Bank of America Pension Opts for DIY Sustainable Strategy

Frustrated with off-the-shelf ESG products, Bank of America Merrill Lynch’s U.K. retirement scheme is building its own sustainable investment strategy and seeking an asset manager to run the fund.

The decision follows similar steps taken by major asset owners worldwide, including the Taiwan Bureau of Labor Funds and New Zealand Super Fund, according to index provider MSCI.

The BAML retirement plan has partnered with investment consultants Aon and Willis Towers Watson to create an alternative to its current global equity fund, with bespoke environmental, social, and governance filters. The fund will initially be offered to members as a choice on the scheme’s defined contribution platform, but could become the default global equity investment option if it proves popular.

Speaking to Institutional Investor, Skip McMullan, chair of the Bank of America Merrill Lynch Pension Scheme, said the fund decided to create a bespoke strategy because the existing “off-the-shelf” strategies don’t meet their selection criteria.

“In our view, and in the view of our consultants, there isn’t something that we feel is sufficiently broadly-based, in terms of screening parameters, that would meet our requirements,” he said.

McMullan, who sits on the board of the Lancashire and London Pensions Partnership and the London Pensions Fund Authority, said investors were increasingly hearing “more noise” about sustainable and socially responsible investing. This led the BAML scheme to question investment managers more closely about what they do “not just in the governance space, but from an environmental and social point of view,” he said.

Currently, nearly half of all investors believe that sustainable investing comes at a cost, according to a Schroders poll of global asset owners released earlier this month.

[I.I. Deep Dive: ESG Focus Dents Returns, Investors Fear]

For BAML’s custom strategy, Aon and Willis Towers Watson have designed a bespoke filtering process to identify the assets that meet the scheme’s ESG standards, while MSCI has been working on creating an underlying benchmark for the new strategy.

According to MSCI, the NT$3.39 trillion ($122 billion) Taiwan Bureau of Labor Funds recently mandated an initial tranche of $2.4 billion to its bespoke strategy, while the NZ Super Fund used a custom index as a reference portfolio for its $10 billion in passive global equities investments.

Christine Chardonnens, an executive director at MSCI, told Institutional Investor that investors place great emphasis on the quality of the underlying data for ESG strategies.

“Investors choose benchmarks and methodologies that have objective and transparent selection criteria [and] complete representation of the underlying universe and strategy,” she said.

At last week’s Pensions and Lifetime Savings Association conference in Manchester, a live poll of around 50 delegates, conducted by Aon, found that 65 percent of pension trustees thought that ESG factors would become a “fundamental determinant of defined contribution investment strategies in the future.”

Aon declined to comment on its work with the BAML scheme. Willis Towers Watson was unable to comment at the time of publication.