“We also need to work to enforce the identification and separation of different responsibilities,” he added. As things stand, Enasarco’s definition of tasks among the different fund entities is unclear, Boco said.He conceded it had low skill requirements and a lack of appropriate mechanisms for managing conflicts of interest.Some six years ago, Enasarco was involved in a big scandal surrounding the sale of its property portfolio. Its then president Donato Porreca and others were accused of accepting bribes from property developer and financier Stefano Ricucci, who stood to gain from acquiring the portfolio.At the beginning of 2012, there was another scandal over an error made by the pension fund’s previous management, which led to a controversial investment in two hedge funds.Most recently, questions have been asked in the Italian Parliament about buildings owned by Enasarco.Based on old contracts stipulated in the past, some buildings have allegedly been let too cheaply to politicians, trade unionists and former Enasarco officials.As part of the internal project on governance, Enasarco has also been making efforts to encourage the pensions industry as a whole to take a good look at itself and shore up governance practices with internationally used standards.To this end, back in November, it organised a two-day seminar in Rome on the governance of pension fund investment.The event, which had been prompted by the president, focused on examples of existing best practice and international models.Claudio Pinna, managing director at Aon Hewitt Consulting in Rome, and Francesco Verbaro, professor at the Italian School for Public Administration, have been working on the project with Enasarco.Italy’s most recent reform of the pension system, which was introduced by Elsa Fornero, the minister of Labour, Social Policies and Gender Equality in Mario Monti’s technocrat government at the end of 2011, has opened the way for a further development of the supplementary pension funds market. If this is going to happen, Pinna and Verbaro argue, the pensions governance process needs to be improved.The Rome seminar covered governance issues and good practice used internationally and also set down the framework for a set of legislative reforms to be introduced in Italy.Pinna said one of the main governance issues for Italian pension funds was the balance between professionalism and representation of the members. Other key themes include the clear attribution of management roles and responsibilities, managing conflicts of interests, a clear definition of the investment decision-making process and disclosures of activities.So what is the best way to address these points? “By considering the solutions already adopted at international level, but, in the end, also coming up with something that is in line with the specific Italian situation,” said Pinna.Boco added that, even in the absence of any firm legislation forcing professional pension funds to self-regulate on governance, the funds were aware they needed to improve their governance.“We think along the same lines as Adepp (the association of pension funds for liberal professions) – that we need to specify the duties and responsibilities of each body and entity in greater detail,” he said.“Whenever possible, we need to set measurable objectives so the performance of each director and entity can be easily examined,” he said.Pension funds also need to enforce the skill requirements for internal bodies, he said, with the governing body then regularly reviewing management’s collective skill set and considering whether it is enough.“Third, we need to adopt adequate self regulation to prevent and manage conflicts of interest,” Boco said.Verbaro sees self-regulation as the preferable route for Italian pension funds to better governance.“But, in the end, if they can’t do this, then a compulsory solution would probably be more efficient,” he said.Verbaro believes management teams at pension funds in Italy are going to become more rather than less concerned about their responsibilities.But stumbling blocks remain.“Probably, it is a question of culture,” he said. “Members of the boards need, for example, to understand that their role has more to do with defining and monitoring investment strategy than taking decisions on specific single investments.” Italian pension fund Enasarco has been working hard to allay lingering doubts about its integrity following several asset management scandals by pioneering a new governance code.Enasarco – the pension fund for sales agents in Italy – said it hoped that putting the new code in place would increase external confidence in its processes.Brunetto Boco, president at Enasarco, which has assets of about €7bn, said: “For the last two years, we have been working to improve our governance, changing the statute and introducing a code of conduct and rules to strengthen accountability and disclosure. It’s an initiative of our own, born out of the need to prevent risks in investment performance and conflicts of interest.”The pension fund needs to have adequate internal controls to make sure government bodies, as well as the fund’s management, act according to the objectives set out in the fund’s by-laws, statutes, contract and internal code, Boco said.
“We really do need more investable opportunities,” he said. “There is actually a lot more money available than there are, presently, investable opportunities.”MacDonald said institutions could be providing the “heavyweight” capital for the interconnection of energy markets.“Greater interconnection between the European grids would actually improve the efficiency of renewables because we’d be able to transport the electricity much further and much more efficiently,” he said.“That actually would improve the efficiency and reduce the unit cost of providing renewable. We can do that, simply by adjusting our existing portfolios, but the opportunities have to be there, and the regulatory framework has to be there.”MacDonald has previously criticised that many infrastructure projects were packaged in a way that was “sub-optimal” for pension funds, and called for greater risk-sharing.During the launch, Frank Pegan, chief executive of the AUD5.3bn (€3.7bn) Catholic Super and chair of the Australian and New Zealand counterpart of the IIGCC, praised the work undertaken in conjunction with the letter to launch a low-carbon investment register, which lists details for several hundred successful climate-friendly investments.“It shows we are currently investing across the whole economy in addressing carbon,” Pegan said, noting that it should hopefully act as a talking point for policymakers.Speaking on behalf of another supporter of the campaign, Anne Simpson, director of governance at the $300bn California Public Employees’ Retirement System, criticised the market failure caused by the lack of global carbon pricing and called for an end to tax subsidies to fossil fuel companies that were “distorting” investment decisions.Her views were echoed by Pegan, who described the Australian government’s recent abolition of its carbon emissions trading scheme as “backward” and said the discussion to curb the country’s renewable energy target showed there were risks across all global economies “unless we continue to push for a strong policy framework”.Anne Simpson will be discussing shareholder activism at the IPE Conference & Awards in Vienna on 20 November,WebsitesWe are not responsible for the content of external sitesLink to low carbon investment register Pension funds should be providing the “heavyweight capital” to improve the cross-border connectivity of energy networks but are being held back by a lack of investment opportunities, according to a trustee at the BT Pension Scheme (BTPS).Donald MacDonald, also chairman of the Institutional Investors Group on Climate Change (IIGCC), said improving the connectivity of national energy networks would reduce energy costs and allow for greater efficiencies in providing renewable energy.During the launch of a letter signed by more than 340 institutions, worth $24trn (€18.5trn), which called for governments to address the regulatory gaps holding back low-carbon investing, MacDonald said he accepted governments no longer had “infinite volumes of money” to finance the transition.As a result, private capital needs to be attracted to such projects, he said.
“Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term,” the study said.Pressures to put ESG policies in place were felt most acutely in Europe, the research showed, with the Middle East, Northern Africa and Latin America region feeling less pressure from investors and regulators.But even though ESG policies were being adopted more and more, there were still some big obstacles to these being implemented, the study showed.The most notable barrier was the difficulty in collecting the necessary data, it said. Also, some respondents cited the attitude of internal managers as a barrier to implementation.“It appears that, while ESG integration has become common, there remain pockets of internal managerial resistance to the whole idea of considering such issues as relevant for investment decisions,” the study said.,WebsitesWe are not responsible for the content of external sitesLink to research conducted by London Business School Institutional investors are increasingly demanding that private equity partnerships have environmental, social and governance (ESG) policies in their investment processes, and ESG has now become a core strategy for the private equity firms to create value, according to a new study.In the research, conducted by the London Business School’s Coller Institute of Private Equity and supported by private equity investor Adveq, 85% of larger private equity firms – managing assets in excess of $10bn (€8.2bn) – said pressure was growing to integrate ESG policies into everyday working practices.Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School, said: “The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.”The study was based on responses from 42 private equity firms with collective assets under management of more than $640bn.
Lack of competition within the clearing market could expose pension funds to unmanageable risks and higher than necessary costs, according to PensionsEurope.The European industry group also argued that the European Market Infrastructure Regulation (EMIR), which currently offers the pensions sector a time-limited exemption from centrally clearing derivatives trades, should be amended to allow the exemption to continue indefinitely.Responding to a consultation by the European Securities and Markets Authority (ESMA) on recommended changes to the EMIR framework, PensionsEurope argued the regulation risked not achieving its goal of increasing financial stability, while leading to higher costs for the pensions sector if no further consideration was given to the use of cash as collateral.The industry group raised concerns about the number of clearing members in the market, arguing it was “not healthy and competitive”, damaging the ability of smaller pension funds to negotiate good deals. “Some [pension funds] experience difficulty finding clearing members that are willing to offer services on reasonable terms, or at all. This may force [pension funds] and other end users to accept unmanageable risks and higher cost levels.”The response noted the current pension fund exemption from clearing, set to expire in August 2017, should be extended until viable alternatives to posting cash as collateral were in place.It also said that as pension funds were usually fully invested, they would need to access the repo market or other methods of collateral transformation to post variation margins – but warned the markets may not be fully liquid at times of market stress, when the collateral would be most needed.“PensionsEurope’s calls on the Commission to maintain the exemption for [pension funds] from the central clearing obligation until a suitable clearing solution has been found,” the organisation said.It added: “The market has not yet developed a practicable and efficient process for central clearing of pension scheme’s over-the-counter (OTC) derivative transactions.“In addition to this, the existing exemption has not delivered a relief from mandatory clearing for three to six years as originally envisaged, as the clearing obligation is still not effective.”The industry group previously warned that clearing would divert funding away from long-term investments.Extending pension funds’ exemption to the EMIR regulation beyond 2017 would require amendments to existing legislation, something that would need ratifying by the European Parliament.,WebsitesWe are not responsible for the content of external sitesPensionsEurope response o ESMA consultation
GPs, it is generally held, can add value in three ways. The first is by leveraging the transaction and repaying the debt before selling the company. If the enterprise value remains unchanged, replacing debt by equity by using internal cashflows to pay off debt would make the equity holders better off.The second way is by improving the operations of the portfolio company, and the third is by selling the company at a higher price/earnings valuation multiple than the multiple for which it was bought.According to Vasvari, the LBS research is based on greatly improved datasets than were available in the past. These are primarily from Standard & Poor’s Capital IQ database, supplemented by a number of other sources. The private equity dataset is improving all the time – US pension funds have been forced to disclose information on their PE investment cashflows and fees, and more GPs are realising there is value to be gained indirectly, at least for them, by creating greater transparency. As a result, the conclusions are not only more robust but overthrow, the LBS team argues, some of the negative results of previous studies comparing listed and private equity.The LBS report argues that value creation is initiated at the moment of acquisition, as, on average, private equity funds pay EBITDA multiples that are more than 8% lower than the valuation multiples paid by public corporations for similar deals. These discounts are particularly significant at the smaller end of the market, where there is less competition. This is perhaps unsurprising, as trade buyers may be prepared to pay higher prices because they can generate synergies with their existing businesses PE firms cannot (although another reason suggested is that GPs are likely to be better negotiators than their public peers).LBS also finds that GPs managing smaller funds of less than $500m (€448m) tend to generate the most post-acquisition sales growth at portfolio companies. They attribute this to a strategic focus on effective investments in growth, and capital expenditures without increasing leverage. In contrast, GPs managing large funds pursue greater operational improvements, as opposed to growth strategies, as their companies show much greater EBITDA growth than the companies owned by smaller funds.The report finds evidence of persistence of outperformance. Established GPs with management of 10 or more funds achieve significantly higher EBITDA and asset growth than the less-established GPs. They also make greater investments partly funded by debt. LBS attributes this to GPs with more funds under management having developed deeper knowledge on the operational side, whereas newer GPs appear to focus on sales growth.Another interesting finding is that, relative to benchmark non-PE-owned firms, matched year by year, industry and other characteristics, companies acquired by private equity firms increase their leverage, operating profitability, assets and sales over the first three years of PE ownership. LBS argues that this shows that GPs, while focused on growth, are also generating significant operational improvements.The LBS research is interesting as a statistical exercise in providing evidence of value creation. For investors, the question that was not asked may be just as relevant – would a passive listed equity fund leveraged to the same extent as the average private equity fund covering the same region underperform or outperform the average private equity fund net of fees? If that can ever be proven, then private equity may be an asset class in which every pension fund should invest. Joseph Mariathasan is a contributing editor at IPE Joseph Mariathasan considers London Business School research aiming to quantify PE’s true valueA key plank of private equity (PE) investment has been the claim PE firms can create more value through ownership than owners of publicly listed companies. Professor Florin Vasvari and his colleagues at the London Business School (LBS) have recently published some research that attempts to quantify evidence of how value is being added. This research is important in the ongoing debate as to whether and how PE adds value, and whether PE firms can justify the fees they charge.Because general partners (GPs) of private equity firms usually control the boards of their portfolio companies, they are generally more actively involved in governance than the directors and shareholders of publicly listed companies. Many GPs would also try to use their own industry and operating expertise to add value while structuring strong equity-based incentive schemes for the company senior management.Many recent studies quoted by LBS provide strong evidence that LBOs create value by significantly improving the operating performance of acquired companies. Some also argue that leverage can improve performance through the discipline it imposes on management, putting pressure on them not to waste money or misappropriate resources.
Two Scottish local government pension schemes (LGPS) are increasing their collaboration efforts to improve investment and efficiency through economies of scale.The £6.6bn (€7.3bn) Lothian Pension Fund said it had agreed a joint investment strategy with the £1.8bn Falkirk Pension Fund as part of a new collaborative model.The announcement – contained in the fund’s annual report for 2016-2017 – followed the UK regulator’s authorisation of LPFI, formed as part of a new corporate structure at Lothian to support the in-house investment team and create efficiencies. LPFI can also facilitate co-operation with other pension fund investors.Another new Lothian company, LPFE, employs staff and facilitates separate governance and controls for the in-house investment team. The Lothian scheme – the second biggest in Scotland – said collaboration allowed other funds to benefit from the commercial advantage of its in-house team to bring benefits through scale investing.It added that sharing costs between co-operating funds would allow reinvestment in systems and the in-house team.Lothian Pension Fund has provided Falkirk Pension Fund with support on investment, including assistance on infrastructure allocations and procurement, for the past five years.The fund said that, with the FCA authorisation, it had agreed a review of the arrangements and a new collaborative model, including a joint investment strategy panel to better align investment governance.Under the new set up, the pensions committee of Falkirk Council would agree an investment strategy and delegate its implementation – including the selection of investment managers. This governance model is similar to that of Lothian.According to Lothian, a joint investment strategy panel would advise the finance directors of each administrating authority (the City of Edinburgh Council and Falkirk Council) on the implementation of the strategy. In a separate statement, Lothian said that the joint investment strategy panel would consist of members of its internal investment team and jointly appointed external advisers.Scott Jamieson and Gordon Bagot – currently advisers to Lothian – will stay on as independent advisers on the joint panel, and the two pension funds are to jointly procure an investment consultant.Despite the increased collaboration between the schemes, Lothian said that the assets of both would remain separate and that investment strategy decisions would be retained by the respective pensions committees.Last year, a spokesman for Falkirk County Council suggested it was considering using the in-house expertise of the Lothian team to look at an equity mandate.He added that the approach was viewed as a “potential model and way forward for better collaborative work” across Scotland’s local authority schemes.During the 12 months to the end of March, Lothian Pension Fund made seven investments alongside Falkirk Pension Fund and another one with the Northern Ireland Local Government Officers’ Superannuation Committee, which oversees the country’s £5.8bn LGPS fund.Lothian indicated it expected further co-operation with other Scottish LGPS partners in 2017-18.The announced collaboration is in line with a Scottish government-backed review recommending increased asset pooling and service sharing.
Growing fears of a trade war between the US and China hurt the funding levels of Dutch pension schemes in March, according to Mercer and Aon Hewitt.The consultancies largely attributed a significant funding drop to the knock-on effects of US president Donald Trump’s protectionist measures.Using different assumptions, the two firms concluded that the coverage ratio had dropped by at least two percentage points on average to 108% at best.Frank Driessen, chief executive at Aon Retirement & Investment, cited “significant uncertainties on equity markets with growing worries about trade conflicts and announced strikes”. President Trump has levied tariffs on Chinese products, prompting retaliation from BeijingMercer credited sliding equity markets as well as falling interest rates for pension funds’ declining funding.It noted that the 30-year swap rate – the main criterion for discounting liabilities – had decreased by 13 basis points to 1.48% in March, while the MSCI AC World Index had dropped 3%.Aon concluded that, as a result of the declining interest rates, pension funds’ liabilities had risen by approximately 2.5% on average.It added that schemes’ assets had increased by 0.3%, as the positive effect of falling interest rates on fixed income portfolios had outstripped the losses on their equity holdings.Mercer estimated that euro-denominated government bonds had risen 1.6% and that listed real estate had improved 3.6%.“Although pension funds are in much better shape than a year ago, the recent developments highlight how vulnerable schemes’ recovery is,” said Driessen.He added that recent figures indicated that larger pension schemes’ funding was still short of the required level of 104%, and that these schemes would suffer most from the funding drop.“Rights discounts are still possible,” Driessen said.Both consultancies concluded that Dutch pension funds’ “policy funding ratio” – the average coverage of the previous 12 months, and the main criterion for rights cuts and indexation – stood at 108% on average at March-end, with Aon noting an increase of 1 percentage point.However, if the monthly funding levels continued to drop, the policy funding ratio would also decrease during the course of this year. Mercer also mentioned “a possible trade war” as well as recent “dovish” remarks made by European Central Bank (ECB) president Mario Draghi, who said that the ECB would not raise interest rates “until far beyond the end of its quantative easing programme”.Aon saw a funding fall of two percentage points on average, whereas Mercer found a drop of three percentage points, taking coverage ratios down to 107% on average.
“Benchmarks, civil society and investor pressure is helping to create a ‘race to the top’ in human rights reporting and commitment to transparency,” it said. Macy’s was among the companies criticised in CHRB’s reportCHRB said its conclusions were backed by consultancies, such as Freshfields Bruckhaus Deringer and ERM, who reported increased demand for human rights support in the wake of its pilot benchmark report in 2017.It added that investors were discussing how poor company human rights performance could result in exclusions from specific funds.According to CHRB, 52 companies issued a dedicated human rights report last year, while over 5,000 firms have reported on their public commitments to avoid modern slavery in their supply chain.Steve Waygood, the CHRB’s chairman and chief responsible investment officer at Aviva Investors, said that “we should all be concerned by the lack of engagement from around a quarter of companies, particularly as they are in priority sectors concerning serious human rights impacts”.According to the CHRB, the 28 companies that have shunned engagement had not responded to the investor coalition, the CHRB’s invitations, consultations or communications.They had not taken part in 2018 engagements either, it said.CHRB said its members would push for greater corporate transparency and engagement this year. It also committed to expanding its assessment into the technology sector, with a pilot benchmark planned for 2019.CHRB was founded in 2013. It is backed by a €5trn investor coalition that includes APG Asset Management, Nordea, Robeco and the Church of Sweden, and is supported by the UK, Dutch and Swiss governments.Several major institutional investors operate public ‘blacklists’, including Sweden’s AP7 and the Norwegian Government Pension Fund Global.AP7 has blacklisted 27 companies explicitly due to human rights issues, according to its website, while eight have been banned by Norway with three more under observation. Companies that ignore human rights issues risk restricted access to capital due to reputational damage and regulatory backlash, according to the Corporate Human Rights Benchmark (CHRB). In a new report, the $5trn investor collaboration named 28 companies including Kraft Heinz, Macy’s, Hermes and Prada had not “meaningfully engaged” with investors regarding issues such as modern-day slavery, worker safety and freedom of association.In contrast, it named Tesco, Nestlé, Gap, Freeport-McRohan and Mondelez as companies reviewing and positively evolving their programmes and policies on human rights.CHRB – a collaboration of large investors and other groups, including APG and Nordea – found that apparel, agriculture and mining companies were committed to addressing gaps in human rights management and improve performance.
In addition, First State ranked as the 15th largest infrastructure manager globally, with €14.9bn of assets under management, according to IPE Real Assets’ Top 75 Infrastructure Managers survey.According to a press release published earlier today, First State Investments is to operate as a standalone business overseen by a board formed from First State and Mitsubishi senior staff, with independent non-executives to be added “in the coming year”.Mark Steinberg, First State Investments’ CEO, said: “Under MUFG ownership, we will have the financial backing and shared strategic vision to enable us to become an even stronger global investment manager.“Our investment teams will continue to enjoy their current levels of investment autonomy, which has underpinned the business’ strong growth and long-term performance. Importantly, their commitment to incorporating ESG principles across their processes and strategies will remain central to their investment approach.”Mikio Ikegaya, president and CEO of Mitsubishi UFJ Trust and Banking, added: “From the outset, we have regarded First State Investments as a well-recognised global business, synonymous with first-class investment professionals and strong fund performance.“We are committed to supporting First State Investments’ strategy of delivering high-quality investment capabilities and establishing and maintaining strong client relationships. We look forward to working with First State Investments as we continue to expand our investment management business and investment offerings globally.” Japanese financial services company Mitsubishi UFJ Financial Group (MUFG) has completed the purchase of First State Investments from the Commonwealth Bank of Australia for $2.7bn (€2.4bn).The deal was announced in October last year after the Australian bank said it intended to demerge its wealth management and mortgage broking businesses.First State, which manages $155.1bn in assets globally, will become part of Mitsubishi UFJ Trust and Banking Corporation, a wholly owned subsidiary of MUFG.It ranked 110th in IPE’s ranking of the largest managers of European institutional assets, according to the 2019 Top 400 Asset Managers survey, with €11.4bn.
ISS ESG has become the latest provider to anticipate the publication of final rules for new EU climate benchmark labels, having today said it has created a family of indices that stand ready to meet the specifications.The index names will be labelled as provisional pending the publication of the detailed rules – so-called delegated acts – consistent with requirements set out by the technical expert group (TEG) that has been advising the European Commission on sustainable finance.ISS ESG, which is the responsible investment arm of US proxy advisor Institutional Shareholder Services, claimed its new family of indices, which were created in partnership wth Solactive, “exceed TEG requirements by incorporating Scope 3 emissions from inception, ahead of the four-year phase in”.ISS ESG’s announcement comes after S&P Dow Jones Indices last week outlined a concept index aligned with the more stringent of the two EU climate benchmark categories, the Paris-Aligned Benchmark (PAB). It said it was on track to launch an index series that will align with the pending detailed rules and also said its product would “go beyond” them.This would be by way of using multiple approaches, including using backward and forward-looking Trucost analytics, and incorporating transition pathway models endorsed by the Science Based Targets initiative.MSCI was the first index provider to make a public move towards the new EU climate benchmarks, having in November announced the creation of two series of provisional indices.Read moreClimate benchmarks: Brown to greenIndex providers are making the first steps towards adoption of the new EU climate benchmarksMSCI puts its stamp on Carbon Delta risk modelMSCI has followed up on its recent acquisition of climate change scenario analysis specialist Carbon Delta with the launch of its version of a tool to help investors assess their exposure to climate risk.The MSCI Climate Value-At-Risk tool measures the impact of climate change on company valuations. It builds on Carbon Delta’s model of the same name with the addition of information contained in MSCI’s data sets.“The model took a big step forward,” David Lunsford, co-founder of Carbon Delta and now head of climate strategy and policy at MSCI in Zurich, told IPE.“We’ve taken data sets that are important and critical to the model and on top of that we’ve also improved some of our physical risk modelling.”According to MSCI, the new tool has four main applications for investors:how current and future climate policies will affect companies (policy transition scenarios);the strategic low carbon investments companies are making (innovation transition scenarios);the impact and financial risk relating to several extreme weather hazards;exact temperature value signifying what future temperature a company’s activities are aligned with.MSCI completed the acquisition of Carbon Delta in October. The focal point of its development of climate change risk analytics and tools is its climate risk centre in Zurich, which was the home of the then-Carbon Delta team.BMO engagement to prioritise climate change BMO Global Asset Management will be working with systemically important global financial institutions that are significantly exposed, through their loan book and underwriting portfolio, to climate change-related risks to encourage them to adopt stronger mitigation strategies.Climate change is its key engagement priority for this year in light of the COP26 meetings in Glasgow later this year, it announced this week.As part of this it will also focus on the phase-out of coal, marine transport, and sustainable food systems.Vicki Bakhshi, director in the responsible investment team at BMO GAM, said: “The next decade is absolutely critical to meeting this ambition. Global emissions need to peak and decline to keep the chances of meeting the Paris goals alive.“Waiting for action by governments is not enough – investors and corporates need to take bold and ambitious action.”The asset manager’s engagement programme for 2020 also includes responsible drug pricing, setting the appropriate living wage, and managing antimicrobial resistance.