EU Sustainable Finance Disclosures
While Partners Capital fully supports the aim of the EU Sustainable Finance Disclosure Regulation (“SFDR”) to bring clarity to sustainability-related disclosures in financial markets, we do not believe the availability and quality of data today is strong enough to adequately measure and report on the mandatory 14 principal adverse impact measures set out by the regulation. Partners Capital manages multi-asset class portfolios for its clients, investing across both public and private markets. We have observed positive steps being taken by a subset of public companies to disclose their non-financial impacts, driven in part by regulatory obligations such as the EU’s Non-Financial Reporting Directive. However, progress is not uniform, particularly for smaller companies with fewer resources dedicated to sustainability reporting. As a result, all companies do not report on all of the principal adverse impact measures set out by the SFDR in a consistent and comparable manner. The standard of reporting by private companies, which are less likely to be subject to any mandatory sustainability reporting obligations, is even further behind. Finally, it should be noted that Partners Capital predominantly invests via third-party fund managers and full transparency to underlying holdings is not consistently provided.
However, we recognise that sustainability reporting is a rapidly evolving field. Accordingly, we seek to be at the forefront of advancements in corporate disclosure requirements and third-party reporting, to effectively assess whether data quality is sufficient to enable us to publish the principal adverse impact statement set out by SFDR in the future. We expect the quality of data to improve in line with advancements in corporate disclosure and through third-party data providers adapting their offerings.
Partners Capital Firmwide Approach to Integrating Sustainability Risks
While Partners Capital does not currently publish a principal adverse impacts (“PAI”) statement in the format prescribed by the Sustainable Finance Disclosure Regulation, the routine consideration of sustainability risks is deeply embedded into our investment process and remuneration policies. As a company, we hold core beliefs about how investing our portfolios in a responsible manner can have a positive impact on the environment and society. These beliefs are closely aligned with the United Nations-supported Principles for Responsible Investment, to which we are a signatory. Our beliefs include the following:
- We believe that businesses that have positive impact on the environment and society, and govern themselves in the most responsible way, are more likely to outperform those that have a less positive or negative impact on the world. We understand that investing in businesses that fail to address these issues may negatively impact portfolio performance and increase risk in the portfolio. This is driven by a belief that these non-financial issues are becoming more relevant today, not less, driven by policymakers, institutional capital and broader society becoming increasingly focused on the major challenges impacting humanity and our planet.
- We believe that we can have impact, beyond the outperformance we deliver to clients, primarily by:
- Selecting managers who invest responsibly and engaging with them to facilitate further improvement.
- Allocating to sectors of the economy and specific investments that are expected to have the most positive environmental and social impact in the future.
- Collaborating with other like-minded investors.
These core beliefs inform our investment decision-making and portfolio construction process.
Partners Capital maintains a presumption against divesting assets for reasons unrelated to their expected risk adjusted return. This is due to a combination of a belief that engagement is more likely to yield positive results than exclusion and a practical reality of our investment strategy which is dominated by investment via third-party managed funds. Nonetheless, we have chosen to exclude companies operating in the Tobacco, Coal, controversial weapons and “payday” lending sectors from our directly held equity portfolios. We will also invest in any share class of an asset manager that adheres to these exclusions over a share class which does not, if doing so does not impose a meaningful cost. Such exclusions are reviewed periodically and updated by the Partners Capital Responsible Investment Committee.
Integration of Sustainability Risks in Due Diligence
For every new asset manager investment approval and for our existing managers on an annual basis, we determine the degree to which the manager integrates environmental, social and governance (commonly termed “ESG”) factors into their decision-making process through our proprietary ESG Integration Survey. The survey is informed by the due diligence questionnaire produced by the Principles of Responsible Investment. The survey is a valuable tool in assessing a manager’s ESG integration capabilities, which we supplement with our qualitive assessment of the manager garnered through the numerous interactions we have before approving a new investment. Finally, we adapt our approach to assessing ESG integration depending on the nature of the underlying investment.
Most notably, the threshold level of ESG integration for those managers investing in sectors with heightened ESG risks (e.g. the energy sector, or certain geographic markets), is significantly higher than that for a manager investing in a sector with lower inherent ESG risk. Where an ethical or reputational issue has arisen during our due diligence, this will also be referred to our Responsible Investment Committee for consideration. In the past, we have considered and rejected investments on the basis of their adverse environmental or social impacts.
Engaging with Managers
During our regular monitoring of the investment managers in which we have invested, we highlight the importance of the incorporation of ESG considerations into their investment decision making process and set the expectation that the manager’s process should improve over time. We aim to assist our managers in improving their ESG integration, particularly those who we deem to have the greatest room for improvement, through sharing industry best practice. Influencing the behaviour of our asset managers, who manage multiples of the total capital that we have invested in their funds, has the potential for Partners Capital to have a highly leveraged impact on the world.
We believe that effective measurement of ESG factors and the impact, both positive and negative, of investment portfolios has the potential to catalyse significant change in the behaviour of both asset managers and business owners and management. Accordingly, we aim to be at the forefront of emerging trends and best practice with regard to ESG measurement. We have developed an ESG and impact investment dashboard which allows clients to monitor their adherence to their responsible investment policies. The dashboard comprises five sections; the portfolio’s aggregate exposure to sensitive sectors, a set of ESG metrics for the public equities portfolio which is calculated using third-party data, the extent to which the portfolio’s underlying managers are integrating ESG factors (measured through our ESG Integration Survey), the percentage of equity managers which engage with underlying management teams and the percentage of the portfolio invested in sectors that have the potential to have a positive environmental or social impact (e.g. Healthcare). We aim to improve the quality of our reporting over time and stay abreast of trends and best practice regarding ESG measurement. The dashboard is therefore updated regularly to incorporate new datapoints as they become available.
Partners Capital has designed its remuneration policies and practices to be consistent with promoting sound and effective risk management, which includes sustainability risks. Our remuneration practices are aligned to the business strategy, objectives, values and long-term interests of the firm.
As outlined in the above disclosures, we hold core beliefs about how investing in a responsible manner can have an impact on the environment and society. We believe that businesses that have positive impact on the environment and society, and govern themselves in the most responsible way, are more likely to outperform those that have a less positive or negative impact on the world. Where employees are eligible for discretionary variable bonuses, in setting these bonuses, we would always consider the overall results and performance of the firm. In addition, a portion of variable pay comprises a deferred award that is invested alongside our clients during the vesting period. Therefore, by embedding good governance practices and integrating sustainability factors into our investment decision-making, and by linking employees’ remuneration with the overall performance of the firm, we believe that our remuneration policies incentivise employees to consider all material risks that our portfolios may face, which increasingly includes adverse sustainability risks.