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Tuesday, June 6, 2023

Who Cares (About ESG) Wins: Asset Owners Step Up

The late UN secretary general Kofi Annan helped push environmental, social, and governance (ESG) issues to the forefront of the investment industry with the publication of the UN study “Who Cares Wins” back in 2004 and, soon after, the launch of the UN Principles for Responsible Investment (PRI).

ESG has transformed the world of finance in the years since. Today, more and more evidence indicates those asset owners that integrate ESG considerations into investment decisions not only promote environmental protection, healthier societies, and good governance, but have a positive and recognizable impact on their beneficiaries’ bottom lines.

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Indeed, according to the “Global Perceptions of Environmental, Social, and Governance (ESG) Issues in Investing” survey of CFA Institute members, 73% of respondents said they take ESG issues into account in their investment analysis and decisions. In partnership with PRI, CFA Institute also produced Guidance and Case Studies for ESG Integration: Equities and Fixed Income and conducted global ESG workshops.

Yet ESG skeptics continue to question the relevance and merit of ESG considerations.

But if there were any doubt as to ESG’s efficacy in portfolio management, recent efforts by some of the world’s largest asset owners may finally put the question to rest. Indeed, as legislators in Europe and elsewhere weigh in, the debate needs to be settled once and for all.

1. Government Pension Investment Fund (GPIF)

We will integrate ESG into every single investment we make, regardless of asset class or geography.” — Hiro Mizuno, Government Pension Investment Fund (GPIF)

Hiro Mizuno, the executive managing director and chief investment officer of the Government Pension Investment Fund (GPIF) of Japan, has called on index service providers to create a new global environmental index so that “super long-term investors” can invest in equities at scale with ESG considerations in mind. Mizuno and the GPIF have also collaborated with the World Bank on a report to increase awareness and adoption of ESG factors in fixed income and have been credited with boosting enthusiasm for ESG in Japan and helping change corporate culture for the better, particularly when it comes to gender diversity.

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2. California Public Employees’ Retirement System (CalPERS)

We consider it part of our fiduciary duty to consider climate change as part of our decisions.” — Anne Simpson and Divya Mankikar, CalPERS

CalPERS and other asset owners have urged G7 governments to embrace stricter national plans to cut greenhouse gas emissions by 2020 as part of the Institutional Investors Group on Climate Change (IIGCC). CalPERS first incorporated environmental sustainability in its investments back in 2013 and has developed a multi-pronged approach to the issue. Those efforts have paid off and yielded critical insights. As CalPERS’s Anne Simpson and Divya Mankikar observe:

“CalPERS carried out its Montreal Pledge to identify sources of carbon emissions in our public equity portfolio of 11,000 companies. A fraction of these — fewer than 100 — were responsible for more than 50% of the carbon emissions we identified.”

3. Caisse de dépôt et placement du Québec (CDPQ) and Ontario Teachers’ Pension Plan (OTPP) 

From now on, the climate will factor into each investment decision and our portfolio will evolve accordingly. Our approach is clear: contribute constructively to the fundamental transition the world is facing.” — Michael Sabia, Caisse de dépôt et placement du Québec (CDPQ)

When it comes to ESG, Caisse de dépôt et placement du Québec (CDPQ) and other leading public pension funds have embraced the notion that long-term sustainability needs to be embedded in their investment processes. CDPQ president and CEO Michael Sabia has called for an “investment strategy to address climate change that sets out ambitious and measurable objectives.” In keeping with that pledge, CDPG publicly reports on climate change and related factors and actively shares its knowledge and best practices.

This month, Barbara Zvan, the chief risk and strategy officer of the Ontario Teachers’ Pension Plan (OTPP), described the OTPP’s approach to ESG:

We identify ESG risks that could impact the investment and work to understand how the company is managing these risks. The integration process may lead to engagement if more information/clarity is needed and/or to encourage the adoption of best practices.

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4. Sovereign Wealth Funds

The One Planet SWF Working Group, composed of six of the world’s largest sovereign wealth funds, has proposed a framework by which large and diversified long-horizon funds can integrate climate change’s potential impacts into their investment management processes. Writing for the group, H.E. Yasir Al-Rumayyan, managing director of the Public Investment Fund (PIF) of Saudi Arabia, stated that the framework “aims to foster a shared understanding among long-term asset owners with regard to key principles, as well as methodologies, and indicators related to climate issues.”

Elsewhere, Nigeria’s sovereign wealth fund has pledged to adopt “best practice environmental, social and governance standards in its investments” and take practical steps to implement them by investing in green agriculture funds and sustainable infrastructure.

5. APG Asset Management

APG Asset Management helped shape recently proposed EU regulations as part of the EU High Level Expert Group on sustainable financeAPG’s stance on the action plan was a function of its management of a Dutch public employee pension fund. At a practical implementation level, APG’s staff have been recognized for their sustainability efforts. Anna Pot, for example, was twice ranked among the Sustainability Top 100 by the Dutch newspaper Trouw.

What all these developments demonstrate is that the world’s largest asset owners have accepted the value of ESG considerations and are integrating them into their investment strategies. They are not just talking about the importance of ESG issues, they are doing something about it.

Indeed, in celebration of Climate Week NYC, many of these asset owners will be in attendance at the upcoming Climate and ESG Asset Owner Summit on 24 September 2018 as part of CFA Society New York’s Asset Owners Series (AOS). Since its inception in late 2015, AOS has provided a forum for asset owners to meet and share insights on the critical issues they encounter. So far, roughly 4,000 attendees, and over 160 speakers who collectively represent $50 trillion in institutionally owned assets, or about 45% of all aggregate owned assets under institutional ownership or advisory, have participated.

Representatives of over $7 trillion in assets under ownership will be speaking at the Climate and ESG Asset Owners Summit, making it perhaps the largest one-day gathering of asset owner speakers, by assets under management, in history.

That they’re meeting to discuss how to increase ESG adoption should finally end the debate about the materiality of ESG considerations in portfolio management. According to the largest asset owners on earth, ESG matters.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Through the Lens

Thomas Brigandi, CFA

Thomas Brigandi, CFA, is an analyst in the Global Project and Infrastructure Finance Group at a Credit Rating Agency (CRA), where he serves as a lead analyst for 34 power, toll-road, airport, port, water, wastewater, natural gas pipeline, and project finance credits. Brigandi also serves on a CRA’s public pension steering committee, ESG Americas working group, and formerly served on the veteran recruiting sub-committee. Brigandi previously worked at the ~$180bn NYC Pension Fund, where he focused on energy and natural resources and reported directly to the chief investment officer. Brigandi is a Board Director of the 11,000-plus investment professional member CFA Society New York (CFANY), the largest CFA Institute society globally. Brigandi, the CFA Institute Inaugural Global Outstanding Young Leader and CFANY’s 2016 Benjamin Graham Distinguished Service Award recipient, has organized 69 CFA Society conferences that were attended by more than 12,800 investment professionals, in addition to over 475 asset owner, investment consultant, and buy-side investment professionals and speakers who collectively and directly oversee or advise on more than $50 trillion. Brigandi is the founder of CFANY’s Asset Owner Series, Emerging and Frontier Market Series, Investment Employment Outlook and Professional Development Series, Putting Beneficiaries First Series and Global Infrastructure Conference Series, and leads a team of over 450 investment professional CFA Society volunteers globally. While serving as the director of global volunteers of the American Foundation for African Children’s Education, Brigandi organized the NASDAQ Closing Bell Ceremony on 23 September 2011, hosted for the president of Sierra Leone. Brigandi maintains over 12,000 connections ‎on LinkedIn and holds a bachelor of science in finance, accounting, and economics from the Macaulay Honors College (MHC) at the City University of New York. Brigandi received the college’s inaugural Alumni Pioneer Award and serves on the MHC Foundation Board of Directors.

Paul McCaffrey

Paul McCaffrey is the editor of Enterprising Investor at CFA Institute. Previously, he served as an editor at the H.W. Wilson Company. His writing has appeared in Financial Planning and DailyFinance, among other publications. He holds a BA in English from Vassar College and an MA in journalism from the City University of New York (CUNY) Graduate School of Journalism.

Paul Kovarsky, CFA

Paul Kovarsky, CFA, is a director, Institutional Partnerships, at CFA Institute.

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