Talking Sustainability with Emily Forsyth-Davies

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Om Jain interviews Emily Forsyth-Davies. Emily is an actuary who currently works as the Head of ESG at Aurum Research Limited, a UK subsidiary of Aurum Fund Management Ltd. (“Aurum”), a specialist investment manager focused on selecting hedge funds and building fund of hedge fund portfolios.

We talk to Emily about her unique career path, her interests in the ESG area, the challenges faced by the ESG sector and what hedge funds are doing to address these issues.

Your career, responsible investment and ESG:

Can you talk briefly about your career to date?

I graduated in 2008, amidst the Global Financial Crisis, which was challenging to say the least. Fortunately, following an internship I joined Goldman Sachs, an investment bank, as an onboarding analyst and during my time there I also pursued a Master’s in Applied Statistics and Stochastic Modelling. Although I very much enjoyed my time there, after 4 years I decided to take a different career path into actuarial work. 

I’d always been interested in becoming an Actuary and decided to leave and become a Pensions Actuary with Aon, a consultancy where I worked for a couple of years building my pensions liability knowledge. 

After making some progress with the exams, I then moved on to become an Investment Actuary and worked with River and Mercantile Solutions, an advisory and asset management firm. As an Investment Actuary I was able to bring my prior experience and wider skill set from both my investment and pensions actuarial background to the role, which gave me obvious advantages. I worked there for six and half years in the Investment Consulting area and focused the last three and a half years working on ‘responsible investments’ as that was my passion. 

Then I joined Aurum Research Limited in November 2020 as their Head of ESG, a role which I’m really passionate about and really excited about developing further. 

How did you end up focusing on ESG?

I’ve always been passionate about social and environmental issues so when an opportunity arose to work on this area as part of my career it was a natural fit. For example on a personal level I’ve been a vegetarian for more than 20 years; I have always been an avid recycler and have done a wide range of volunteering, from helping at an invasive lionfish removal programme in Belize to being a member of the UK Youth Parliament working to increase young people’s interest in the democratic process and more recently industry speaking and mentoring. So I was able to bring my passion and the knowledge I already had to the role and it just developed from there. 

ESG, Hedge Funds and Challenges:

What are the some of the key challenges working in ESG?

ESG means something different to different people and different industries. There is a lack of consistency of data and views and there has been a very quick evolution in regulation and expectations. For example, a few years ago, pension schemes weren’t very concerned about ESG related factors. But now there has been a clear shift for various reasons, not least of course the Department of Work and Pensions legislation on implementation statements and more recently Task Force on Climate-related Financial Disclosures (“TCFD”) requirements, and wider policy changes. So ESG is now a key topic on pretty much every meeting agenda for this year and beyond. Even companies that aren’t facing investor and shareholder scrutiny are interested as this will become a more important topic in attracting and retaining talent in the future. On the Company side they are keen to ensure their pension scheme objectives are aligned to their wider corporate objectives on ESG and there is a real reputation risk for companies and schemes that don’t take ESG issues seriously.

Initially, ESG was more about the carbon footprint linked to investment portfolios. It has expanded from there to wider topics such as social issues and my expectation is that this will continue to expand through time. 

Hedge funds typically have high yielding investment portfolios. As the Head of ESG, do you face difficult trade-offs between return and sustainability criteria?

It is currently challenging for hedge funds to have strict sustainability criteria for investments. Hedge fund portfolios are typically shorter term and can vary from one day to another, in comparison to a more traditional portfolio, which is usually more static. Hence, you need to look at the sustainability criteria a little differently when thinking about a hedge fund.

From my perspective as the Head of ESG, it is about making sure that the underlying managers are aware of how ESG can enhance risk adjusted returns, for example by:

•    Understanding how ESG considerations can impact stocks in the near and longer term;
•    Looking at ESG related opportunities; and
•    Looking at portfolio themes that relate to ESG trends such as the transition to a low carbon economy and the Paris Agreement. 

What might work for traditional assets cannot always be directly applied to this space, because sometimes it doesn’t quite translate. Hence, it needs to be thought of a little differently.

Is there a role for environmental philanthropy alongside investing?
There is definitely a role for environmental and social philanthropy alongside investing and this is especially important given the growing environmental and social challenges the world is facing. For example, Aurum have the Embedded ImpactTM approach where they make donations from the Management/Advisory Fees from their two Embedded Impact Funds, as well as making charitable grants from a percentage of bottom line profits. 

What are some of the challenges and opportunities facing ESG funds over the next 5 years

From a hedge fund perspective there are two main types of ESG approach, each with its own challenges: 

  • The Exclusion Approach
    • This involves excluding specific stocks and sectors from the portfolio, which means it can be more difficult to outperform the wider market. If you look at it from the market portfolio optimisation theory, if you have a smaller opportunity set mathematically it is harder to outperform.  Many funds do have an ESG positive tilted version of their main fund which includes exclusions of industries considered to be less ethical, but if these are not implemented across the full product range it can indicate a lack of conviction in this approach.
       
  • ESG Integration Approach
     
    • This involves incorporating ESG information into investment decisions to help enhance risk adjusted returns. My view is most asset managers are employing this approach, whether they view it as ‘ESG’ or not.  Wherein they consider how ESG factors might impact returns and how they can be used within their security and theme selection. I believe this area will evolve over the next five years as more data sources become available. Currently, it is difficult to ascertain what “biodiversity” considerations mean for an underlying company in a portfolio, however, we expect this to get clearer in the next few years. 
       
    • The opportunities of the integration approach could be ESG thematic investments like electric vehicles, clean energy and moving to more efficient companies. The challenge that I see with this approach is demonstrating that this investment thesis stacks up – as over the last few years there’s been a large influx of investor funds into ESG positive tilted investments leading to higher prices. There are other challenges around product differentiation as competition grows.

More generally, there are significant challenges around data, keeping up with policy responses, and meeting the changing expectations of investors. 

Actuarial Science, Hedge Funds and ESG:

You are an actuary working with a hedge fund, focusing on ESG. That is quite a rare combination. What would your advice be to other actuaries who want to pursue a similar career path in either hedge funds or ESG?

It definitely is quite niche! However, the actuarial skill set does translate well into a sustainability role. 

For anyone thinking about a change of career direction, I’d suggest starting by finding something you are passionate about.  It is then about understanding what is required for this career move and getting the relevant experience and qualifications (depending on your interests!) For example to enhance and cement my ESG knowledge I took the CFA ESG Certificate in investing.

I have a Bachelor’s degree in Maths and Computer Science, a Master’s degree in Applied Statistics and Stochastic Modelling and I am a Fellow of the Institute and Faculty of Actuaries (“IFoA”), which provided a strong technical foundation. However, like most actuaries my education was very technical and I had a knowledge gap with employee related policies, which is sometimes called the other ‘E’ in ESG. To address this, I undertook a Level 3 Apprenticeship Program in Leadership and Management, which significantly improved my understanding around business strategies and the associated ESG implications. 

From my previous roles, I gained a lot of experience in investing, both generally as well as investing in ESG on a fund-of-funds basis. 
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Read the full interview on the Sustainable Finance Community LinkedIn page.