The 2021 survey highlighted that while ESG adoption remains near peak levels amongst institutional investors globally, there is a sizable group of institutional investors (29 per cent) who have placed greater emphasis on ESG considerations as a result of the Covid-19 pandemic. These investors are also the most vigorous supporters of ESG as an enabler of investment performance, as nearly all of this group (97 per cent) believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios, a significant difference compared to the overall global respondents who said the same (83 per cent).

Among this same group of investors who have strengthened their commitment towards ESG incorporation as a result of the pandemic, 80 per cent believe ESG integration helps generate long-term sustainable alpha (versus 51 per cent of the total respondents), and 88 per cent believe that ESG integration helps mitigate risk (versus 61 per cent of the total respondents). In addition, this group had the strongest opinions on the diversity of corporate boards, with 70 per cent saying board gender diversity targets should be adopted (versus 47 per cent of the total group).

While the number of investors who use ESG appears to have plateaued over the past several years, there remains a geographic divide when it comes to adopting ESG principles. European investors remain most committed to ESG adoption for the fifth straight year, with 96 per cent of European respondents using ESG in their investment approach. In contrast, US investors remain the most skeptical, with just 64 per cent of respondents using ESG. Although a strong majority of Canadian investors adopt ESG principles, this year saw a slight decrease, as 81 per cent of respondents said they used ESG principles – still a strong majority but down from 89 per cent last year. Asian investors continue to show an increase in ESG adoption, with 76 per cent of respondents using ESG principles this year, compared with 72 per cent in 2020.

“The findings suggest that for the most ESG committed investors, the Covid-19 pandemic has highlighted the critical importance of hardwiring environmental sustainability and social equality into their investment process,” says My-Linh Ngo, Head of ESG Investment and Portfolio Manager at BlueBay Asset Management LLP. “The pandemic has impacted governments, companies and individuals in unprecedented ways, and it will continue to reshape how society and the economy operates going forward. We think this presents a unique opportunity for investors to review and recalibrate how they incorporate ESG considerations into their investment practices.”

“Over the past five years, our data has clearly demonstrated that institutional investors are convinced of the merits of ESG adoption, and are committed to incorporating ESG in their investment approach to help mitigate risk and generate long-term sustainable alpha,” says Melanie Adams, Vice President and Head of Corporate Governance and Responsible Investment at RBC Global Asset Management. “In a year where ESG risks such as Covid-19, high profile cyber breaches and climate-driven weather events dominated headlines, it will be interesting to see how perceptions toward ESG will continue to evolve.”

However, the unprecedented nature of the market volatility should encourage DC schemes to assess the resilience of their default funds allowing them to derive and implement suitable measures to improve member outcomes.

As an established annual compendium of statistics, The DC Future Book provides insight into the current state of DC workplace pensions and their likely direction of travel. Since 2015, the publication has been tracking DC membership rates, contribution levels, pot sizes, auto-enrolment milestones, investment allocation trends and much more.

The newly released data shows that in the 12 months to the end of June 2021, aggregate DC assets have grown from GBP471 billion in 2020 to GBP490 billion.

In addition, there are now around 13.7 million active members in DC workplace pension schemes, around 8.7 million of these are in master trusts, while 10.5 million employees were automatically enrolled by 1.87 employers. This is nearly twice as many employees as those recorded in 2015 (5.4 million).

The number of employees found ineligible for automatic enrolment grew, reaching 10.1 million, compared to 9.8 million in 2020. This is likely to be linked to the impact of Covid-19 and employees earning less, working part-time or being on furlough.

The median DC pot size meanwhile tands at GBP11,400, an increase of GBP1,800 between 2019 and 2020. This shows a continued positive trend and is due to existing members being enrolled for a longer time. The median DC pension pot size at State Pension age stands at GBP38,000.

The number of DC pots accessed decreased by 36 per cent declining from 433,000 in 2019 to 277,500 in 2020. There was a marked fall in the number of pots being fully withdrawn (bottoming at 134,500 in 2020 compared to 252,000 in 2019), suggesting that savers were cautious about accessing savings during a period of volatility. On the other hand, partial withdrawals increased slightly to 232,000 over the last year, compared to 222,000 in 2019.

Assuming current trends continue, by 2041 there could be 15 million active DC savers. Aggregate assets in DC schemes could grow to around GBP995 billion and median DC pension pots could grow to around GBP63,000.

Lauren Wilkinson, Senior Policy Researcher at the Pensions Policy Institute, says: “The long-term nature of pension investments, and the pragmatic approach taken by many DC schemes and savers in response to uncertainty and volatility, mean that the DC schemes have been less impacted than other areas of the economy and society more broadly. However, it remains to be seen what the longer-term impacts of the pandemic will be on investment, employment, policy and individual saving behaviours.”

Michaela Collet Jackson, Head of Distribution, EMEA at Columbia Threadneedle Investments, says: “While the Covid-19 pandemic has had a major impact on societies and economies, it did not halt positive trends we have been seeing in the UK DC market for some time, including growth in aggregate assets and median DC pot sizes. Similarly, due to DC schemes’ long-term investment horizons and diversified portfolios they withstood the market volatility and protected their members, a large proportion of whom are invested in default funds.

“However, this is not the time for complacency. A prolonged market downturn could have resulted in a far worse outcome for DC scheme members and their nest eggs. We encourage all pension trustees to use the experience of Covid-19 as an opportunity to work even more closely with their advisers and asset managers to assess the resilience of their schemes’ default funds.”

Valuable lessons include the growing importance of diversification across multiple asset classes, geographies, sectors and the inclusion of illiquid assets. Also, a better understanding of where longer-term returns may be found has allowed more equity-heavy portfolios to benefit from capital recoveries. For example, sectors such as technology and online sales experienced growth.

“The experience of Covid-19 has heightened awareness of Environmental, Social and Governance (ESG) factors, particularly around social issues such as health and labour practices. This shifting emphasis among investors highlights how rapidly ESG issues can evolve, underscoring the importance of trustees being both proactive and flexible in their approach to responsible investment considerations. Reviewing investment strategies is a complex task, but we believe valuable lessons can be learnt to support DC schemes to emerge even stronger post Covid-19,” says Collet Jackson.

The survey found that almost half of respondents (48 per cent) are confident about achieving their three- to-five-year goals but are less certain (24 per cent) of meeting their shorter-term objectives, post-pandemic.
 
Adding to this mixed sentiment, the survey showed that more than 57 per cent of institutional investors agree some industries will not recover, with more than 47 per cent agreeing that Coviod-19 has created investment opportunities and 35 per cent agreeing that markets do not fully reflect the long-term economic impact of the pandemic.
 
When questioned about their top concerns over the next 12 months, 68 per cent of UK institutional investors expressed their fear of a global recession and 52 per cent are worried about the potential formation of market asset bubbles. Unsurprisingly, 55 per cent highlighted high unemployment and 48 per cent growing government deficits.
 
“While there has been an overall recovery in spending as pent-up demand is realised in the UK, the global disruptions across industries, markets and regions stemming from the pandemic have left institutional investors uncertain about the future. This sentiment, against a fluctuating inflationary outlook, demonstrates that a renewed focus on long-term fundamental investing will be key to addressing uncertainty at both the industry and individual security level, post-pandemic,” says Elaine Alston, managing director, UK relationship management team at MFS.
 
“We believe that investment returns in the next decade will be markedly lower than they have been historically. Consequently, skilled active management and the alpha it can provide will play an important role in helping investors achieve the additional returns needed to meet their retirement goals,” she adds.
 
While pandemic disruptions have created uncertainty, 61 per cent of UK institutional investors believe their organisation coped well with the impact of the pandemic, yet many see the larger UK investment industry coming up short, as only 24 per cent agreed that the industry coped as well.
 
As the UK eases restrictions, institutional investors voiced their concern about the ongoing disruption to their day-to-day business activities due to the possibility of a prolonged, remote-service model. While most respondents do not anticipate significant issues, a majority indicate they expect some level of difficulty for a wide range of activities if the status-quo remains, particularly conducting due diligence on investment management firms (72 per cent) and getting timely responses to their inquiries (59 per cent).
 
Active managers have done a better job than passive managers of providing valuable communications and support during the pandemic. Rating the usefulness of pandemic-related support, 56 per cent of respondents said the information received from the active managers they work with in the UK was useful versus only 25 per cent for their passive managers.
 
The human impact of the pandemic has not been lost on institutional investors. Almost three-quarters expressed their concern for the health crisis brought on by the global pandemic. In addition to this, 27 per cent also rated the physical and mental health of staff post-pandemic as a potential challenge over next the 12 months, surpassing similar levels of concern around technology/cyber threats (11 per cent), geopolitical-driven volatility (11 per cent) and pandemic-related business disruptions (15 per cent).
 
“We are heartened to see concern for individual employees showing through among all respondents, here and in other markets, signaling a growing recognition that the well-being of investment and operational personnel supports long-term investment outcomes. Our hope is that this continues as all organisations, not just investment, can learn from the remote servicing experiences of the pandemic as they reconsider the way they engage employees and the industry in order to create value for investors,” Alston says.
 
The notion that institutional investors are putting a greater emphasis on the human element within their own organisations speaks to the growing impact of Environmental, Social and Governance (ESG) factors and sustainable business practices being brought to the forefront as a result of the pandemic. However, it remains to be seen if it will translate to investment action by those same organisations.
 
Consider, almost half of UK institutional investors agree that sustainability will be more important as a result of the pandemic going forward. In support of this, 41 per cent agree the pandemic will accelerate the adoption of ESG investments or strategies.
 
“We continue to see UK institutions engaging us more intensively on sustainability. While the pandemic has exposed significant gaps in the social contract, moving the needle on how to think about and incorporate the consideration of sustainable investing and the material impact of ESG factors into the day to day remains a challenge for many institutional investors emerging from the pandemic,” Alston says.

With Covid-19 top of mind, impacting both operations and investment strategies, the impact of the ongoing pandemic is a major theme running throughout this year’s report.
  
In response to Covid-19, governments rushed to implement policy measures designed to prop up their economies and public services such as health, as well as providing support for businesses and households at a time when tax revenues retreated with depressed economic activity.
 
The impact on public finances led some governments to tap their sovereign wealth funds for capital to fund spending and plug budget deficits with more than a third of sovereigns seeing drawdowns during 2020, including 78 per cent of liquidity sovereigns and 58 per cent of investment sovereigns. 
 
Many sovereign funds had learned the importance of building large liquidity reserves, following the global financial crisis, and were successful in supporting local economies and large companies in need of stabilisation finance. But the scale and speed of withdrawals for those that hadn’t, meant a significant impact on allocations, and led to a rethink on liquidity risk management. This has prompted a shift towards cash, with portfolio cash reserves more than doubling during 2020, as some sovereigns continued to focus on liquidity in anticipation of possible further withdrawals. 
 
However, sovereigns also noted that the pandemic had shone a spotlight on the importance of liquidity more generally, both as a buffer for future black swan events and to afford the flexibility to take advantage of market opportunities when they arise, such as the early run in equities at the start of 2020.
 
The challenge of drawdown also varied across economies and geographies; 57 per cent of funds in the Middle East and 82 per cent in Emerging Markets registered drawdowns, notably due to their predominately commodity-based economies. In Asian and Western markets around a fifth of sovereigns registered drawdowns, with many stepping in to support businesses that might otherwise have struggled to find financing during the challenges of the pandemic.
 
The study also revealed a shift in asset allocation as sovereigns were forced to look elsewhere in the face of falling fixed income yields, as the widespread easing of monetary policy pushed rates lower. Fixed income allocations fell from 34 per cent to 30 per cent as concerns about stimulus-driven inflation returned. The volatility present in markets through the first quarter of 2020 caused an uptick in equites, reversing a two-year trend of declining allocations. Sovereigns increased their allocations by 2 per cent from 2020, rising to 28 per cent. A further 30 per cent of respondents expect to increase their allocation to equities over the next 12 months.
 
Rod Ringrow, Head of Official Institutions at Invesco, says: “Governments, faced with fiscal challenges, have turned to sovereigns to help plug their spending deficits. While some funds were well prepared, others have had to make rapid adjustments to generate liquidity. Sovereigns have also become aware of the importance of maintaining liquidity in order to take advantage of market opportunities as they arise. At the same time, generating sufficient returns in the face of an extremely low interest rate environment is having a substantial and potentially long-lasting impact on strategic asset allocations and perception of market risk.”
  
This study has tracked a significant increase in the incorporation of environmental, social and governance (ESG) principles into sovereign and central banks portfolios since 2017. In just four years the proportion of respondents adopting an ESG policy at the organisational level has increased dramatically, rising from 46 per cent to 64 per cent among sovereigns and from 11 per cent to 38 per cent among central banks.
 
The Covid-19 pandemic broadly acted as a catalyst for sovereigns and central banks to prioritise ESG; nearly a quarter 23 per cent of sovereigns and 45 per cent of central banks increased their focus on ESG as a result of the pandemic. The more mature and experienced an investor is in their ESG integration, the greater the likelihood the pandemic increased their focus on ESG considerations. Of the respondents integrating ESG for at least five years some 50 per cent increased their focus on ESG due to the pandemic.
 
Sovereigns’ ESG commitment is in stark contrast to the attitudes observed in the 2017 edition, which pointed to persistent reluctance by some to pursue ESG considerations at all, let alone during a crisis that exacerbates competing priorities. Yet there are idiosyncrasies arising from differences in the purpose of sovereign wealth funds which influence ESG adoption.
 
For example, liquidity sovereigns are more focused on maintaining liquidity to assist funding budget shortfalls and only 12 per cent of liquidity sovereigns have a formal ESG policy. In contrast 79 per cent of liability sovereigns have an ESG policy, reflecting their longer investment horizons and need to take into account long-term risks such as climate change, as well as a need to reflect the views and priorities of their beneficiaries.
 
Sovereigns have also accelerated their research for sustainable investment opportunities. A growing appreciation of the opportunities in climate-related investments has contributed to a shift in their motivations for ESG integration towards improved investment returns (Figure 6), with 57 per cent of sovereigns believing the market has not priced in the long-term implications of climate change, offering opportunities for alpha.
  
China’s appeal has steadily increased over the past four years, driven by attractive local returns and opportunities for diversification. In the first few months of 2020 when the implications of the Covid-19 pandemic were still unclear, sovereigns were among those investors making tactical shifts away from markets perceived as vulnerable, including China, to less risky investments, notably the relative quality and safety of North America, and US bonds in particular.
 
The rapid response to the Covid-19 pandemic enabled emerging APAC nations and economies to bounce back, and, as a result 40 per cent of investment sovereigns and 56 per cent of liquidity sovereigns see China as more attractive than pre pandemic level. Increased allocations to the region though came at the expense of Europe, the Middle East and other emerging markets such as Latin America and Africa, which were deemed to have presented a less appealing investment case.
 
Despite China’s growing appeal there are some notable obstacles to investing. 86 per cent of sovereigns point to the rising political tensions with the US as a significant barrier indicating that the tensions are influencing their asset allocation decisions. As well as being the most significant barrier to investment, political risk was the obstacle most commonly cited as having changed for the worse in the past two years.
 
Other obstacles investors noted include the inability to convert RMB (cited by 50 per cent of sovereigns), a lack of alignment of investments with ESG considerations (45 per cent) and the comparative lack of investor rights (41 per cent).
 
Looking ahead the study found that in 2021 sovereigns expect to finance increased allocations to China both with new capital and by drawing on North America and Developed Europe allocations. The rise of China as an economic and political powerhouse with favourable consumer themes – including an emerging middle class and a highly digitalised economy – all contribute to the prospect of attractive local returns for sovereign allocations. The survey found that 75 per cent of sovereign’s were attracted to invest in China due to the prospect of attractive local returns, a further 57 per cent saw China as an important portfolio diversifier.
 
Many investors remain bullish on China and are looking to build on existing allocations. Over the next five years 40 per cent of sovereigns plan to increase allocations, including 71 per cent of liquidity. A liability sovereign explained that China still offers the largest markets for sustainable energy, infrastructure, and development property and 32 per cent of liability sovereigns plan on increasing allocations to China over the next five years.
 
Ringrow says: “China’s increasing appeal comes from improved access and growing opportunities for attractive returns. This is being buoyed by innovations in areas such as technology and increased openness to foreign investment in sectors such as infrastructure. Chinese companies are making improvements in addressing environmental issues. However, transparency around corporate governance continues to be an area of concern and a rise in operational obstacles demonstrates the unique nature of the Chinese market.”
 

The survey and forthcoming report, Covid-19, One Year Later – Capital Markets Entering Uncharted Waters, follows the analysis of member sentiment reported in 2020. Market volatility appears to be a lesser issue in 2021 compared to a year ago. While 26 per cent of members surveyed reported that market volatility had forced their firm to reconsider asset allocation choices in April 2020, only 18 per cent responded in the same way in March 2021.
 
“It is interesting to see the survey results telling us that respondents believe that equities have recovered too quickly, as it could show that CFA Institute members believe there is a disconnect between economic growth fundamentals and capital markets caused in part by monetary stimulus, which could be corrected in a not-too-distant future of less than three years,” says Paul Andrews, Managing Director of Research, Advocacy and Standards at CFA Institute. “To me, it also indicates to authorities that monetary stimulus is not a simple or linear lever to pull given the complexity of the economic and financial ecosystem; there will be unintended consequences to consider in the future.”
 
The proportion of respondents who believe that equities are fairly valued is low in all regions (between 2 per cent and 16 per cent):
 
Respondents in North America (the United States, in particular) are more worried about a correction than Europeans (50 per cent vs 40 per cent), which can be explained by the pace of equity markets’ recovery in both regions since March 2020.

Respondents in emerging markets appear more optimistic that equities in their own market and in global emerging markets will gradually stabilise in line with the real economy, which is not a view they share for developed market equities.

Many perceive that global developed market equities are more overvalued than those in global emerging markets, likely due to the variations in monetary stimulus and government relief programs enacted in different parts of the world.
 
Of the 6,040 global respondents, members’ position on volatility has changed markedly from a year ago, possibly attributable to the decisive actions of authorities to tame potential market dislocation through policy intervention and monetary stimulus.
 
In March 2021 28 per cent of respondents were investigating the potential impact from market volatility, in comparison to 42 per cent in April 2020.

Some 48 per cent of respondents now think volatility did not have a material impact on their activity or that of their firm (32 per cent in April 2020).
 
The proportion of respondents who indicated that volatility has had a significant impact fell from 26 per cent to 18 per cent globally. 

Further analysis suggests that emerging markets across all regions have experienced the effects from market volatility more significantly, as they did not benefit from the same level of government support as seen in advanced economies. Respondents in Africa (37 per cent), Latin America (29 per cent), Middle East (38 per cent), and South Asia (33 per cent, including India and Pakistan) continue to show a more significant impact from volatility on their investment processes and asset allocation choices.

In a new white paper, “Managing through a Pandemic: The Impact of Covid-19 on Capital Markets Operations”, buy and sell-side firms reported that, while their post-trade operations (Ops) and operations technology (OpsTech) proved largely resilient during the pandemic, several key challenges emerged as market volatility surged throughout 2020. T 

The study was conducted with research assistance from McKinsey & Company, and was based on insights from Ops and OpsTech professionals at 35 buy and sell-side firms.  

The top areas of focus highlighted were:  

• Cash fixed income and cash equities were most impacted by the pandemic-induced market volatility, with 30-35 per cent of firms across the buy-side and the sell-side reporting operational post-trade processing challenges in these asset classes. 
• From a processing perspective, settlements/payments and collateral/valuations were impacted the most, with 58 per cent of sell-side firms reporting challenges in settlement and payments during the peak of the pandemic. 
• Buy-side firms typically experienced less disruption to post-trade processes than sell-side firms due to simpler operational models, with the sell-side reconciling breaks and settling trades across hundreds of counterparties. 
• The sudden transition to a work-from-home operating model was achieved almost seamlessly, and in most cases within a matter of days, due to the ability to implement tactical changes to operating models.  

Respondents cited that efforts made in recent years to re-engineer and automate processes and upgrade technology platforms were the main reason for firms’ resilience during the pandemic and their ability to manage an unusually prolonged business-continuity planning (BCP) event. A significant majority of respondents stated that the pandemic validated their Ops priorities and investment plans.  

Michael Bodson, President & CEO at DTCC, says: “During, and in the immediate aftermath of the Covid-19 pandemic, the industry remained resilient, with buy and sell-side firms working seamlessly to support unprecedented volumes and ensure uninterrupted trading for clients and underlying investors. However, opportunities remain for further optimizing post-trade processes across the capital markets.”  

The survey highlighted that while the pandemic did not create an impetus for change in Ops and OpsTech due to largely resilient operations, a consensus emerged around where firms should focus next:  

• Sell-side and buy-side firms are aligned on the need to further simplify and standardize a sub-set of post-trade services which were hardest hit. For the sell-side, these include making enhancements to reconciliations and confirmations capabilities, while the buy-side prioritized an increased focus on fails and collateral management. 
• More than half of firms who responded to the survey plan to increase capacity, build new capabilities or re-engineer post-trade processes. Respondents highlighted the need for a continued focus on shortening settlement cycles due to the impact of the unprecedented trading volumes and volatility on liquidity and margin. More than 50 per cent of firms plan to increase capacity in support of these processes. 
• The stigma around working from home and productivity no longer exists, with many firms planning to retain part of the remote and flexible working model post-pandemic across post-trade operations.  

Bodson adds: “As the impact of the pandemic continues to unfold, firms must keep their focus on delivering continued improvements to efficiency, while reducing risk. At the same time, to unlock new sources of value and remain relevant to clients, a focus on innovation will be essential. The industry will need to embrace collaborative approaches, common processes, best practices and deploy operating models that continue to meet the evolving needs of market participants.” 

Based on the views of alternative managers, law firms and advisors from across North America, Europe and Australasia, including some of the world’s largest investors in alternatives, the research for this new report – entitled ‘The Future of International Fund Domiciliation 2021’ – was carried out between October 2020 and February 2021. Building on the first IFI Global report in this series, published in April 2020, which found that investors and managers want stability when it comes to fund domiciliation, this new report explores how investor and manager attitudes have changed in light of some key developments in the investment space landscape over the past twelve months, including ESG acceleration, Brexit and regulation.  

Overall, the survey found that investors continue to be the key driver behind domiciliation decisions, and they want to allocate to funds that are domiciled in well-known jurisdictions that have a good reputation. In addition, however, the survey found that there are differences in what UK and US managers consider to be their priorities in domicile selection. While the majority of UK managers need funds to be domiciled in jurisdictions that meet a certain regulatory threshold to meet EU investor expectations, US managers said that, aside from familiarity, cost considerations and local regulatory requirements matter most to them.  

Among the report’s other key findings were:  

• 69 per cent of all interviewees believe that ESG considerations will play a growing role in their decision-making, including domiciliation 

• Investors are generally more interested in ESG than managers – 100 per cent of investors thought including ESG criteria in the selection of fund jurisdictions and service providers will become more important in the future, compared to 74 per cent of managers, with most of those who said no being based in the US  

• Just 12 per cent of all interviewees believe it would be beneficial for there to be an agreed international standard of regulation for ESG, with most suggesting that jurisdictions should develop their own ESG regulatory standards  

• 37 per cent of managers did not see any real opportunity for growth in EU markets. There is much more interest in the US and Asia-Pacific region.  

• Covid-19 has not impacted fund domiciliation patterns but, should travel restrictions continue beyond this year, it may very well begin to affect domiciliation  

Elliot Refson, Head of Funds at Jersey Finance, says: “The previous study we supported just over 12 months ago was clear in its conclusions –  that investors are key influencers in domiciliation decisions and that they prize stability and jurisdictional reputation. While that message remains fundamental to domiciliation today, there is no ignoring how much has happened since the collation of that research. 

“As this new analysis shows, the rise of ESG, Brexit, and evolving substance demands, coupled with a business environment emerging from an unprecedented pandemic, are new factors that are increasingly shaping domiciliation, with diverging attitudes between North America, Europe and Asia all creating a picture that is more complex than ever.  

“The findings of this new study provide a valuable insight into the thinking of alternative managers and investors at a time of unprecedented change and underline just how important it is for Jersey, as a forward-thinking specialist fund centre, to stay focused on providing a straightforward, investor-friendly platform.”  

Simon Osborn, CEO of IFI Global and author of the report, comments: “2020 was certainly an eventful year for the international asset management industry and the pandemic was just one of several reasons for this. ESG, Brexit, EU blacklists, and related issues such as BEPS and demands for yet more substance in all fund jurisdictions, are also having – or threaten to have – an impact on future domiciliation decisions. Domiciles need to be alive to these trends if they are to continue to serve the needs of investors globally.” 

Bowmore Asset Management’s research is based on a consensus of analysts’ views on how dividends will increase over the next year.
 
Bowmore Asset Management says many FTSE 100 companies took conservative approaches to dividends in 2020 to ensure their balance sheets weren’t put under too much pressure during the early stages of the coronavirus crisis.
 
Banks and oil & gas companies, two of the UK’s largest dividend paying sectors historically, were among the sectors to cut dividends the most aggressively in 2020, alongside the industries hardest hit by the lockdown restrictions, such as travel & leisure and commercial property. Banks were forced to suspend dividends at the height of Covid-19 crisis last March, with regulators believing they could have difficulty lending if dividends were continued to be paid.
 
HSBC and BT were among the largest FTSE 100 dividend payers to cut dividends in 2020, with each cancelling payments totalling more than GBP3 billion.
 
With the economy beginning to recover, many companies, including banks who have been allowed to resume dividend payments, are now announcing higher dividends to be paid this year. Barclays and Royal Dutch Shell are among the companies to already announce dividends to shareholders in 2021.
 
Charles Incledon, Client Director at Bowmore Asset Management, says: “It is hugely encouraging to see FTSE 100 dividends expected to rise this year. With the recent success of the UK vaccine roll out, the UK economy is now earmarked for a quicker and stronger rebound than was previously expected. As a result, investors should be able to look forward to more blue-chip companies announcing increased dividends in the months ahead.
 
“However, all investors would be wise to check whether a share’s dividend is well-covered by a company’s forecast earnings. Those companies that still have an unsustainably high dividend policy may not be bailed out by a recovering economy.”
 
“The ability of the large oil and gas companies to keep growing their dividends is heavily dependent on the price of oil. Investors will, therefore, need to keep an eye on global economic growth in the months ahead. Investors may also want to keep an eye on the banks’ loan books to see whether they start to deteriorate in the coming months.”
 
“The FTSE 100 has a strong reputation for providing investors with high yielding shares, attracting shareholders who are looking for that additional income. That reputation was dealt a severe blow by the lockdown and the economic shock it created. However, it does look like we are gradually returning to normal and that’ll go a long way to rehabilitating the reputation of the FTSE 100 providing steady dividend growth.”
 

2020 was an exceptional year for engagement. In March 2020 LGIM wrote to companies with constructive suggestions about how they could cope with the unfolding pandemic and resulting lockdowns, from supporting employees to raising capital. In addition to increasing focus on topics such as executive pay, board governance and income inequality, stewardship efforts have continued to shine a light on companies’ gender and ethnic diversity as well as the longer-term threat of climate change. 

In 2020, LGIM expanded its UK Principles of Executive Pay to highlight that it will increase scrutiny of those companies that have received support from government or shareholders – via additional capital or suspended dividends – or those that made staff redundancies, but continued to pay director bonuses
 
LGIM was involved in 145 separate remuneration consultations – up from 96 in 2019 – covering policy changes to be put to shareholders at 2021 AGMs and additional uncertainties around the COVID-19 pandemic. In 2020, there were 341 proposals to adopt new remuneration policy at UK companies, with LGIM voting against the adoption of 128 (37.5 per cent). Of those, 82 (64 per cent) related to policies with post-exit shareholding requirements that did not meet LGIM’s pay principles.
 
In addition, LGIM asks all investee companies to ensure they are paying a living wage, or the real living wage for UK-based employees, and to ensure that ‘Tier 1’ suppliers are paying the living wage. Of the FTSE 100, including those it has engaged with, 43 companies are now paying the real living wage.
 
At the start of 2020, LGIM announced its decision to vote against all companies where the roles of board chair and CEO were combined and over the course of the year, it voted against 411 companies with joint chair / CEOs. In North America alone, it voted against 280 directors with combined roles, and supported 42 shareholder proposals calling for an independent chair.
 
Sacha Sadan, Director of Investment Stewardship at LGIM, says: “The Covid-19 pandemic brought into sharp focus the need to take action now to address the threats facing our societies, , our message to companies has been clear – focus on all stakeholders, not just shareholders. Climate change continued to be a central topic of engagement, as despite drastic lockdown measures globally, the world is still a long way from reaching net-zero carbon emissions. The pandemic and the events of 2020 have exacerbated many of the social issues that we have been increasing engagement on for many years, including inequality and ethnic diversity.” 

LGIM has increased its engagement on diversity issues in 2020, launching high-profile campaigns to drive greater ethnic diversity within boards, while engaging on gender and leadership diversity in Japan. Over the course of the year it:
 
Voted against 10 Japanese companies including Olympus, Central Japan Railway and Kubota for failing to have a woman on their board. The scope of LGIM’s policy will expand to both the TOPIX mid400 companies and TOPIX 100 companies from 2021.

Engaged the 44 S&P 500 firms and the 35 FTSE 100 companies whose board membership showed a total lack of ethnic diversity. From 2022 LGIM will vote against the chair of the board or of the nomination committee is there is still no ethnic diversity at board level.
 
Sadan says: “Cognitive diversity in business is a crucial step towards building a better economy and society, but it is also financially material. There is a growing acceptance that more diverse organisations make better strategic decisions, show superior growth and innovations, and exhibit lower risk. We are already seeing the positive results of our engagement on ethnic diversity at a board level and we hope to look back at 2020 as the start of a step change on this issue.”
 
The report highlights LGIM’s strong voting stance, with more votes cast in support of shareholder resolutions on diversity, human rights or climate change than the majority of its peers. In 2020 LGIM have also strengthened their disclosures with a new platform publishing voting decisions the day after the vote[i]
 
Climate change remained the topic on which LGIM’s Investment Stewardship team engaged most frequently with companies in 2020 with 407 engagements, an increase of 63 per cent on 2019. In addition, LGIM has sought to strengthen its climate analytics and solutions for clients, including:
 
Expanding its Climate Impact Pledge engagement programme to a larger number of companies, with voting and divestment sanctions applied across more funds for companies falling short of minimum standards:

• Publishing on LGIM website climate change disclosures for global companies
• Strengthening the way fund managers and analysts use climate data and expertise, leading to tangible investment actions
• Expanding its range of low-carbon investment solutions, including clean energy, fossil-free strategies developed with leading asset owners and products that overweight green bonds and the debt of companies with better ESG scores
• Continued advocacy for policies supporting ambitious climate action and a ‘green’ recovery
• Developed a new climate risk framework, Destination@Risk, allowing LGIM to quantify the physical and transitional risks within investment portfolios under a variety of climate scenarios, including a below 2°C scenario in line with the Paris Agreement.
 
Sonja Laud, CIO at LGIM, says: “There is a pressing need to build climate resilience in the financial system, a process already underway at LGIM, not least through our net zero targets. ESG must be integrated and impact considered alongside the traditional metrics of risk and return. Our framework for responsible investing is based on stewardship with impact and active research across our different asset classes. This enables early identification of potential risks that threaten sustainability of returns.”
 
This comes as the Legal & General Mastertrust and its default defined contribution (DC) pension funds announce a roadmap to net zero emissions by 2050, targeting -50 per cent carbon intensity by 2025 in the main default.

In 2020, LGIM continued its longstanding policy advocacy, engaging with global policymakers and regulators on over 30 topics focused around three key areas: corporate governance and stewardship standards, achieving the Paris Agreement and net-zero targets and sustainable finance policy and regulation. As the UK prepares for the crucial COP26 conference in Glasgow this year, LGIM’s CEO is co-chairing the Business Leaders Group alongside the COP26 president, thus continuing our efforts to galvanise policy and business action on climate.
 
Michelle Scrimgeour, CEO of LGIM, says: “Asset managers have a crucial role to play in tackling the challenges presented by this era of uncertainty, many of which have been heightened by Covid-19. We will continue to use our influence and scale to ensure that major issues impacting the value of our clients’ investments are recognised and managed appropriately. This includes working with policymakers and regulators and collaborating with asset owners on ESG-related policy and regulatory developments to bring about positive change and inclusive capitalism.”

The Covid-19 crisis threw a spotlight on renewables, with energy price volatility highlighting the sensitivity of renewable energy assets to merchant power prices while, at the same time, reduced energy consumption provided a glimpse into a future where renewables represent a greater proportion of global power generation.
 
Asset managers in renewable energy infrastructure – an increasingly numerous group with over 65 strategies now available – have not reduced return expectations amid today’s more competitive climate. Instead, the strategies available to investors have evolved substantially, with key trends including greater exposure to development risk, use of less conventional technologies, investing in new geographies and greater specialisation.
 
These are the key findings from bfinance’s new report, ‘Renewable Energy Infrastructure: Lessons from Manager Selection’.
 
According to the report, demand for renewable energy infrastructure has continued to rise with investors driven by ESG related priorities or drawn by the opportunity associated with the energy transition. A growing number of institutional asset owners are seeking ESG-related ‘thematic investments’ and/or ‘impact investments’ that explicitly aim to deliver positive non-financial outcomes. bfinance data shows that 34 per cent of investors in real assets (infrastructure and real estate) are involved in thematic investing, with a further 20 per cent considering doing so.
 
The report touches upon the trend among asset owners towards assessing portfolio carbon emissions and creating targets around reducing those emissions – a practice that can support demand for carbon-offsetting strategies such as renewable energy infrastructure. Recent data from bfinance shows that 46 per cent of asset owners globally are now assessing portfolio carbon emissions, versus just 13 per cent three years ago, and a further third are “actively considering” doing so.
 
bfinance’s report highlights the considerable growth in the number of funds available to investors in renewable energy infrastructure, with more than 65 strategies fundraising as of early-2021 compared with approximately 50 in 2019. Strategies are classified in a variety of ways including by geography, where Europe remains the most popular region, and by sector focus where the report notes a rising number of strategies now focused on ´energy transition´. Offerings also be classified by overall risk profile – ‘Commoditised’ strategies with very well-established technologies and low development risk at one end of the spectrum; ‘Frontier’ strategies at the other.
 
The report highlights that due to a general reduction in the expected returns, particularly for conventional technologies in new markets, managers have been evolving their strategies to remain attractive. There is an increasing trend of managers prepared to enter projects during the development phase. Some managers are expanding the geographical remit, such as adding Central and Eastern Europe or developed Asia. Many are incorporating newer technologies, such as offshore wind, rather than focusing purely on the more conventional sectors of onshore wind, solar and hydro. bfinance´s report also notes a growing number of strategies targeting less-well established themes associated with the energy transition, such as smart meters, electric vehicle charging or grid stability projects. A notable emerging trend is the use of batteries paired with renewable energy generation projects.
 
According to the report, as greenfield investment becomes mainstream, it is important to distinguish between construction risk and development risk. Renewables differ significantly from other types of infrastructure investment in this regard: construction periods in mainstream infrastructure can often be longer than the development phase, whereas the construction lead-time for conventional renewable technologies is now relatively short. As such, construction premia have fallen considerably – particularly in Western Europe, where the difference between operational projects and those that are ‘shovel-ready’ translates to a premium of about 25-50 bps for solar and 50-150bps for onshore wind.
 
Although all risks should be handled with care, the report highlights that it is worth paying particular attention to the subject of how exposed investors are to merchant power price risk. With the decline of subsidy-led economics in renewable energy generation, managers now often point to corporate Power Purchase Agreements (PPAs) as the secure foundation for revenues but not all PPAs are created equal.
 
While ESG standards are generally improving in this asset class, the report does note differentiation between managers who rest on the argument that renewables represent a visible form of ESG in action versus those who are more committed to the broader ESG picture. The authors point towards asset managers that talk about their ESG capability but have no ESG sections in their Investment Committee papers, and even managers receiving ESG-related industry awards who have been found lacking when it comes to ESG integration in their investment process. Careful analysis is needed to distinguish between substance and style.
 
Anish Butani, Senior Director at Private Markets at bfinance, says: “Although renewables seem to be the way forward for global energy production, we are now entering a new phase for the emergent asset class of renewable energy infrastructure. The economics of this asset class are fundamentally changing with the overall withdrawal of subsidies and the development of the technologies. With more competition than ever, both from a fundraising perspective and an investment perspective, managers are having to be creative and adapt to the new climate.”