Future Fund’s deputy CIO: We’re placing ‘more emphasis’ on ESG

Australian sovereign fund's executive tells conference investors must adapt and improve their processes to keep up with the influx of capital into private equity

Future Fund, Australia’s sovereign wealth fund, is putting managers under greater scrutiny about how they handle environmental, social and governance issues in their portfolios.

Speaking on Wednesday in Melbourne at the Australian Investment Council Conference, which was broadcast online, deputy chief investment officer Wendy Norris told delegates that investors must improve their investment processes to keep up with the influx of capital into the private equity.

“Asset owners face higher scrutiny,” she said. “And as we seek to be a responsible investor through the investments we make, we place more emphasis on understanding the way our managers engage with their investee companies about their social and environmental impacts.”

According to PEI’s LP Perspectives Survey 2019ESG was a “major consideration” in fund due diligence for only one-third of LPs, with the remainder reporting that ESG issues were of minor or no concern at all. Two-thirds believed GP investments reflected their ESG policies only “somewhat” and just 19 percent reported that their ESG outlook was strongly aligned with manager practices.

The Melbourne-headquartered Future Fund now manages more than A$200 billion ($137 billion; €124 billion) across six public asset funds. In recent years, it has received additional government funding via the A$3.9 billion Future Drought Fund, the A$2 billion Aboriginal and Torres Strait Islander Land and Sea Future Fund, and the Medical Research Future Fund.

Around 16 percent of its portfolio is allocated to private equity, Norris said, noting that the asset class was becoming an increasingly important consideration in portfolio construction.

“Capital availability is like a pendulum,” she said. “While it is very favourable towards managers right now, we know this will swing back at some stage, and those who treat us well when capital is abundant will find us to be a great partner through leaner times.

“We are always seeking strong and consistent investment processes, which value diversity as a perspective and that limit downside risk without cutting off the opportunity for the outperformers that significantly influence fund performance. We also value robust fund manager business structures, with considered sharing of economics and thoughtful team development and succession planning.”

Future Fund launched a review of its organisational structure last year to reinforce its investment process, technology and risk management. This resulted in the appointments this year of Norris as deputy CIO for private markets; of two additional deputy CIOs for public markets and portfolio strategy; and of Alicia Gregory as head of private equity.

Gregory’s appointment followed the departure of three senior members of the private equity team in December 2018. Among these was former private equity head Steve Byrom, who went on to launch Potentum Partners, an investment consultancy and fund manager.

Future Fund is one of Australia’s most enthusiastic alternatives investors. It allocates around 45 percent of its portfolio to private equity, debt, timberland, infrastructure property and other alternatives. Its allocation to private equity far exceeds the 4 percent average for superannuation funds in Australia, according to AIC data.

Sovereign wealth funds’ appetites for alternatives have been on an upward trend over the past five years, with investors having an average allocation of 21 percent, according to an August survey from Invesco. Private equity and infrastructure remained the largest sub-sectors and registered further increases this year to 6.9 percent and 2.7 percent respectively.

“In the private equity market, we see fund managers that are awash with capital striving to deliver the same returns they have delivered in the past,” Norris said. “In the past, managers could buy almost any company, add some leverage and sell it in a few years’ time at a comfortable profit. Today’s market requires them to take every opportunity to add value at every stage through the life cycle of an investment.”