(7 minute read)
Published: 7 February 2025
Written by Alice Thornton, Head of Research and Impact, with Matthew Roberts, Head of Alternative Solutions at Fulcrum Asset Management
Introduction
In May this year we published an updated version of our Investment Policy, which can be accessed by clicking here. The main changes relate to our approach to exclusions. We have now excluded any investment in the following:
- Indirect investments into tobacco (we have excluded direct investments in tobacco companies for some time, but we will now exclude investments held indirectly as well, for example holdings in pooled funds).
- Thermal coal (a type of coal that is burned to generate electricity).
- Tar sands (a type of sand or sediment containing bitumen, which can be processed into crude oil).
- New primary market capital for fossil fuel production and infrastructure (this means, for example, we will not buy new shares issued by oil and gas companies).
We have chosen to make these exclusions because we believe these activities can never be compatible with our organisational aim to advance wellbeing for people, society and the natural world. In other words, no amount of engagement with companies who derive income from tobacco, thermal coal or tar sands will help to achieve our aim; and providing new investment to fossil fuel production and infrastructure is fundamentally misaligned with the aims of the Paris Agreement, which seeks to keep temperature rises well below 2°C above pre-industrial levels.
It is relatively common for trusts and foundations like ourselves to exclude investment in tobacco, and it is increasingly common to exclude thermal coal and tar sands as well. However, we have taken a nuanced position on investment in the fossil fuel industry by only excluding new primary market investments and not applying a full exclusion, which is more unusual amongst our peers. This blog provides a case study of the process of implementing our updated Investment Policy in practice, with Fulcrum Asset Management – one of our six fund managers – who have co-authored this blog with us.
Implementing our updated Investment Policy
Our Finance & Investment Committee reviews and updates our Investment Policy annually in partnership with our staff team. However, implementing the changes that are agreed is a process that we work on year-round. This process involves engaging with our six fund managers to ensure that they are aware of any changes that have been made, the rationale for them, and what implications there are (if any) for the ways that they invest our money.
This year, the changes we have made are relevant to four of our fund managers (out of six). One already excludes all investment in tobacco and fossil fuels, and one is a UK-based property fund which therefore does not invest in tobacco or the fossil fuel industry. We are invested in a pooled fund with three of the remaining fund managers, and a segregated fund with the fourth.
The segregated fund is managed just for us, separately from other institutions’ investments, and it was therefore quite simple to update our Investment Agreement with this fund manager to make sure the way our money is invested complies with our updated Investment Policy. However, this does also mean that the updates to our Policy had a limited impact; they changed the way our own funds are invested, but had no effect on the way other institutions’ money is invested by this fund manager.
The process of implementing our updated Investment Policy with the remaining three fund managers has been less straightforward because – as investors in pooled funds where our money is invested alongside other institutions – we do not have complete influence over the way that each fund is invested. Nonetheless, any changes to the way a pooled fund is invested can be much more significant, because those changes will apply to a much larger pot of money than just our own.
Applying our updated Investment Policy to a ‘fund of funds’
One of these remaining three fund managers is Fulcrum Asset Management. We are invested in their Diversified Liquid Alternatives (DLA) Fund which is a ‘fund of funds’, i.e. Fulcrum invest a portion of our money with other underlying fund managers as well as investing some of it directly themselves. We are a relatively small investor in the fund, currently holding around 12% of the total amount invested.
As a starting point, we were aware that Fulcrum have a firmwide exclusion policy whereby tobacco, controversial weapons and predatory lending are excluded from their investments. Their approach to investing in the fossil fuel industry was initially less familiar to us.
At the current time, the DLA Fund is invested in 25 underlying fund managers. This means that to ensure compliance with our updated Investment Policy, the team at Fulcrum had to engage with all 25 fund managers to check that their investment strategies comply with the exclusions we have set out in our Policy and use this engagement process to identity any risks of potential non-compliance. Clearly that is no small task and has taken a period of time to complete.
To initiate the project, Fulcrum reviewed their portfolio for compliance, before embarking on an engagement process with the underlying fund managers. As an example, the following summary focuses on the credit managers in the portfolio, of which there are nine. They found:
- Most fund managers don’t tend to differentiate between primary and secondary markets when considering sustainability-related exclusions. It was therefore necessary to have more detailed conversations with each team to understand their investment strategies and position on this topic.
- Three of the underlying funds were already compliant with our updated Investment Policy.
- One was not compliant, but the manager was willing to change their investment strategy to no longer provide new primary market capital for fossil fuel production and infrastructure – and therefore have committed to become compliant within the next six months. Importantly, Fulcrum did not feel that this change would detract from future returns for the strategy.
- There are three managers where the underlying investments may not comply with our Policy currently, but there does seem to be a path towards compliance in the medium term future.
- In the case of two emerging market debt managers, the progress on climate transition is generally slower in emerging markets and many nations remain reliant on hard to abate sectors. As such, while there remains today a greater reliance on fossil fuels, these fund managers feel that supporting these economies is an important part of a Just Transition. There is, however, a path for compliance over the medium term, which will require ongoing engagement.
- In the case of the third manager, a specialist in structured products, they invest some of their fund in third-party managed collateralized loan obligations (CLOs) as a part of their mandate. Each CLO contains about 100 individual line items, of which they do not always gain full scrutiny prior to investment when investing in primary markets – an important component of their investment process. Fulcrum is engaging for us with the manager in question, but we acknowledge the limitations in this respect.
- One manager was not fully compliant, but the nature of their investment process – where every investment the manager makes is positively aligned with at least one of seven impact criteria – renders it a strategy we would like to explore in greater depth to assess the real-world impact.
- Finally, one manager suggested they cannot guarantee compliance with our Policy, and do not wish to constrain their investment strategies by agreeing to comply in future.
This engagement process provided an opportunity for the Fulcrum team to further discuss underlying fund managers’ assessments of the financial risks of climate change with them and explore how this is taken into account in their investment strategies. As might be expected in this fast-evolving area, relative manager convictions evolve over time and the engagement Fulcrum has undertaken on our behalf has brought some interesting reflections to light which will help inform their research going forwards.
Reflections on the engagement process
Clearly this is a complicated picture, where asking an apparently simple question has led to many varied responses and approaches. We feel this is a small illustration of some of the complexity involved in shifting the investment management industry towards a more sustainable future for the planet.
We were particularly pleased that one of the underlying fund managers has already agreed to comply with our updated Investment Policy by no longer investing primary market capital for fossil fuel production and infrastructure. This is an example where a change in one small institution’s Investment Policy has shifted investment practices and led to a real-world impact – even though we are invested in a pooled fund and do not have full influence over the way it is invested. This is the type of impact we were hoping to achieve when we updated our Investment Policy.
We are also pleased that there is a clear opportunity to influence three further managers in the medium term to no longer provide primary market capital for fossil fuel production and infrastructure. Whilst we would prefer them to comply more immediately, we do have to recognise that there are reasons why they cannot commit to this yet. We recognise that the impact of our updated Investment Policy does not have to be immediate; this is the start of a conversation, and we – both John Ellerman Foundation and Fulcrum – believe that there is still room for change. We will be working together to put in place a plan outlining how we will continue to engage with these fund managers.
This process has been a useful one for the team at Fulcrum. It has empowered them to have important conversations with underlying fund managers because a client has asked for them. This process also means that we now have a much clearer understanding about DLA’s alignment with our updated Investment Policy and it is reassuring to know that Fulcrum have taken a lack of alignment seriously.
Conclusions
I joined John Ellerman Foundation in May 2024 as their Head of Research and Impact, shortly after the current version of the Investment Policy was signed off. I began by seeing compliance with our Investment Policy in very black and white terms, and as something that could be easily assessed. This experience has helped me to understand why the reality can sometimes be more complex. As an asset owner, we have influence over the ways our money is invested but there are nonetheless limits to that influence, particularly when investing in pooled funds. But moving funds into segregated accounts cannot be the whole answer; it can limit our ability to create meaningful change in the wider industry, or on the way money is invested outside of our own.
Sustainability is a central part of Fulcrum’s due diligence when researching managers. But the industry has evolved from one where exclusions have been the backbone of responsible investment, to prioritising engagement and driving change – and this case study is an example of that. In most circumstances, engagement can contribute more to real world change than divestment; it is difficult to influence change when there is no “skin in the game”. On the other hand, divestment constitutes a series of trade-offs from a financial, social, moral and political perspective and, in extremis, can be a credible and powerful tool in the engagement approach. One of the most powerful ways to shift behaviour in the investment industry continues to be moving capital away from fund managers or companies which do not align with our aims, values, and/or investment beliefs.
We have learnt that advocating for change in a fund of funds takes time, diligence and patience – and requires working together with a fund manager who understands your position and has a willingness to change, as far as they are able. We are cautiously hopeful that patience and perseverance can pay off incrementally, if and when asset owners actively use their influence to drive changes that have a greater impact than on the investment of their own funds alone.
This blog has been jointly written by John Ellerman Foundation and Fulcrum. At Fulcrum’s request we are including this disclaimer. Any views and opinions expressed are for informational and/or similarly educational purposes only and are a reflection of the author’s best judgment, based upon information available at the time obtained from sources believed to be reliable and providing information in good faith, but no responsibility is accepted for any errors or omissions. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Some of the statements may be forward-looking statements or statements of future expectations based on the currently available information. Accordingly, such statements are subject to risks and uncertainties. In no case whatsoever will Fulcrum be liable to anyone for any decision made or action taken in conjunction with the information and/or statements in this blog or for any related damages. Reproduction of this material in whole or in part is strictly prohibited without prior written permission. All rights reserved.