Sustainable pensions

Pension funds in Latin America driving an attitude shift towards ESG.

The importance of Environmental, Social and Governance issues to institutional investors is reaching a tipping point – some funds are even using their sustainability culture as one of their key differentiators. Latin American asset managers are equally enthusiastic to incorporate ESG metrics into their decision making processes.

A Peruvian asset manager confirmed, “AFPs [Administradoras de Fondos de Pensiones, Private Pension Funds], have turned 180 degrees in the last five years. 10 years ago there wasn’t even any interest in the ‘G’, now we are all over that. ESG may just be a marketing tool for some but we believe it can drive better returns.”

The latter half of his comment has been the knee-jerk response from fund managers in the past but they genuinely seem to believe it now, the fund manager continued, “We are now convinced that better companies have better returns as they have less of these tripwire ESG issues such a treating staff and suppliers badly, having defective products, polluting the environment or not have the appropriate controls in place. When these issues blow up they cause steep drops in value, investing in better ESG monitoring can mitigate this.”

“We are now convinced that better companies have better returns as they have less of these tripwire ESG issues.”

Asset Manager, Peru

We also spoke to a second Peruvian fund manager that had recently repositioned his strategy towards ESG, “It is costly at the beginning because you end up with fewer assets but they are focused and it is a great marketing tool, especially as the reputation of AFPs has suffered a lot recently in both Peru and Chile.”

This all sounds encouraging but what is actually being implemented? The ESG focussed fund manager admits, “Implementation is slow across the industry. AFPs are pressuring companies over governance but there is still a long way to go on environmental and social issues. There is also the Principles of Responsible Investment (PIR), created by Aldo Casinelli, this has been a big hit with AFPs, insurance companies and several SAFIs (a type of investment fund). The problem is that some managers believe that just paying the annual PIR fee is enough. We are still in the early stages of development of this industry. It also has to be a careful balance, because there is a 50% limit on foreign holdings and there a very few companies that would comply in-country, they have to be careful about how strict they are with ESG.”

“Implementation is slow across the industry. AFPs are pressuring companies over governance but there is still a long way to go on environmental and social issues.”

Fund manager, Peru

There is also some concern that returns may be left on the table that others will take from the funds, “We all know that the banks here have zero principles!” continues the fund manager. “The banks are going to lend to those who we pass over and it is a big problem since the AFPs are part of the group of banks, which do not respect any principle, they want to lend and have their money returned. There is a gigantic conflict of interest. If banks applied ESG properly, they would lose half their customers.”

One challenge for investors is their ability to measure the impact of their investment decisions since the concept involves very broad factors that are difficult to quantify. A portfolio manager at Canadian investment fund, supposedly a leader in ESG, admitted, “I know that ESG is important to the firm, and we have an ESG team, but I don’t really know how that fits with my daily work.”

For ESG to be successful, it must become a part of the mindset of everyone at the firm, not just siloed in a small team within the legal and compliance department.

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