16th JULY 2020

[Corinne Carr: CC] [Ian-Povey-Hall: IPH]


CC: Hi, everyone! Today I’d like to introduce you to Ian Povey-Hall who is the Head of Sustainable and Impact Investing at Acre. I met Ian a few months ago when he kindly invited me to provide remuneration input at an investor event which was attended by all the main investors. The topic of the event was ‘How to align incentive structures to impact outcomes’. So it’s very relevant to the subject of Responsible Reward that we’re talking about today. On the back of that event, Ian wrote a white paper which he will talk about a bit later in the conversation today. So hi, Ian, would you like to introduce yourself, Acre and what would you do with Acre?

IPH: Yes. Hi, Corinne. And Firstly, thank you for inviting me to be part of the podcast series. And so Acre is a sustainability specialists search firm. We have been around for 22 years. We cover a variety of different areas across sustainability in its broadest context. So we have the core capabilities we’ve had from the outset around Corporate Social Responsibility and operational sustainability. We have a team that looks at health & safety and well-being. We have another team that looks at energy and resource efficiency roles. And then the team that I sit in that looks across the banking and finance space.

So we unpack that into two broad areas. One is specifically about hands-on investment skills, running strategies across sustainable and impact themes. And then the broader capability across the responsible investment space where we work on a variety of roles for banks, insurers, asset managers, private equity groups and non-profits. That’s people like the UNPRI, Carbon Tracker. We help them evolve what they’re doing with the right type of skills. And that can be both larger organisations looking to integrate these principles and launch new products. As well as specialist boutiques who are looking to scale and grow as a function of the increased investor appetite in this space. I’m based in London. And we also have team members in New York and the Netherlands. We have recently opened an office there a couple of months ago.

CC: Very good. So truly international. So I’m puzzled because we hear a lot of jargon around ESG, sustainability, impact investment. All of these terms may be very familiar to the investment management industry, but not so familiar to support functions like Human Resources and Remuneration. So could you please explain how the ESG function has evolved over the last few years?

IPH: Going back to the different kind of terminology, it’s been referred by a few different people as an ‘alphabet soup’ really. We do business intelligence exercises for our clients sometimes to map the market and help them understand what their competitors are doing and different functions.

If you look across the top 20 asset managers, when I put this last presentation together, six months ago, there were 11 different job titles for the lead person looking at sustainable/responsible/impact/ investing/ESG across those top 20 asset managers.

So it’s definitely still a relatively nascent market. And they’re still developing into a more coherent structure where there’s an obvious job title that extrapolates across all these companies.

But to give you a flavour of some of the roles that we recruit for: Head of ESG, Head of sustainability, Head of Sustainable Investing, Head of Responsible Investment. Ultimately, these roles facilitate a change that investment management or the investment world is going through. Being able to look at a different set of core principles, and then being able to apply them within existing strategies and behaviours for employees. Also looking at how an asset manager could evolve, what it’s doing, or projects they’re working on. So being able to launch new products and strategies that align with the  outcomes that the clients are much more aware of now. Either directly or as a result of actions from the beneficiaries of their pension fund.

Going back to your original question on the evolution of the ESG function, we’ve tracked it through four different stages that we’ve seen play out over the last say 10 years. 10 years ago was very much a case of a classic corporate governance function that carried out proxy voting, with some issues driven research and engagement that was very much client driven. If there was a charity or a particular foundation that, for example, wanted to have certain exclusions that they didn’t have exposure to certain themes, controversial weapons, etc, then that would be sat within the corporate governance function.

And then this ESG terminology started to materialise of how you could effectively split those exclusions across Environmental, Social and Governance themes. Then we started to see a more specialist role, a specialist/generalist role, because obviously, no one’s going to be an expert across all those themes necessarily. And that’s when this hybrid role started to materialise. It’s about issues-based research, company analysis, some ESG integration work across the different asset classes that would need to be implementing these exclusions, and then taking on the responsibility for proxy voting.

And then with the more evolved businesses, we started to see an actual Responsible Investment function, starting to crystallise and having more people within the function, playing out more specialist roles. So a Head of ESG integration, for example, the Head of Stewardship, and then specialists sector research individuals. They would be looking at how you could target more material ESG factors, the analysis of a company, and work with the investment teams to be able to incorporate that into that process from a strategic perspective.

And then the next step that we’re starting to see now is much more around Sustainable Impact investing as an investment methodology itself. There’s a need for more centralised teams who can look at how these types of factors can be identified and then incorporate them in investment process to feed that directly into what the investment analysts are doing. But not cross over and take over, because you’ve got asset managers in particular that already have investment analysts that are bright, smart and looking for these opportunities.

So it’s more about having a centralised capability with additional ingredients. You’re having a more comprehensive recipe if we stick with that analogy, which otherwise they wouldn’t be aware of, because quite a few of the themes that we’re talking about here don’t conveniently sit in one sector and cut across themes.

That’s where we’re seeing an increased demand for those specialists to be able to feed into that and add an extra dimension to what the investment analyst would more traditionally do.

Similarly, on the engagement side, we’re seeing a requirement for specialist individuals to join managers who come from broad sustainability backgrounds or have expertise within particular themes and sectors. They have been able to engage with companies either from a consultancy perspective or internally within larger corporates. They drive that change that is now expected of the holdings these investment managers have.

But rather than building a large, separate team that will take on separate engagement activities, the more progressive organisations are looking at a small number of relatively senior experienced individuals that can add the additional context to what the investment analysts and fund managers are already doing. So it becomes a more comprehensive part of their role.

So that’s really the trick and what good looks like. From our experience of looking at the more progressive managers, having a centralised function that is really driving additionality, through the investment teams rather than a separate niche area that’s operating as a silo. Purely reacting to what particular request from clients if they have a certain agenda which was driven by a family office, a foundation or a charity that has specific values that they want to see addressed.

CC: What are the typical goals that come up from your clients? And what do these people actually do?

IPH: One of the key things that we talk through with clients, and it’s very important for us to know before we go out to market beyond the job title itself, is where the client is in terms of their thinking, their thought process and the evolution of being able to actually take action around these concepts and themes.

Some, particularly when they’re first time roles is often looking for someone to be able to do a hearts and minds exercise to a degree, build consensus and then set out the architecture that can be delivered.

As opposed to a different skill set coming in and saying, right, ‘we’re all on board, we want to do this, show us how’. We can actually drive this from an investment perspective. And so, to a certain degree, it’s important to know how much of a focus they want to have on still going through that change versus actually the implementation side.

But in terms of different roles, the Head of Stewardship is quite a useful one. And I talked about it briefly earlier. That role was effectively being able to engage with companies directly on particular themes, but also increase the education from the existing engagement activities, which are obviously mainly focused about financials to incorporate Environmental, Social and Governance factors. Being able to get a more holistic picture of a company and then be able to make a better decision around whether that’s an appropriate holding or not.

And then the other piece on this is also being engaged with the wider policy space. And so what we’re seeing with the European taxonomy, etc, and how regulation is changing is an important factor. Because that relates to additional clarity that managers can have with regards to their underlying holdings.

And if they’re not engaging effectively, it’s going to be difficult for them. The Head of Sustainable Investment research position is much more around the data and analytics side. So one of the biggest challenges for the investment world as we see it, is incorporating these factors and getting them into digestible data that fund managers are used to looking at or investment managers looking to use it when they’re evaluating a company. A lot of these data sources are quite messy and unstructured. There are the classic data providers and that will continue to be a key part of the early stages of ESG integration, people like Sustainalytics, MSCI, etc. But the more involved approach is about breaking that down and looking at new types of machine learning, AI data sources that the investment team can actually utilise in their process and be able to do that on a day to day basis.

And that really does come down to the data, the relevance of that data and its digestibility. If it’s just coming down as a binary score, that’s very difficult for an investment team to really work with. And often, they do conflict as well. There’s a classic example of Tesla where, if you look at three different data providers, you get three different scores. And so the investment team needs a lot more information to be able to work with them.

The next question is around where these individuals come from.

Quite often we’re placing people who aren’t currently within the investment management world. The whole point of an evolutionary change is that the skill sets don’t exist within the sector. And that’s why you need to bring in people from broader backgrounds. There’s quite a number of smaller more boutique specialist organisations or people that do have the right experience within an investment context. And so quite often it can be a case of those individuals looking to increase the impact that they can have and hence being interested in working with larger organisations. They want to help drive that change through.

And then there’s the consultancy world. There’s often and there are continues to be a very interesting talent pool with both some of the larger consultancies and some of the specialists out there that can go out to add quite a lot of value.

And then the final area is around the NGO space where we’ve been quite successful in terms of finding pools of talent of people who have core investment backgrounds or financial backgrounds, from big institutions that have worked within an NGO. So it’s like a working MBA in ESG, responsible investment and sustainability etc.

They are able to move back into the investment world now able to implement the understanding they developed within the NGO space.

CC: There are people from academia that might be interested in moving from academia into industry. I guess that could be a talent pool from an ESG point of view?

IPH: Particularly on the policy side. The academia/policy crossover is quite interesting. Also from academia in some of the data roles, where you’re looking at geospatial mapping. Often the most pioneering work is being done in the universities.

CC: So, a wide range of sources as to where ESG specialists come from. You mentioned’ ESG integration’ earlier on – what does it actually mean?

IPH: I’m not sure if I’m fully qualified to give an absolutely precise definition of that. From how we see the market, a lot of it is around bringing people on board in terms of the utility it can have for the investment team.

So for some of our senior roles, for example, part of the interview process is sitting down with members of investment team that don’t believe it adds value to what they’re doing as investors. Then the result of that meeting is that they want to meet again, because the candidate’s able to actually articulate the benefits that it gives them in terms of delivering better outcomes for clients be that financial return or be that transparency around the impact of their investments.

A lot of that is around education and persuasion, I suppose. And then the project management team to actually deliver that. So, as well as having those conversations in person and getting people on board, it’s actually then be able to build the systems and the frameworks to effectively bolt on an additional lens to the existing activities of investment teams.

And that’s where it comes down to, project management and delivery. But it is obviously quite a wide range of responsibilities depending on the nature of the company that you’re doing it in. And the large complex asset managers will have much more project management requirement versus a more specialist boutique. It’s about getting the investment team on board and then utilising their core activities to then be able to deliver a more ESG or sustainability aligned investment process.

CC: I see. But when we look at ESG, surely it can’t be just centralised in specific teams. It has to permeate throughout the firm to ensure that everyone is aligned to achieve the sustainability agenda of that very firm. So how do we actually transfer this ESG skills throughout a film?

IPH: It’s difficult. And that’s why part of the ESG integration role is being able to get people on board with the principles they had saw, actually delivering it themselves, and what they do.

But I think we’re seeing more and more around an alignment of compensation structures that reflect behaviours, which I think is a very key factor. One of my clients’ investment team, for example, now have an investment target and 50% of their annual bonus will be aligned to that. But then the other 50% is on the behaviours.

And previously behaviours were much more around character, how you’re engaging with different people in the office, being a good citizen se within an organisation. Now we’re starting to see additional behaviours in terms of how they’re demonstrating engagement with companies around ESG, how they’re incorporating that point in their process, participation in working groups, and being able to provide expert sector or investment leadership in terms of how they’re integrating ESG beyond the activities of the of a centralised team.

I think we’ll see that continue to evolve in terms of behaviours right down to the carbon footprint of each individual team, how much they’re traveling versus how they were doing previously and how they’re evidencing the integration of these philosophies in their behaviour as much as in their investment process.

CC: That’s really interesting. So we’ve got another episode in this podcast series where I’m talking to John Featherby about the B Corp movement. So we’ll go into that on that particular episode. It’s clear that there are some new entrants into the industry who have got different views on compensation and remuneration. In fact, some of them were present at the event that I mentioned very early on in this conversation. You’ve mentioned the split of remuneration between financials and behaviours. Is that is that the trend? Is that what’s happening now?

IPH: I would say so. I think it’s still early days. And there’s the majority, particularly investment roles, where the weighting is still very much towards investment outcomes and performance. But I think there’s an expectation there that’s being driven by investors that they want to see people walking the walk. And having aligned incentives is a very good way to do that. The difficulty, as we touched on in the paper, is the measurability and how you can actually hardwire that in. I think it’s always going to be a more discretionary element than something this is as binary as investment performance. But I would say that definitely is a trend. That’s coming through in terms of how packages are evolving.

The other trend that is more common on the investment banking side for a whole variety of factors that were exacerbated by and highlighted by the 2008/2009 financial crisis is the movement towards a much less variable component in compensation. It’s more about salary and longer term incentives.

And indeed, whether that’s actually new equity in a boutique or whether it’s having shares in the fund. And the fund has impacts framework and measurements that it will stick to. I think that type of expectation from clients is becoming more prevalent as opposed to a lower salary and then high performance bonus on an annual basis that can be quite volatile and potentially encourage the wrong type of behaviours. That’s what responsible investment is intended to achieve.

CC: So you mentioned your white paper. Would you like to give us the highlights? We’ll include the whole paper in the newsletter that accompanies the podcast series.

IPH: A good starting point is why we chose this topic. That was a result of a number of conversations with a few of the impact funds that we’re working with. They do actually have impacts KPIs that are hardwired into how they get paid. For example, an alternative energy or energy access funds in Sub Saharan Africa where they have to demonstrate a certain number of people connected to clean energy over the duration of the fund in order for their carry to be released.

And so we started to unpack that and look at whether it is even possible to do that at scale? And that’s how we ended up on the title, which is ‘Outcomes aligned incentive structures for investment managers and their employees’. And the topic for debate was whether the accurate measurement of outcomes is a prerequisite for impact investing, or whether there’s too much focus on the precision measurement and it actually acts as a barrier to progressing the wider impact story.

We unpacked that discussion with the different types of people around the table. Obviously, it’s much easier for a specialist boutique where this is all they do to be able to align that behaviours piece across the whole firm. Versus the bigger investment managers that are in, as they will generally admit, in a process of transition and incorporation of these factors.

So, it was an interesting discussion and I definitely urge people to have a read through the paper and see the different perspectives for the different types of actors who were there. And these are always intended to be a starting point as opposed to a definition of a point of view. And so hopefully it prompts some interesting debate. And if anyone is particularly interested to connect with any of the people in the paper, have a conversation with me around how they can start thinking about these types of principles, then obviously I’m very happy to help them.

CC: And you write papers on other subjects as well. Is that right?

IPH: Yes. So, we did one a couple of years ago around the nature of recognising the impacts of an investment portfolio and the opportunity that can give investment managers to connect in a deeper way with their clients. And then most recently, we’ve put out a round table around investment stewardship and engagement. How important that can be as a tool but also the importance to have measurable outcomes as a result of the Engagement activity, the challenges but also some of the best practices around that. So that’s another one that’s definitely worth reading through. It will be on our website.

CC: So there are a couple of papers there, one on incentives and the other one on good stewardship on the ACRE website. If people would like to follow up this conversation with you, how can they contact you?

IPH: LinkedIn is obviously a good way. And also, at the end of the papers, my email address and contact details are on there. So, definitely drop us a note. For anyone who’s interested in a more of a candidate driven discussion from a recruitment perspective, then the best thing to do is to review our website, find the most relevant roles for your experience, and what you’re keen to talk about and then directly connect with whichever consultant in the team is managing that role.

CC: That’s great. Well, that was Ian Povey-Hall from Acre. Ian, I’d like to thank you very much for your insights, sharing your experience and what you’re actually seeing on the ground. That was most informative. Thank you very much.

IPH: Thank you, it was a pleasure.

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