“Investors pursuing virtuousness, may at best be deluding themselves and at worst, doing more harm than good,” warned the Economist in an article on September 4, 2021, stating that responsible investing practices may promote “poor returns and a flabby corporate sector,” even suggesting they could “derail the capitalist model.”
This bashing is as nonsensical as it is sensational. Sure there are problems with ESG implementation, especially when it comes to protecting retail investors. For example, greenwashing by corporations and asset managers has become a problem and regulators need to step in and set proper reporting standards. But such challenges should not be used as an excuse to deter ESG investing, particularly by large asset allocators such as pension funds and sovereign funds, who have the scale, resources, and expertise to make a difference. We should instead encourage them to take greater action.
It is in this context that the Responsible Asset Allocator Initiative (RAAI) at New America, an organization dedicated to mobilizing capital toward sustainable and responsible investing and toward achieving the Sustainable Development Goals, has just released The 2021 Leaders List: The 30 Most Responsible Asset Allocators, a ranking of the world’s top sovereign wealth funds and government pension funds on their responsible investing practices. The study, developed in partnership with the Fletcher School at Tufts University, rates and ranks 251 asset allocators from 63 countries with assets of $26 trillion, to identify the 30 leaders and 22 finalists (the top quintile) that together set a global standard for leadership in responsible, sustainable investing. This year’s ranking builds on the groundbreaking RAAI reports released in 2017 and 2019.
RAAI researchers have found that top asset allocators are implementing ESG not out of “virtuousness” but rather out of practicality. These institutions see responsible investing as a vital tool to manage systemic risks and generate long-term, risk-adjusted returns for savers. Traditional financial metrics are useful in managing short-term idiosyncratic risks in portfolios, but they fall short in pricing and managing long-term systemic risks such as climate change or income inequality. Modern portfolio theory focuses on diversification as a key method to protect portfolios, but systemic risks cannot be easily diversified. Accordingly, leading asset owners are adapting their investment decision-making process and using ESG to identify and price long-term risks, engage with portfolio companies, and manage risk-adjusted returns more effectively.
The RAAI leaders and finalists provide a window into the future of investing, a world where the planet’s largest investors are addressing the world’s greatest challenges. These top performers are unleashing hundreds of billions of dollars to invest in renewable energy, clean technology, and sustainable infrastructure, while improving access to clean water, affordable housing, healthcare, and education.
For the 2021 RAAI Leaders List Report, researchers expanded the scope of coverage, evaluating 634 asset allocators and rating 251 institutions, up from 471 and 197 institutions, respectively, in 2019. The number of rating criteria increased from 20 to 30, raising the bar to a minimum score of 96 per cent for the 30 asset allocators that were selected for inclusion on the prestigious leaders list. The 22 asset allocators selected as finalists, were not far behind the leaders, needing a minimum score of 92 per cent to be included in the top quintile.
Key findings from the 2021 RAAI study:
- The UK has the greatest number of asset allocators on the leaders list with five, followed by four from the US and three each from Australia and Canada.
- Overall, Europe is the best performing region. The 62 rated asset allocators in Europe have an average score of 78 per cent. Europe accounted for half of the top quintile asset allocators.
- Responsible investing is advancing across the world but slowly and from a low base. There is scope for substantial improvement. The average score for all world asset allocators increased from 44 per cent in 2017 to just 52 per cent in 2021.
- The leaders and finalists continue to set the bar for responsible investing, widening the gap with the rest of the world. The top quintile shows an average score of 96 per cent. The other 200 rated asset allocators showed an average score of just 40 per cent.
- The world’s two biggest economies, the United States and China – comprising 40 percent of global GDP – are lagging dangerously behind on responsible investing. The average score for the 82 USA asset allocators rated by RAAI is just 34 per cent.
The RAAI leaders list is a unique group, representing 15 countries and five geographic regions, including Africa, Asia, Australasia, Europe, and North America. With $7.9 trillion in AUM, the leaders exert enormous influence in global capital markets and can serve as a powerful force for change.
THE 2021 RAAI LEADERS LIST (in alphabetical order)
- Alberta Investment Management Corp. (AIMCo) (Canada)
- AP Funds (Sweden)
- APG Groep (Netherlands)
- ATP Group* (Denmark)
- AustralianSuper (Australia)
- Aware Super* (Australia)
- BCI (Canada)
- Brunel Pension Partnership* (UK)
- Caisse des Dépôts et Consignations (France)
- CalPERS (USA)
- CalSTRS (USA)
- CDP Group, SpA* (Italy)
- CDPQ (Canada)
- COFIDES* (Spain)
- ERAFP (France)
- Government Pension Fund – Global (Norway)
- GPIF (Japan)
- Ireland Strategic Investment Fund* (Ireland)
- LGPS Central* (UK)
- London CIV* (UK)
- New York State Common Fund* (USA)
- New Zealand Superannuation Fund (New Zealand)
- PensionDanmark (Denmark)
- PGGM (Netherlands)
- Public Investment Corp. (South Africa)
- Railpen (UK)
- UC Regents Investment Funds (USA)
- Unisuper* (Australia)
- United Nations Joint Staff Pension Fund (Global)
- USS* (UK)
* New addition to the leaders list in 2021
Click here for further information on 250 asset allocators rated by the RAAI
Click here for a PDF of the 2021 RAAI Leaders and Finalists
Scott Kalb is director, The Responsible Asset Allocator Initiative at New America.
The Responsible Asset Allocator Initiative is focused on mobilizing capital from the world’s largest institutions toward responsible investing and the achievement of the Sustainable Development Goals of the United Nations. It is a window into the future of investing, a world where global savings institutions deploy funds not only to achieve financial returns but also to address the broader social and environmental challenges we face today. The RAAI was founded at New America, an organization dedicated to renewing America by continuing the quest to realize the nation’s highest ideals, honestly confronting the challenges caused by rapid technological and social change and seizing the opportunities those changes create.