Integration of RI into investment decision making
USS believes that factors such as environmental, social and corporate governance issues can, and do, impact the value of our investments. Yet analysts often overlook their role. The fund therefore, seeks to achieve additional risk-adjusted performance by integrating extra-financial factors into stock selection and risk management.
The RI Team works closely with USS’ London Investment Office (LIO’s) portfolio managers in both integration and engagement, providing research and advice on companies, sectors and asset classes.
Integration of extra financial factors is not limited to listed equities. USS works to integrate them into other asset classes including alternative assets, real estate and sovereign bonds as outlined below.
Resources
The fund has resourced its investment team to analyse how extra-financial issues impact asset values and consider how this information can be used to make better informed investment decisions. The RI team includes a CFA qualified analyst with experience of extra financial issues, to synthesise the extra financial knowledge of the RI function and provide analysis in a form that LIO fund managers can use. This includes both financial modelling and qualitative assessments.
The fund uses a range of data sources (from financial analysts, to specialist RI research contracts, to more informal resources such as NGOs and RI networks) to provide information to both the RI function and other members of the USS investment team.
Analysis from investment banks is an important information source. These are the research providers (usually termed sell-side analysts or brokers) that fund managers generally receive information from. USS unbundled its research and trading fees for investment research (in conjunction with founding the Enhanced Analytics Initiative) in 2004 and the RI team has its own allocation of fees based on the quality of service and research received from brokers.
Equities
The impacts of extra-financials for company valuations are notoriously difficult to calculate, yet their importance to company performance is widely appreciated. The difficulty lies in calculating these impacts in advance.
The RI team has sought to strengthen its work in this area by working with LIO portfolio managers to analyse extra-financial value drivers alongside traditional value drivers. In particular, we examine in increasing detail the underlying assumptions in analyst valuation models, and how our long term insights would cause us to alter these assumptions and thus the valuations delivered. For instance, in 2009 we devoted significant attention to translating valuable insights USS gained from its sponsorship of the PharmaFutures project to inform LIO portfolio managers.
Further details regarding our approach to engagement can be found in the engagement section.
Property
Working with USS’s Property Team, we have sought to evaluate environmental performance at the most significant of the Fund’s directly held properties, and set targets for reducing energy use, water consumption and waste production. Further information regarding these targets and policy can be found on the Property Investment section. The RI team is also actively involved in the property investment advisory interviews ensuring responsible property investment is integrated into the tendering process.
In addition, we are developing a process to assess RI in indirect investments and participating (with APG and PGGM) in a global survey on practice in this area. In 2009, USS, working with other institutional investors and Acclimatise, commissioned a report on the UK property sector to consider the investment implications of adapting to a changing climate - see the Climate Change section for further details and a link to the report.
Fixed Income
The RI Team produces an annual ranking of countries in terms of key governance, social and environmental risks for use in the Fixed Income investment process.
Scores from selected global indices are combined annually to provide a composite country score and ranking which reflects a broad range of environmental, social and governance indicators. The ranking is used in the sovereign debt selection process for emerging markets. The data in the rankings are used in comparisons between countries in cases where the financial returns and other factors are deemed equal by the Fixed Income team.
The rankings are based upon an equally weighted amalgamation of the component headline scores, rebased to one hundred, for four base indices detailed below:
The indices were selected due to their credibility and accessibility, and the range of social and environmental criteria that they combine. This includes (but is not restricted to):
- Adult literacy and education enrollment
Air pollution
Biodiversity and habitat protection
Carbon intensity
Corruption
Female representation
Investment & regulatory restrictions
Life expectancy
Population below poverty line
Price controls
Private property rights
Water accessibility and quality
We continue to monitor the availability of additional data sets, particularly in relation to governance, human rights and labour standards to add to the customised index.
As the four data sets used do not cover exactly the same countries, a number of states are not represented in the USS combined data set. For countries outside this full data set, the Fixed Income team should consult with the RI team for an individual decision.
Private Equity and Hedge Funds
USS has taken a leading role globally in integrating RI issues into the Private Equity and Hedge Fund investment process. RI issues are considered as part of the standard due diligence process prior to investment. RI conducts interviews with relevant staff at the investee GP or Fund, and an ‘RI opinion’ is then discussed and lodged with the USS Alternatives team to form part of their investment process.
USS has also influenced our General Partners (GPs) through market-wide activities with the UN Principles for Responsible Investment, BVCA, EVCA and US Private Equity Network.