Schroders: The Value Perspective with L.E.K. Consulting - Peter Ward and Eilert Hinrichs

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Hi everyone and welcome to the latest episode in our new miniseries "Allocator's Edge". In this episode, we're going to be looking out over the UK and European markets in the months to come and some of the challenges that are currently facing the pensions industry. We're joined today by Peter Ward and Eilert Hinrichs from L.E.K. Consulting. L.E.K. Consulting is a world-class strategy consulting firm with over 40 years of experience advising companies.

Its expertise includes corporate strategy, M&A, operations and organizational performance. Both Peter and Eilert have over 20 years experience in advising investors and leaders in the financial services sector. In this episode, we're gonna cover with the landscape of defined contribution and defined benefit lookalike in the UK. Also, thoughts on is DB dead?

How insurance is participating in the de-risking of the defined benefit space, what their outlook is for Europe. And finally, a survey on the cost of ESG, amongst different age groups in the UK, including its findings and implications. Enjoy.

- Pete, Eilert. Welcome to the "Value Prospective Podcast". Is a pleasure to have you here. How are you?

- Very well, thank you. Thank you for having us.

- Pete, I'm going to start with you. Could you please provide us with a little bit of an introduction about yourself, your journey, and if possible, can you tell us a little bit about L.E.K. consulting?

- Of course, yes. So I'm Peter Ward, one of the partners of L.E.K., I wear two hats, L.E.K. One is to co-lead our financial services practice, and the other is to head our London office. So I've been with the firm since the backend of 2000, which many would regard as an unwisely long period of time, but it's been an interesting and varied, interesting and varied career.

One of the things I specialize in is, as I say, financial services and pensions is one of the topics we're talking about today, hence being here today. On your question about L.E.K. more generally. So L.E.K. is a global strategy consulting business, and what that means is, we apply a range of analytical skills combined with commercial insight and pragmatism to help our clients solve commercial and strategic problems. So they're with things like, how do we enter a new market?

How can I grow in this category? So positive questions, there can be some more emergency type questions to help people get out of turn down troublesome situations. So I've started losing share, I don't know why. And we cover a range of M&A advisory work, which is largely commercial diligence, alongside more practical matters, such as post-merger integration and things like that.

And we have a big more, activation related part of our work, which is around how do you really do the things that we're advising? So operations and performance topics also form a big part of what we're doing today.

- Is L.E.K. consulting a global firm or is it UK focus?

- It is not quite, but nearly global. So we have over 20 offices around the world. So we have around seven in the United States. We have around six in Europe.

We've got around around seven in Asia Pacific. So we're not absolutely everywhere, but we are global in scope and we work very commonly on global and international projects where we have global and international teams. So as a single partnership, we're able to bring together the best of our experts around the world quite easily, to bear on particular topic matters.

- Eilert, welcome to the Schroders studio and welcome to the "Value Prospective Podcast" on this new mini series, the "Allocators Edge". Could you please provide our listeners with a bit of your background and your journey?

- Yeah, pleasure and thank you very much, there. Thanks for having me. Eilert Hinrichs, I'm a partner at L.E.K.. I've been all my career in the financial services world.

Over the last 15 years or so, really increasingly focusing on the impact of the aging population on the economy and the financial services in particular. Where I really spent my time thinking about how does the people in retirement really fund it? What products do they have in terms of accumulation in the pension side, that's where DB sits where DC sits, but also thinking about how we then de-accumulate their asset basis as they go through retirement. That will be then including wealth management, but annuities, draw down products, but also other products in the wider space like equity release.

I also think about the population from a healthcare perspective, because that's the other very big part of this population as the aging, what care do they need and how do they fund the care and how do actually those two barriers really play together. It's one of the key areas where we as a society will have many, many more opportunities, really to support this and really develop structures and products that they are consuming as they go through their retirement. So, very nice having me, thank you very much to talk about this topic today.

- Do I notice a slight accent? Maybe not as strong as mine, but I think that you are not English born.

- I'm not, I'm German by nationality, but joined L.E.K. about 25 years ago and I've spent most of my career sort of in the L.E.K. network in both our key regions in Europe, the US as well as in Australia.

- And I'd say German and English by nature, by this stage of his career.

- Thank you Peter. So it's very kind.

- So the "Allocator's Edge", we aim to have conversations and sessions with chief investment officers and CEOs of different capital allocators around the world. And we are, or we've had conversations with the chief investment officers of many pension schemes in the UK and in Europe. And so we would like to explore with you and to begin with, what is the landscape of the pension sector today in the UK?

- Very good, thank you. That's a very good and very broad question. Let me just probably pick up a few facets of that question. So in the main, we are differentiating between occupational pension schemes, that's where we have defined benefit schemes, as well, some defined contribution schemes.

And on the other hand we have insurance based schemes, which are almost for all sense and purposes all defined contribution schemes. The big difference between two, as many people will know, defined contribution is really your investing in a wrapper into a scheme, and the mortality and the investment risk is carried by the individual. A defined benefit scheme is set up in almost entirely in occupational settings, where the benefits are being defined at entry point, and therefore the mortality and the investment risk has been carried by the employer, by the sponsor. So what we have seen over the last 30 years is therefore that the sponsors, the employers increasingly understand that's not really their core business.

Their core business of is running a business. British Airways sometimes we refine to, is a pension scheme with an airline hobby. So therefore what we've seen over the last 20 years, is that increasingly these schemes have closed, at least for new members, but also increasingly for new accruals, and therefore people think DB is dead, because it's thing of the past, it is to some degree, but really where we sit today, we still have 5,000 schemes operating in the UK, with about 10 million members of whether they're pensioners or deferred members or active members. And these schemes are managing about 1.5,

1.4 trillion pounds of assets. It's a huge amount of money and it's hugely important to the overall pension of this country. And therefore we are seeing really, when we talk about longevity in this market, we are talking about decades, not years, there's a whole industry around supporting these schemes and asset managers are one of them.

So we are seeing a annual revenue pool of DB advisory firms of about 2.7, maybe 3 billion, of which about 400 million is going into investment advice. And that is, does not include the funds and fees that the asset manager gets. So it's a big industry, it's important for asset managers and it will be important for many, many years.

We've just finished a project where we considered about de-risking, clearly everyone talks about de-risking today and we might wanna talk more about this, de-risking is therefore buying out the liabilities and we've modeled what the impact might be on the industry.

- When you say buying out the liabilities, what exactly do you mean by that?

- What I mean by that is that an insurance company will step in because the defined benefits are there, they cannot be taken away. So in instead of the sponsor really carrying the risk, he will basically hand over the assets and hand over the responsibility of that liability, that pension liability to an insurance company in order to carry that risk, and really fulfill the commitments that made for them.

- I think that was, that's a really interesting point, but I would like to step back just for one second. You phrase the explanation of the current pension landscape on the defined benefit schemes as in it's not debt. What does that exactly mean? And if it's not debt, is it growing and at what rate it's growing or how should people, or how do a CIO of many of these very large schemes are thinking about the next years?

And you were actually saying it's not even years, it's gonna be decades.

- It it is a very interesting question. And I think before answering it very directly, I mean, I think it's of interest to point out that the landscape as is now, is in a sense, it reflects the political history, the philosophical history around how we think about people in retirement, right? So the defined benefit schemes and the state pension and all this, all these sorts of things, you know, the main part of that infrastructure was set up around the time of the first world war, where you, you'd have pensions, people retiring at the age of 65 would be expected only to live for a couple more years at that point.

And so, and so at that point it was relatively easy to afford, for a much larger workforce than it is now. And over time, as societies in the UK and around the world have had the remarkable achievement of better longevity and health and so on, that's had the indirect disbenefit of making those things unaffordable, and really how it's transformed over recent decades has reflected the dominance of that lack of affordability over the more philosophical and moral questions that underpinned it in the first place. So really the longevity of DB in part, reflects how much of it there is left from the many decades that there were before and how long it takes to transition an entire society from one to the other.

So I think that's interesting context, but I think you were gonna comment on the longevity itself.

- Yeah, the longevity therefore, for these people that you just mentioned, they need to think about that this is a liability which is here for 40, 50 years. It obviously depends exactly on their scheme and on their member base, but when we are modeling this, we are expecting gross definitely in the asset base, but also in the revenue pool for the servicing industry for at least another sort of six, eight years, 10 years. We then seeing a slow down, probably of the gross, but we think that revenue pool, which is a good indicator of the longevity of this industry, is going to plateau maybe in 15 years, maybe in 20 years.

So this is really a market which is gonna be here, as I said, more for decades than for years. There's increasing need for these funds to be managed appropriately and therefore asset managers really need to think about how do they engage with this industry. Asset managers, we think in 2040, probably will be able to earn about 500 million of advice fees just from DB schemes. That's 15 years out, it's about 400 million now.

So it will continue to grow and will continue to be an important part of this country's pension for the next 40 years.

- Yeah, and Eilert and I've been working in this particular part of the pensions industry for 20 years now?

- Yeah.

- I would say. And during all of that period, there have been headlines and industry views that DB is dead. And all we have seen since then is that it continues to grow, because there is still a huge need for advice and even as the schemes close to new members and no new schemes are created and things like that, there's an enormous amount of money and liabilities and benefits to deal with. And so even if you think there's a huge amount of buyouts and buy-ins and various other types of de-risking going on, it's huge amounts of money in the trillions of pounds.

So it simply isn't affordable to close it all quickly. And even if it were, there's an enormous amount of work to be done, which simply cannot be executed in a short period of time either. So it's one of those ones where you think, well, it might sound like an optimistic view to say that this market will continue to grow for, you know, 10, 15 years, but if you think it's not going to, you have to explain what else is going to happen, that means it's not there. And every time it's like, well, there's not enough capital to buy it all out, there's not enough advisory capacity to solve the whole problems it were.

So, you know, if you do the work and the analysis, you can become very confident that it will be there for some time.

- And I think you talk about a problem, Peter, but it's not necessarily a problem when you think about, again, it's in the name, it's a defined benefit scheme. So the benefit is defined so the sponsor knows exactly what he's promising and therefore how much capital he needs to provide in order to live up to the liabilities that he has, that is an employee benefit. It's an employee benefit of the past. We think today about different employee benefits, but that was the employee benefit of the industry for many, many, many years.

So therefore these schemes, when we talk about de-risking, de-risking is from a sponsor perspective, because yet he's carrying the mortality and the investment risk. As Centrica or as British Airways or British Telecoms, it's not their business to manage mortality risk. That's why we have insurance companies. That's where the balance sheet of insurance comes coming in.

That's why when we talk about de-risking, it means that that liability that the employer has given to the employees, it's been taken on by an insurance company, which is much better positioned to really deal with pension liabilities. They're running DC schemes, they're running other life insurance schemes. That is their skillset. So therefore it's offloading in the sense that the assets and the lily will be handed over, in a state where it's been assumed to be fully funded.

So schemes when they're de-risking are handing over pension liabilities, which are today's are being considered to be funded, but clearly need to be managed. There's some expectation that's for deferred members, there will be yields achieved through investment strategies, which are linked to liabilities. So it's just a handing over of a responsibility of a liability that the sponsor has been given and that liability is a lifelong promise.

- I want to step back before we go into the, into the insurance bit. You mentioned 5,000 schemes still ongoing in the UK. That seems still like a very large number and you guys are you specialized in advising M&A for many of your clients? Is your scope for consolidation in the industry?

Is that something that you guys have been seeing or it's not really feasible?

- Not on a scheme basis, because you are as a sponsor, you can't sell your defined benefit scheme from that perspective. Of course, if there is M&A between two companies, you have their own different schemes, you could consolidate those. But when we are talking to petitioners in the market, they tell us that's quite difficult and you are probably better off retaining them separately and just let them run. But what we do see is some of the smaller schemes are being combined into what we call, so either master trusts or consolidators, where they are creating structures where smaller schemes can be managed more collectively.

And that is something that we are expecting to see probably more in the future, but it's therefore no consolidation and M&A as you think of it in a sense, the 5,000 schemes are separate schemes and there will be a little consolidation from that perspective.

- I mean classically M&A is difficult to do, in the sense that in most M&A transactions, you know, you would in some sense look to take best of both in certain functions and things like this. But because you know the benefits are defined, you can't say, well this scheme is like this, this scheme is like that, that one's more beneficial to the scheme owners, so let's move this one to that, you know, the degrees of freedom you have around that, because of the commitments you have to your beneficiaries defy that to some extent.

- Okay and now moving on to the due risk side of it and the participation of the insurance companies stepping in to assume those liabilities, how long has this been happening?

- It's a good question. Definitely for more than 10 years, and I don't have at hand the date of the first de-risking activity from that matter. It's what a lot of people also refer to as "bulk annuity" because in essence it's not that dissimilar to a bulk annuity transaction. They're currently eight or nine insurance companies who are participating in that market.

And we have seen sort of in the order somewhere between 20 to 25 billion of liabilities are being sort of taken out and being de-risked. And that has been sort of volatile on an annual basis slightly depending on the exact time of this de-risking of a larger scheme. But what we've observed in the last 18 months is that the liabilities of these schemes are based on a DCF (indistinct), and therefore as we had a very low interest rate environment, liabilities, therefore really about significantly high and over the last 18 months, because of the rising interest rate, the liabilities technically have dropped, because you are discounting future cash flows and therefore mathematically they are lower.

Which meant that more schemes now in a sort of a surplus situation because sponsors have had to put in more money in order to fund those liabilities. And we are now in a world where we are seeing an overfunding, and as such more schemes are now really thinking and have a desire to de-risk. Therefore last year we've seen a significant jump in de-risking values. I think it's probably more like 40-45 billion.

And we are thinking that this will continue to be a very active market for the coming years, as schemes are have a desire to de-risk and insurance company bulk annuity providers have some desire to deploy some capital.

- What sort of rate of return need the CIO of any of these defined benefits schemes meet or achieve or target to meet their obligations?

- That's probably a technical question that we are not quite qualified to answer. But from a scheme perspective, you need to think about the schemes as schemes have been operated by board of trustees and they are acting on behalf of the members and their key objectives is to meet the pension liabilities that they have been promised. Therefore, there is no sort of target for them as saying I need to achieve that sort of yield. Of course, from the sponsor perspective, from a planning perspective, they would say, look, so what could you achieve in your overall planning of funding these liabilities?

How many assets do we have? What are the asset classes are you investing into? And therefore what yield might you expect? Because that clearly reduces the overall funding requirements from a sponsor perspective.

But that's not necessarily the discussion that we are having.

- Yeah, I mean it's an interesting technical question and there are, it's more an actuarial one, around where are your assets allocated to how much is gonna be in equities, bonds, other things. What assumptions do you make around that? And because the liabilities are so long term, you're looking at making assumptions over multiple decades and there are different valuation methods according to what you expect to do with the scheme. So a buyout valuation is different to an ongoing one, for example, but the assumptions are in actual meth methodologies are reasonably standard, but they may not reflect how the assets are actually allocated in some cases.

But it's a question we have ad advised on, for example, we did help, Marconi, when it was being acquired by Ericsson, to Eilert's remark about British airways, Marconi really was a pension fund with a telecoms hobby at that time. And in order to execute that transaction, there needed to be a substantial amount of capital set aside to cover those pension liabilities, which Ericsson quite understandably did not wish to acquire whilst protecting the interests of the beneficiaries. And so how you actually go about allocating the assets, what's safe to assume is a question we've looked at on a more commercial rather than actuarial basis.

- Interesting. In a this conversation that we had before, you mentioned the importance of a new requirement, which is the consumer duty requirement, and you were making the point that, that is something of, it's a big change, and something that people need to be more aware of. What is the consumer consumer duty requirement and why is it so important?

- Consumer duty is a new regulation, where the FCA is trying to ensure that the consumer is getting a fair value, that the consumer is being considered to be treated fairly, that the consumer is getting the service that they're paying for. And that does include the entire value chain in the financial services world. So it clearly does include the financial advisor, but it goes all the way down to the asset managers. And when we are having discussion with the asset manager part of the market, there's a clear expectation that this will drive up regulatory internal costs, because also the asset managers needs to demonstrate that whatever they're charging in terms of management charge is A, fair, question mark what fair means.

But that's clearly a lot of FCA regulations are thematic and therefore everyone needs to determine what what fair means. They need to make sure that the consumer understands what they're paying for, and therefore we are expecting that there are at least two or three impacts also on the asset manager and fund manager part of the value chain, in terms of transparency, what are you paying for? And then the ability to articulate what are they paying for, what are the 50, 60, a hundred basis points, what activity does that actually in include? So therefore we have seen on more on the advice layer that much more is about cost to serve, so that people have to be able to demonstrate, I'm charging a hundred basis points, what does that actually cost me?

So the FCA is not a price regulator, but the FCA will therefore drive more oversight and that will drive up cost. And I assume that might also lead to slightly more price pressure on the asset management level. That's one. The other aspect is fairly closely into that, is the assessment of value.

Again, a regulation which just came in reasonably recently again, which will require the fund management industry and the asset management industry to demonstrate that they are actually providing value. I think they need to report annually on that - [Host]

How do they show that they are providing value?

- That is a very good question. And the regulator is not clear by that, therefore they need to consider, is what they service they're providing and the charge that they are charging for that service, is that value appropriate? That there is, they are not a price setter, but they will clearly look at how you justify the cost.

- I know that you guys are specialists in the UK market, that's where you operate, the companies that you advise your clients are here, but given that L.E.K. has a presence in Europe, how different is the landscape for pension schemes and regulation in Europe versus the UK, given that Brexit has already happened? And I think that there is a sort of an expectation that the UK will drift a little bit apart from the frameworks that were established by continental Europe.

- Many of the leading European economies have very different approach to pension. They have a much stronger government based system. Germany, for example, and Pete you already alluded to to that, so Germany introduced a pension, I think sort of in sort of 1,890 or so, maybe 1895 or something. Bismarck was introducing it and as you rightly said, at the time, he thought he was doing a really good trick by setting the retirement age actually above the average life expectancy of miners, for example.

So he said that's a good idea and it's remarkable that, Pete as you said, that we as a society still have the 65, which was set sort of the best part of 130 years ago as our retirement age. So these European systems are much more government based, which sort of is good or bad, good in a sense that most people do not need to think about their private retirement savings as much as here in the UK. Bad in a sense that most of these schemes are unfunded and therefore their pay as you go.

- Are most of the schemes DB or DC?

- They are government based and they're unfunded.

- Okay.

- So actually, they're neither a DB nor DC - Yeah, interesting.

- They are are just a scheme which has pay as you go. Now in one sense you can say it's a ponzi scheme, because people who are receiving money now, that's fantastic. But what we are seeing is that even these countries, the government's realizing is what the liabilities are and they're pushing more, more pressure on the individuals to save for their pensions. So they are reducing the benefits.

They are interesting now considering at least to increase their retirement age. Again, Germany is one something I clearly know slightly better. Interesting, for a couple of years ago they reduced the retirement age, was complete madness, but they're now thinking to increasing into 67, I think 68. And that is in, so therefore, we are seeing on the continent more government based systems which are increasingly moving to more where the UK is already, where the UK clearly is a more mature market.

And the other difference is that the continental European markets very often use life insurance structures to actually offer pension savings. So it's a different tax wrapper from that perspective. Virtually benefits the insurance companies, because they're the only one who are able to provide those tax wrappers. It then provides a lot of money for their, quite often in-house asset management functions, because these are being managed, these are largely DC based schemes.

And then you are finding the odd DB scheme. Again, Germany has a few, again because of its history, the Siemens, the BASF buyers, they all, Daimler, they all have DB schemes, because when they were set up 60, 80 years ago, that was the employee benefits that people thought of. And these large industrial conglomerates all thought that they needed to provide some support for their at least middle management, when they retire.

- I read recently that many people's solution to some of the issues around the pension landscape is the fact that the retirement age was set at a time where people, when people were not living as long as they're now, and then the solution to that is to increase the age of retirement as you just pointed out. But they were saying that or they were claiming on that article that many people are finding it very difficult to keep their jobs past a certain age and then they become unemployable. So actually, if you push the retirement age too much, then you are actually putting at risk the quality of life a lot of people.

Do you have any, any thoughts about that?

- Probably be a topic you think about?

- Yeah, no, well I do. I mean I think it's a matter of political philosophy and what the pension is for, right? And in the UK example, the state pension established around, yeah, time of the first world war is it was around well, most people are doing manual jobs and if you've been doing a manual job to the age of 65, when you probably started when you were 14, you've been doing 50 years of manual work, you've probably accumulated a bunch of physical ill health, injury and stuff like this. And it's a respectful way to allow people to live for a while longer when it's demeaning to continue.

The philosophy was absolutely not let us pay for people to have a 25 year holiday at the end of their life. And of course, yeah, that's an extreme way to describe it, but that's what some people would think of it, think of it that way. So I think it's one where you, you've got to choose what you think the the pension is for. And so with respect to keeping jobs past a certain age, of course there is also legislation around not being biased against people for reasons of age and things like, so that needs to continue to keep pace with these changes and be implemented in practice.

So there will be some avoidance of that legislation not by saying, well you have to retire because you are 65, but finding some other reason, which is highly correlated with 65. But I think it's not automatic from a moral or philosophical perspective, that you should increase the age just in line with mortality. So, and life expectancy. But it will be a consideration.

But you do need to think about what else you're going to do. So some increase while whilst you've got a long working life in good health and physical health continues to improve, one would expect that on the whole, it's reasonable to continue to increase the agent in line with that. But the other consideration of course is what's deliverable politically and in many countries, but specifically the UK the people in receipt of pensions and over 55 vote a lot more than people under those ages. So, there's a disproportionate political impact, you know, electorally around what a government can say it's going to do on that while still having any chance of being elected.

And that's one of the reasons why the age is stuck where it is for decades, because no one wants to be the person who's gonna be taking the goodies away. But it's been in denial for such a long time now, but it's very difficult. But it, you know, it comes down to, so some who say I want the same rights as my grandfather, but your grandfather retired at 65 and would be expected to live till 69 and you are retiring now at 65 and having got to the age of 65, you would now expect to live to what, 85, 87 at that age, you know, so the overall life experience is a bit lower, 'cause people died younger than that.

But having got there, so the commitment is more than 10 times as much.

- And I think this, I totally agree with you Peter. Let me just a couple other thoughts sort of, historically, people thought about retirement at about a, just a particular almost day when you turned 65 you retire. So from one day you were employed to the next day you retired. That sort of sharp sort of declamation line has disappeared.

When we think about retirement these days, retirement is a process that starts around 55, maybe 60, and that ends when people almost turning 70. So retirement isn't anymore something that basically happens overnight. Retirement is something that people change how they engage, they may at yeah, 55, 60 slightly depending where they are in in their life where the family is, they wanted to work a bit less, they may go halftime, but because they're turning 65, that doesn't mean they're not anymore having things to contribute to the society. I think Peter, you're absolutely right, we are as a society today, have much more service industries with much more, less and less physical work.

So therefore why wouldn't somebody who's 65 not able to continue to coach, to continue to train. And when we think about the workforce, I had this morning, a seminar about in the healthcare space, where we are seeing such a shortage of healthcare trained, skilled, experienced healthcare workers, it will be disastrous if we as a society, think at 65, send everyone into retirement. We should rather think about how can we engage these people for longer economically, keep them economically engaged, which would mean that they have an income and therefore we can slightly reduce the pressure on the retirement funds, because we are thinking about their retirement income in a more holistic way.

And that's why I think it is right to say the individuals are also responsible, more by thinking about their retirement income. It's not just the government. So, but it's wrong from the government to push it entirely down to the individual to carry mortality risk and investment risk, because the individual is the least capable part of the whole chain to carry that risk. It's either insurance company, probably that's probably the best or the government, but the government isn't really, that's not their role either, nor is it the employers.

So I think that's where the insurance industry definitely have a very important part to play. And that's where asset managers have a very important role to play and say, well what return, what yield can you sensibly generate without re-risking the branch? And if I look at some of the asset allocations in the DB schemes, for example, I looked at it yesterday, 70% sits in cash and bonds.

- [Host]

Wow. It's a little bit like the junior ISAs.

- Then you look it and say, - Actually, they went to cash as well.

- Well, shouldn't you, given that this is such a long investment, shouldn't you have a slightly higher exposure to equity, where the wisdom definitely is, that the stock market is still generating on a longer term, more sustainably superior revenues than cash.

- Hmm. Which leads me to my next question. You make a reference about the sort of expected yield this pension pots should achieve so that they actually can meet their expectations and L.E.K. did a, you carry a survey on the topic of ESG and how different age groups of people were thinking about energy transition, climate change and how to invest, or where they wanted to invest their assets. And I think that you had some, some really interesting insights into that.

Can you elaborate a little bit on that?

- Yeah, I'm happy to do so. Let me start and Peter please also come in. So we've done a consumer survey, I dunno, six months ago or nine months ago, in which we ask about the interest in ESG investment solutions. And really, really encouraging and good to see, 75% or also set very interested or interested, which clearly is a high proportion and say the consumer definitely is interested in ESG as an investment topic.

We then segmented that by age and it was interesting to see that the younger are more interested than the slightly more older. So over 65 definitely were less interested in ESG. And again encouraging to see is that the younger and younger was probably, I think below 40, were also at least expecting some either higher cost or some lower returns when investing in, in ESG sort of products. So that's quite encouraging therefore from a, again, from an asset manager perspective, clearly a topic that people should pick up on and clearly a topic that the consumer is interested in and want to hear more about.

- And it's a very interesting one in terms of what drives interest in ESG investing around the world. And we've done quite a lot of quite interesting strategy work in this area where one of the findings is that the transition towards more interest in ESG investing in the United States is driven more by ultimately consumers, but more investment funds themselves and regulation contributes to that, whereas in Europe regulation is driving it more and consumers are kind of catching up to that and to some other observations. So we've also done some similar survey work in banking and people articulate their interest in working with ESG friendly or green banks, but they actually move less than that.

So they stated interest but they don't do it as much as they, as much as they say they were going to. But there's a huge infrastructure growing around ESG investing. So as the regulation becomes broader and more clearly defined and you move from relatively straightforward to quantify scope one emissions, towards scope two and even scope three emissions, where you are mandated to consider the impact of your supply chain as well as what you are doing directly in your energy supply and things like that. So that broadens it out quite considerably.

And there are some very interesting ethical questions around how you achieve the transition. So for example, there are, superficially attractive statements such as, don't invest in any oil companies, but the oil companies are clearly in the driving seat in terms of transitioning away from oil and they need to be invested in to help them to do that. And if you simply defund them, you're not gonna help, not gonna help the problem. But it, however you think about it though, it is rightly an error of hugely increased interest, and you know, the train has left the station on this, the momentum will keep going.

- Did you find in your survey that the younger generations understand the trade off and the cost that it might imply for them to be excluding certain sectors or segments or companies from their portfolios?

- Asked that very direct way, my hypothesis is no, they don't, because in our survey they definitely indicated that they needed and wanted more information. So when you think about in this context about the retail market, that's a very clear need to educate and inform the financial advice market about ESG, about what it means, where investing or not investing, what are the cost implication. There's a very clear indication from that survey, that there is interest. I think the understanding it will be very different, some understand it very well.

I think some definitely need more. So therefore I would definitely, again, think when from an asset manage perspective, from a fund management perspective, and retail is an interest market, absolutely there is a great desire there, but it needs much more education and communication and the IFA channel, the investment advisor need much more information. And also informing about what and when and how.

- I agree. I think the interest is at the level of principle really, and I think unfortunately despite information requirements and so on, most consumers don't really have a very clear picture either of the cost of investing or what the expected returns are in the first place. So it's a little difficult and I would say further, you know, it's not completely clear that returns have to be lower for ESG investments at all. And many green investment funds will say, if you look at funds which have positive ESG characteristics and your investing companies that have those characteristics, the returns are better because ultimately sustainability of those companies, in the sense of they have business models that are sustainable over a long time, including in relation to sustainability legislation, but not only that.

They are worth more because of course they will be sustained into the future. So, I think there may be a transitional period during which the argument that, ESG funds should return low. It may be partly justifiable, but I expect over time it won't be, particularly as it becomes more and more expensive not to comply with ESG regulation. And so that will dampen down the performance of companies that don't.

- We're coming to an end of our session and we ask all our for a book recommendation. So I'm going to start with Eilert first, please.

- Interesting. Very good question. I would go slightly off piece here. I would think of "Guns, Germs, and Steel".

I think from Jared Diamond, I find a really interesting book which deals about the evolution of the human race, but also really starts to explore why is the western world from today's perspective, clearly has more successful economies, bigger grows, more worlds, why some of these reasons are and is that down that we are more intelligent or actually are there other reasons which are slightly much more random, that benefited particularly Europe in its evolution. So a really interesting book. I really enjoyed it. So that would be my recommendation.

- Pete?

- Well I think Eilert's is a very good recommendation to start. I would say that. My recommendation, so I would recommend, "American Prometheus", which is the biography of Robert Oppenheimer that underpinned the Oppenheimer movie last year. So I think that the movie was great and good luck to it in the Oscars, but it was of considerable length.

But in many ways it just scratched the surface of the scientific and political context in which was operating. So I was prompted by that movie to read the book, which I would emphasize is of even more considerable length. It's close to a thousand pages, but is extremely interesting if you would like to learn more either about the science or the politics around what was going on. But it stops short of very technical explanation, but it's certainly very enlightening and I much enjoyed it.

- That's fantastic. Thank you very much both for coming to the "Value Prospective Podcast".

- Thank you.

- Thank you very much for having us. (uplifting music)