Brunel Constructs Positive Case for Sustainable Investment

UK pooled public sector scheme’s £1.2 billion multi-manager fund targets sustainable equities.

The Brunel Pension Partnership, one of eight UK pooled local government pension schemes, has launched a £1.2 billion Sustainable Equities Fund which focuses on the positive case for investing in companies with strong ESG credentials.

The fund will be run jointly by three external managers – Ownership Capital, RBC Global Asset Management and Nordea Asset Management – following a selection process aimed at providing investors with access to a broad investing style, whilst focusing exclusively on companies which provide both sustainable solutions and financial return.

Brunel said the new sub-fund responds to demand from local government clients to invest in a portfolio which not only integrates ESG considerations but also has an explicit mandate “to positively pursue companies that will provide a benefit to society”.

David Jenkins, Portfolio Manager for the Sustainable Equities Fund, said this approach goes beyond traditional responsible investing techniques based on negative screening of companies. “A process which focuses on ‘positive pursuit’ effectively targets companies which are looking to provide a net benefit to future societies and where company engagement is integral to the process,” he told ESG Investor.

Jenkins cited Danish power company Orsted as an example a positive pursuit company, based on its long-term, engagement-led transition pathway to becoming a sustainable energy provider.

Brunel received 70 expressions of interest, from which 15 managers were invited to tender, with eight shortlisted for investment due diligence meetings, before three were selected to form a blended solution.

“The Sustainable Equities Fund gives clients access to both the equity risk and sustainability focus they requested,” said David Cox, Head of Listed Markets at Brunel. “The three managers we appointed share a broad investing style and a prioritisation of sustainability, yet their approaches are also different enough to provide clients with the diversification they were looking for.”

In a statement, Brunel said it had selected managers which integrate ESG metrics throughout the investment process, encompassing decision making, stewardship, policies and strategies.

The partnership provided interested managers with an expression of interest covering company-wide and process-specific questions, applying quantitative techniques including cluster analysis and style regression analysis to identify comparative managers. Successful managers were taken through to a formal invitation-to-tender stage involving an in-depth qualitative and quantitative assessment.

“The questions are more detailed and the quant analysis focuses on time series analysis, but also includes holdings based ex-ante analysis where we look at things such as commonality, factor exposure etc.,” said Jenkins. “We then combine and allocate to managers with complimentary characteristics which achieve the portfolio specification.”

The portfolio opened with a significant underweight to energy stocks and an aggregate carbon intensity “significantly lower” than the MSCI All Country World Index, which it uses as a benchmark.

The fund’s ‘positive pursuit’ philosophy means it does not necessarily target specific ESG metrics, said Jenkins, to enable exposure to companies aiming to provide a positive benefit to future society. But Brunel’s investment team will measure carbon intensity exposure and other ESG metrics including controversy flagging as well as revenue analysis.

“In line with our climate change policy, we also seek to ensure that our portfolios’ climate risk profiles are better than the benchmark,” he said. “During the selection process, all managers displayed a bottom-up fundamental analysis encompassing a proprietary approach to measuring a company’s sustainability. Reporting was a big part of the selection process as all managers focused a large amount of resource on competent sustainability reporting, includes techniques such as SDG mapping.”

Brunel manages the investment of £30 billion in pension assets for 10 local government pension scheme funds, namely Avon, Buckinghamshire, Cornwall, Devon, Dorset, Environment Agency, Gloucestershire, Oxfordshire, Somerset and Wiltshire.

“The Cornwall Pension Fund aspires to be at the forefront of responsible investment best practice, and investing in companies and assets that contribute to the long-term sustainable success of the global economy and society is key to this. This cutting-edge product offers us a new way of meeting this aspiration,” said Sean Johns, Funds Investment Officer, Cornwall Council.

Earlier this month, Brunel launched a global small-cap fund with assets of £300 million, with management also split across three external providers, Montanaro Asset Management, American Century and Kempen Capital Management. The fund invests in developed markets, tracking the MSCI World Small Cap Index, with an outperformance of 2-3% net of fees. Brunel said the fund would have robust ESG integration and engagement practices.


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