Investment, Standard Life Investments Zoi Fletcher: What does strong leadership and a well-integrated ESG strategy within an institutional investment fund look like in practice? Euan Stirling: It needs to focus on the relevant issues to bring accountability and well directed actions. You need to have a trustee body or decision-making structure all the way through the fund, from the beneficiaries to their appointed trustees and the investment manager through to the investment management agreement (IMA). Through this decision-making structure, you should ideally reach the right structure of assets to meet the needs of all of the people in that decision-making tree. In the part of institutional investment management that I see, very often the beneficiaries don t have a direct say in the way that the fund is run. It is very important that the trustees consider carefully what the wishes of beneficiaries are and consult with them on a regular basis to make sure that whatever motivation they start out with remains both current and up to date. Because we see this changing over time and there is a greater focus on long-term sustainability, which covers all aspects of good governance to make sure that concerns over workers rights, environmental issues etc. are all taken into account. In different funds you might find that there are different voices coming to the fore, but it is very important for the beneficiaries to be considered and regularly consulted by the trustees when they are making appointments such as fund managers as well as when they are reviewing the performance of the fund managers. Zoi: What is the pivotal role of trustees and what knowledge and competencies do trustees need in this area? Euan: We see a wide variety of experience and expertise amongst trustees, so you can see what good practice and not great practice looks like. The pivotal role is one of being able to listen to the instructions and requirements of the beneficiaries and to place this in a framework that results in the right financial result in a longterm and sustainable way. The trustees need to be able to do that essential job of translating something that might be quite soft in nature into something that is quite hard in the form of an arrangement with a group of investment managers. They need to make sure that the financial requirements of the beneficiaries are met, as well as the other issues around sustainability that are of importance to the beneficiaries. This is quite a difficult thing to do, because in many cases there is a lot of discretion allowed to the trustees, and inexperienced trustees are often reluctant to use the full range of powers and responsibilities that they have for fear of tripping up or making a mistake. They tend to go down a very narrow route in the way that they might appoint fund managers and the type of investment management agreement that they put together; whereas trustees who have a good deal of experience are often a bit more imaginative and can use their knowledge, experience and that of their advisors to try and create something that is more likely to meet the broader needs of the beneficiaries. Zoi: What knowledge and competencies are the more inexperienced trustee missing? Euan: The knowledge that you don t need to focus on very short-term financial results. You can achieve your fiduciary responsibility by aligning them with longer-term issues of sustainability. Some may feel that there is a contradiction in those two terms, but in actual fact if you think a bit more widly and more broadly about which financial objectives and fiduciary responsibilities you are trying to match, you can get a much more suitable outcome. We find that inexperienced trustees tend to stick to whatever has been established as the industry standard. So they might go for a very standard agreement with their investment managers which results in using industry standard benchmarks for their funds to be managed against, whereas more experienced trustees are able to blend the broader requirements of the beneficiaries into the IMA. Whether these requirements are in respect of straightforward governance, social or environmental issues, they become a real focus for how the fund manager goes about achieving the financial returns. If this is done well you end up with a fund that meets its broader fiduciary responsibilities rather than just aiming for a specific financial return. 10

11 What is the impact of the variability of knowledge and experience amongst pension fund trustees on decision-making? What we find is that trustees who are not experienced or engaged in this kind of thought process tend to fulfil their responsibilities in the form of ticking boxes. Zoi: Are there any examples of where a trustee s inexperience impacted on decision-making? Euan: What we find is that trustees who are not experienced or engaged in this kind of thought process tend to fulfil their responsibilities in the form of ticking boxes. They will come up with an unimaginative asset mix or set of instructions for the investment managers and when the investment managers report their performance against those benchmarks, it does again feel like a box ticking exercise. Even when you are trying to introduce issues of sustainability in your reporting sometimes you find that the trustee body isn t particularly interested. For example, at the most basic level this might be about fulfilling their voting responsibilities for the equity shares that they own. Quite often you find that the trustee body is simply not interested and that is indicative of a trustee group who lacks the experience to understand what the significance of the voting is. They don t understand the deeper responsibilities that you have as an asset manager and asset owner for the running of the companies that you are investing in. Zoi: How can asset owners identify the variable knowledge amongst trustees of the changing fiduciary duty and evolving ESG responsibilities? Euan: The identification process comes from raising these issues further up the priority list. It should be quite obvious by doing this which of the trustees understand where the whole organisation is pointing and those who don t. By putting ESG considerations right at the forefront of manager selection, you can identify who is switched onto these issues and who isn t. When this works well and you have trustees who are clear about their responsibilities and how they wish to direct the funds, owners are able to convey that in a concise, understandable and accountable way to their investment manager who then has it at the core of their responsibilities in running the funds. It becomes embedded in the reporting structure and in the discussions between the asset owners, the trustees on their behalf and the investment managers. Then they all become clearly aligned in trying to reach the same objectives. These objectives are the right financial returns over the right timescales to meet the needs of the beneficiaries with all of the ESG issues taken into account along the way. This allows you to avoid investing in companies and industries that are doing the wrong things and focus your investments to reward those parts of the capital structure that are doing the right things, whilst taking into consideration all of the ESG issues that should flow through this entire decision tree. Zoi: How can asset owners build ESG competency and knowledge among their trustees and improve leadership throughout the organisation? Euan: There is a huge amount of variability in the way that different funds deal with these issues. One of the common threads is around trustee training and in many cases the asset owners will ask for help from the asset managers to bring financial expertise to the training. But it is incumbent on the asset owners to state quite clearly how they view the other softer issues around the whole management of the scheme. The competency and knowledge needs to be trickled down from the asset owner through training. This training should set out quite clearly what the reporting responsibilities are, so that as broad issues evolve, the trustees can keep up to date with them and make sure that the investment managers are being held accountable for them. The proper framework of training, reporting, voting etc. using the asset managers where appropriate to also educate from the financial perspective should result in the right type of ESG competency and leadership. Zoi: You mentioned that trustees should be translating what beneficiaries want, which goes from a soft understanding to more quantitative thinking. Where do you think that kind of competency comes from and how can asset owners improve it? Euan: It can come from the asset owners themselves but it can also come from asset managers who have considered these issues. It is something that we often come across as people who appear to have different motivations are often just thinking about things along different timescales. One of the mistakes we often encounter as asset managers is company management teams or client trustees who are focused on the short- term, which does tend to drive the wrong behaviours. For example, if a company is being run for a very short- term financial goal, then often they are underinvesting for the future and you end up in an unsustainable position of exceptionally high returns over very short time periods. The investment deficit that is taking place in order to create the higher margins in the short-term comes back to bite 11

12 What is the impact of the variability of knowledge and experience amongst pension fund trustees on decision-making? the organisation. Because you can experience a breakdown in the whole investment path, which leads to good people leaving, which leads to cultural change for the worse; and you end up in a really vicious cycle rather than a virtuous one. A more virtuous scenario could be achieved by having people focus on the right long-term objectives. Zoi: Thank you for sharing your views on this topic. 12