In an interview with Herman Bril, PSP Investments’ new head of responsible investment, Top1000funds.com looks at how the fund is collecting and reporting on sustainability information based on a technology-enabled, data-driven approach that spans a bespoke, green taxonomy for climate investing to ESG scores derived from AI.
Pension funds haven’t attracted the same greenwashing criticism as banks or asset managers. They don’t sell financial products, and don’t have a commercial incentive to exaggerate their green credentials. Still, it’s fair to say responsible investment reports often feature more pictures of windmills and greenery than data or hard numbers around portfolio emission reductions.
Canada’s PSP Investments, which invests C$230.5 billion on behalf of Canadian public sector pension plans, hopes it has broken the mould with its 2022 Responsible Investment Report, notably heavier on reporting, measuring and analysis than environmental storytelling.
The numbers dotted throughout the report are based on a technology-enabled, data-driven approach that spans a bespoke, green taxonomy for climate investing to ESG scores derived from AI.
“There are more numbers than stories in this report,” says Herman Bril, PSP Investments’ managing director and head of responsible investment, in the role since July this year.
Numbers like the $46.5 billion invested in green assets, a jump of $6.2 billion. Or the 14 per cent increase in the number of companies in the portfolio reporting GHG data as per TCFD recommendations to 42 per cent. Elsewhere the report cites a spike in exposure to transition assets by $1.4 billion.
Gathering the numbers is no mean feat. Accessing emissions data in public markets is getting easier, but for pension funds with large allocations to private assets like PSP Investments (where half the portfolio is in private markets) accessing accurate climate data from infrastructure, credit or private equity holdings remains an enduring challenge.
Asset class heads request emissions data from portfolio companies and GPs, which PSP Investments then uses to measure the carbon footprints of its assets in a process complicated by the fact disclosure is still voluntary in many jurisdictions.
green asset taxonomy
Cue new tools to support the process, amongst which a green asset taxonomy is the most unusual. The framework, both quantitative and qualitative, assesses investee companies carbon intensity and the creditability of corporate transition plans, helping measure exposure to green, transition and carbon-intensive assets.
“Not many pension investment managers have produced or published their own taxonomy,” enthuses Bril, who explains that assets are labelled various shades of green, through to brown.
In another approach, PSP Investments has embarked on a composite scoring process, begun in public equity but with a view to rolling it out across private markets.
The scores are based on cherry picked data from a variety of vendors. For example, the team will use governance data from one vendor and dynamic materiality signals from another in a process that builds a much better sustainability risk profile of an asset than buying standard ESG scores off the shelf.
“You can order a plate of spaghetti from a takeaway and not know what is in it – or you can cook your own. You might use the same ingredients, but you will have a much better understanding of the different components and how you put the dish together,” Bril says.
But the scores are not primarily used for decision-making. Rather, they are a source of base data from which the team then performs more research.
“The scores show how a company has performed at a high level and flag where we need to take a deeper dive before we invest,” he says, adding that the scores are an important source of proprietary data.
“We are not in the business of providing ESG scores to others. We do our own homework as active investors and as part of our mandate as a pension investment manager.”
The taxonomy has revealed PSP Investments’ holdings in brown and transition assets as well as assets in hard-to-abate sectors. Although holding them means emissions in the portfolio will likely rise, these assets are an important component of the portfolio and sustainability strategy given they offer the opportunity to engage and encourage corporate transition to science-based emission reduction pathways.
“When we buy a transition asset with initially high Scope 1 and Scope 2 emissions, our carbon intensity goes up. But our approach is to actively engage and encourage using transition plans so that companies transform from brown to green, and reduce actual emissions. If you divest, someone else will be a buyer and nothing has changed in the real economy,” he says.
Bril believes data gathering will get easier. European disclosure legislation will accelerate a trend in transparent and standard emissions reporting elsewhere, even though issues around quality, timing and methodologies remain.
Things are also beginning to change in the US, he says. Like the Biden administration recently issuing new procurement rules that all companies delivering goods and services to the US government must disclose their emissions data.
“This market is worth about $600 billion dollars a year. It is an interesting way to encourage more companies in the US to start disclosing emission data,” he says.
He also believes that technology, particularly AI, will bring ESG reporting mainstream. For example, investors can already measure a company’s digital footprint to gage the extent to which it is looking into ESG exposures or reputational matters.
“The machines may get you anyway,” he says. “Tools are getting much better in identifying if the emperor is wearing any green clothes at all.”
Hub and spoke
In a next step, PSP Investments plans to push the ownership of ESG integration out into the asset classes. A strategy pursued by other investors like Sweden’s AP4 and which CEO Niklas Ekvall recently credited with accelerating and transforming ESG integration at the fund.
Involving a significant cultural shift, an essential element of the hub and spoke model is that it’s coming from the top, evident in the fact Bril’s responsible investment department sits in the office of the CIO, Eduard van Gelderen. “I report to the CIO,” says Bril.
His team of 10 will concentrate on being a centre for excellence and focused on best-in-class ESG, while standard ESG underwriting will be transferred to the asset class teams themselves.
“The assumption will be that anything related to ESG is completely embedded in the investment process and an extension of the investment function, baked into investment like risk,” he concludes.