Global Equity – Thematic ESG & Impact

Client-Specific Concerns

The client, an Italian pension fund, was looking to make an inaugural equity investment in an impact equity strategy or a thematic equity strategy focused on environmental, social and governance (ESG) issues. The investor wanted the allocation to serve a differentiated ‘satellite’ role in the overall portfolio and needed assistance comparing a range of offerings. The broad search parameters enabled the client to consider addressing any number of ESG or impact themes (access to clean water, healthcare, sanitation, etc.) or topics referenced under the UN Sustainable Development Goals. From a product standpoint, the client required that prospective managers have an office in the Eurozone, authorization as a Luxembourg SICAV and proven portfolio management experience with impact equity or ESG-related themes.

Outcome

• Adapting the search to the client’s needs: the pension fund had a pre-defined stock exclusion list that encompassed ESG considerations, so the bfinance team customised the manager search to address the extent to which the list—if applied to the mandate—would impact on managers’ underlying portfolios. This process included analysis of the exclusion list’s effect on the current portfolio holdings; portfolio managers’ own willingness to implement custom exclusions; any potential impact on alpha; and the feasibility of implementing exclusions in a pooled fund or SMA. The first manager selected was willing to offer the client a customised account portfolio so the client could apply its exclusions.
• Applying a rigorous due diligence framework: defining and demonstrating ‘impact’ in public equities is not straightforward; the product universe includes a number of fast-evolving strategies with limited track records. The bfinance team utilised its proprietary due diligence framework to cut through the prevalence of so-called ‘impact washing’ in the asset class, which can overstate the effects of a given strategy. The team also conducted an extensive mapping exercise of available thematic and impact equity funds, looking for evidence of robust analysis and reporting—and depth of expertise.
• Providing a choice of relevant strategies: bfinance narrowed down the field of 26 proposed strategies to six high-quality product offerings and ensured that each of the shortlisted strategies would fit the client’s needs. Using a deep dive review on the investment strategies, the team was also able to help the client differentiate between ‘thematic’ and ‘impact’ strategies—variations that, in some cases, were not apparent in product descriptions or labels—and delineate the investment opportunity’s source of ‘alpha’ or outperformance.
• Customised manager review and fee negotiation: bfinance provided tailored reporting for the pension fund’s board of trustees to facilitate its internal decision-making and manager ratification process, which allowed the client to have a full, auditable record of the manager selection process. The team also assisted the client in negotiating management fees, resulting in material reductions in the preferred managers’ initial offered rates.