Nancy Kilpatrick and Andrzej Pioch: Adopting ESG – getting it right

03 May 2023 Interviews

An interview with Nancy Kilpatrick, head of charities at LGIM and Andrzej Pioch, asset allocation fund manager at LGIM

This content has been supplied by a commercial partner.

As 2023 continues apace, interest in responsible investing among charities is still on the rise. “At the moment, 99% of our inward inquiries from charities are about adopting environmental, social and governance (ESG) strategies,” says Nancy Kilpatrick, Head of Charities at Legal & General Investment Management (LGIM). “Charities want to adopt them but there is still uncertainty about what the risk and return profile might be and whether the funds truly reflect their ESG requirements. Charities must ask their managers: What are you doing on my behalf? Is my investment policy being translated in the right way?”

Furthermore, ESG investing is constantly evolving and this also presents challenges, says Kilpatrick. “There are so many moving parts when it comes to tackling pressing issues such as climate change. Charities need to know that their asset manager is not only providing ESG-labelled strategies across all client assets, but also combining this with voting and using their scale effectively to influence real change.”

Striking the balance

To achieve this, LGIM Asset Allocation Fund Manager Andrzej Pioch says it is imperative that asset managers listen to the questions from clients. “If we want investors to pay attention, we have to first pay attention to investors, because we need them on board,” he says. “When it comes to climate financing, for example, it’s very much an all hands on deck scenario. However, we need to bear in mind when we pursue ESG objectives that we don’t swing the pendulum too far in one direction and lose sight of other financial material risks. Sometimes we believe ESG investors can start fishing in a very small pond of companies leading to a concentrated portfolio, so it is important to maintain diversification, in our view.”

Pioch says it is about striking the right balance between these two objectives. By asking the right questions, charities can aim to work out what the best ESG strategies are for them. “The key questions that investors should be asking are: Am I comfortable with the level of concentration that I have in my investments? Am I comfortable with the charges that I’m paying? When and how will my manager address other risks around recession and inflation? Is the portfolio well diversified? Can my manager also offer exposure to alternatives?”

LGIM aims to address concentration and minimise the impact of any implicit biases held in a portfolio, says Pioch. “One way ESG investors may consider doing this would be to look into creating a potentially welldiversified global multi-asset fund, aiming for a blend of active and index building blocks.”

Reporting in a meaningful way

To keep investors on board, they have to understand how their funds are operating. For LGIM, communicating this is a key focus. Kilpatrick explains: “Our reporting is very detailed, and hopefully meaningful. It’s all well and good having vast spreadsheets and lots of data, but whether that can be digested properly is key. As a client, you need to understand what your fund is doing. It’s really important to report in a relevant, meaningful way and present it so that it is easy to understand.”

Pioch agrees that when it comes to ESG reporting, the client needs to have all the facts to remain engaged. “Additional reporting is essential because having ‘ESG’ or ‘sustainable’ in the name of a fund is just not good enough. It’s not clear enough because different people understand ESG differently. There is no commonly accepted definition. So it does require more due diligence of what ESG means in the context of that fund and whether that resonates with the client’s objectives.

“Our methodology is very transparent upfront, because it’s part of the index methodology. So we disclose exactly what metrics we use. And I think that helps to bridge the information gap between what the fund manager is doing and what the client wants to achieve. We can then have more in-depth discussions with clients about what’s important to them and whether what we do really reflects their convictions.”

Kilpatrick adds: “Charities are pushed for time and resource, so it’s important to be able to speak about ESG in an understandable way. Don’t overwhelm the investor with information because it’s going to be counterproductive to reporting in any meaningful way.”

Real-world impact

Aside from stable returns, the reason a charity may choose an ESG strategy is to have real-world impact. “You need to know how this fund can make a difference in the world and in the underlying economy,” says Pioch. “Ask your asset manager for specific examples of how the money they have invested has made a difference.”

That impact has to come through engagement with the companies in the fund. “What did your manager achieve, for example, through engaging with companies that they invest in?” continues Pioch. “Are they sitting on the fence or abstaining when they have the opportunity to vote on shareholder resolutions or do they actually take the opportunity to influence the outcome? We believe it’s our responsibility to vote on every share that we can. We pledge never to abstain. You need to engage with companies and say, ‘how can we help you to do better?’.”

The issue of voting says Kilpatrick is important to driving the change charities want to see. “Most managers now should be reporting transparently and giving a rationale on why they do certain things on behalf of their clients. It’s not just about giving one example of engagement; it’s about showing how we vote and how we are trying to influence the story and time lines. And it’s not just about slapping people on the wrist; it’s about giving an incentive for companies that are performing well within their sector to continue to do better. When one company goes that way, the others will follow because it means that they will get more investment.”

Nancy Kilpatrick is head of charities and Andrzej Pioch is asset allocation fund manager at LGIM

Fast facts

Top 10 charity manager

£4.6bn of charity assets entrusted with us

True active owners of capital

180,200 votes cast in 2021

Source: LGIM internal data as at 31 December 2021

What we do

We are here to help organisations make the most efficient use of their investments. At a time when the call to the third sector is greater than ever, we partner with our clients to help them achieve their investment goals, whether that is long-term growth above inflation, income, seeking capital preservation or an element of all three. We pride ourselves on offering straightforward, cost-effective solutions to our clients, supported by award-winning client service. LGIM is building on its credentials as a responsible investor to lead the asset management industry in addressing the dramatic challenges posed to by a rapidly changing world. We believe this activity is crucial to mitigate investment risks, capture opportunities and strengthen long-term returns for our clients. 

More on