The Scott Trust believes that incorporation of environmental, social and governance issues in analysis may positively impact investment returns over the long term. It is also compatible with our own beliefs and investment policy. Managers’ own broader responsible investment policies (e.g. on active equity ownership) are also important in both of these areas. Therefore, the degree to which external managers have integrated such considerations into their process is a fundamental part of our selection, and monitoring processes across all asset classes.
For example, given our stated policy to both divest from fossil fuels over the medium term and invest proactively in strategies which are aimed at supporting the possibility of a lower carbon future, the entire portfolio is being assessed on these terms. Particular emphasis is placed on seeking managers who can demonstrate a strong understanding of both the threats and opportunities presented by a transition to a low carbon economy.
In order to monitor our progress on this stated policy, we are collecting data on fossil fuel exposure twice a year from our external managers as well as looking at this factor in all new potential managers. We have used this information to create objectives for reduction in our fossil fuel exposure over time and make manager selection decisions to meet both of these objectives and the primary duty of generating strong risk-adjusted returns.
Beyond this specific policy, the entire endowment is managed with a strong emphasis on ESG. We aim to be proactive and innovate here. For example, during the reporting year some notable activity was as follows:
- We moved our entire passive equity allocation to an innovative new ESG solution. This moves away from simple capitalization weighting, halving carbon emissions intensity versus the MSCI World index, eliminating 100% of exposure to owners of fossil fuel reserves, and doubling exposure to companies with green revenues. This is all combined with conventional smart beta factor tilts and is optimized for tracking error. While some existing pooled products offered some aspects of this, we worked with a manager to produce a new innovative solution during the period.
- We made a major new investment in an active manager whose entire firm is built around applying sustainability and proactive engaged ownership principles in a single global equity product. We are proud to support such ESG innovators.
- We engaged with major two hedge funds, leading to the creation of two new responsible investment share classes of existing products, and then invested in these.
- We invested in a new clean energy global equity fund that launched during the reporting period, supporting the creation of an innovative new product.
We analyse managers through integration of ESG considerations in manager research and the collection of fund level data on responsible investment attributes (e.g. ESG integration policies, voting and engagement, investment exclusions, the ability to accommodate responsible investment demands in separate accounts). We also conduct analysis of underlying holdings of our managers. This latter work has included carbon footprinting of our portfolio and ESG scoring of the underlying holdings using third party ESG analytical tools.