Norges Bank Investment Management, NBIM, investment manager for Norway’s NKK 12.72 trillion ($1.28 trillion) Government Pension Fund Global, has unveiled its latest investment strategy for the period 2023 to 2025 outlining a contrarian approach that will capitalise on periods of volatility plus boosted, internal technology expertise in its quest to become the best, large investment fund in the world.

“We have made a detailed plan which outlines how we intend to become the leading large investment fund in the world. We look forward to implementing this plan over the next three years”, said CEO Nicolai Tangen, speaking at the launch of the strategy.

Performance

NBIM will increasing use active management to exploit periods when it believes “variations in asset prices are excessive.” Such positions will apply across the fund’s equities, fixed income and real assets exposures. “Our active risk-taking will vary as market conditions change,” the report says.

NBIM manages assets close to a benchmark index comprising 70 per cent equities and 30 per cent fixed income.

However, the asset manager believes some investment opportunities merit diversifying beyond the reference index, particularly in unlisted assets. “All our investment processes have active elements,” it states. “This improves our ability to achieve the highest possible return and to be a responsible owner. Our long horizon enables us to act differently from other investors in difficult and illiquid markets. We believe that the most profitable investment opportunities arise in volatile markets.”

NBIM uses a range of investment strategies grouped into three main categories: market exposure, securities selection, and fund allocation applied across equity, fixed income, and real asset management.

Contrarianism will be a key part of strategy going forward. “We will seek to buy when others want to sell and sell when others want to buy,” says the report, adding NBIM will support portfolio managers who “dare to be contrarian and avoid herd behaviour.” The asset manager will also develop its investment simulator to analyse investment decisions, systematically learning from mistakes, and providing portfolio managers with feedback so that they can make better decisions in the future.

The largest element of the equity allocation is managed internally in the market exposure strategy. NBIM invests broadly in the companies in the benchmark but seeks to avoid mechanical benchmark replication with its high trading costs. NBIM also enhances return by following a diversified set of index refinement strategies, such as corporate action and capital market strategies. Going forward, the fund plans closer collaboration between traders and internal portfolio managers and says it plans to further automate trading processes.

Forensic analysis

In the fundamental strategy, NBIM pledges to expand “forensic accounting and behavioural analysis to reduce exposure to companies” it expects to underperform. It will take slightly larger stakes when it has reason to believe companies will outperform and will also use external managers in segments and markets where it believes they will enhance returns – or mitigate losses. NBIM will also pursue opportunities to invest in companies before they list, pre-IPO. “This would give us access to companies earlier in the company life cycle and potentially enhance returns.”

Fixed income

The main purposes of the fixed income portfolio is to dampen fund volatility, provide liquidity, and harvest risk premia in the bond market, says the report. As in equities, NBIM will invest in selected segments outside the 30 per cent allocation to diversify the portfolio and harvest risk premia. It will invest in corporate bonds based on company research, utilising its company knowledge across equities and fixed income.

Between 2016 and 2020 the relative performance for internal fixed-income management was 45 billion kroner ($5.1 billion), the most successful period for the allocation in the history of the fund. The allocation is run by a team of 25 portfolio managers, 10 analysts and 15 traders across different time zones invested across geographies, currencies, sectors and types of issuers.

Real estate

In real estate, NBIM will target an allocation of between 3–7 percent of the fund. The portfolio, which consists of listed and unlisted real estate, will actively exploit periods of disruption in the market. NBIM will target more development projects in the coming years and will adapt investments to meet increased demand for energy efficiency and flexibility in buildings. “To access the most attractive assets at acceptable risk, we will invest alongside best-in-class investment partners with a proven development track record,” it says.

Technology

Elsewhere the strategy outlines the investor’s pledge to develop tailored trading solutions. “We will buy adaptable and well-proven solutions externally when appropriate,” it says. “We will use our immense set of market and non-market data to support machine learning with the aim of strengthening our investment processes.”

Rather than use consultants, NBIM plans to hire and develop its own people, developing an internal, expert, technology culture in the coming years. “A close relationship between technology and the rest of the organisation ensures that technology developments are tailored to our needs,” it says.

ESG

NBIM integrates responsible investment and ownership at three levels. It works at the market level to elevate global standards for all companies; it works at the portfolio level to monitor ESG information and integrate this into the management of the fund and it works at the company level to promote good governance and sustainable business practices. “We will be a transparent and result-oriented owner. We will continue to develop our activities in collaboration with companies, peers, academia, and other stakeholders,” the report concludes.

 

 

CPP Investment’s current forecasts for contributions and compound investment earnings have it reaching the C$1 trillion mark by about 2030 (and $C3 trillion by 2050).

Chief investment strategist Geoff Rubin told the Investment Magazine Fiduciary Investors Symposium in Melbourne in November that the fund is already planning for that eventuality and actively designing the best structure and strategy to support it.

Rubin said CPP’s growth to date had been relatively straightforward, in the sense that it was endowed with C$200 billion and set out to build the investment capabilities and supporting functions it needed to transition those funds from passive management to active management.

But it’s now at the size, and expecting to achieve the kind of scale in the near future, that requires its various activities to be more joined-up, better coordinated and more focused.

Rubin said CPP has identified four clear areas where it can gain an edge over its competitors: being larger and more liquid, being smarter, being better connected, and being better run.

He said these four “sources of edge” would create a foundation for an organisation that has a simple set of strategic objectives encompassing a single purpose, clarity on its competitive edge, strong relative value capabilities and a set of cultural norms and expectations. Plus effective delegated accountabilities, optimised engagement with partners, methods for measuring success and ways to drive improvement, a set of common capabilities, and a highly optimised decision-making.

“This is some work we started to do to try to identify all possible sources of edge we as an organisation might draw upon,” Rubin said.

“This is not to say we [currently] possess these edges or possess them everywhere. I don’t think any institution possesses them all. But where can we start thinking about very clear demonstrable sources of edge that we can track, that we can measure, that we can push ourselves to perpetually sharpen – in particular, can [we] draw upon combinations that few other investors can?

“If we want to achieve that objective delivering the most return it’s very clear we need to be sharp and picking our spots as to where we apply these sources of edge.”

Rubin said a clear edge for CPP was to exploit its scale to gain an “incredible vantage point over global capital markets”.

“We have these capabilities, we’re invested everywhere, we see a huge swath of the investable capital markets across the world,” he said.

“That should allow us to identify where incremental risk-adjusted return prospects are greater or lesser, and then try to flow capital and other resources to those areas of greater interest, and away from others. No one in the world does that well, because it is really, really tricky, but we’re going to try to build out some of those systems.”

Rubin said CPP’s claim it could gain an edge by being smarter than the opposition was put forward tongue-in-cheek.

“To be honest, this is one that we kind of put up cheekily, because it certainly feels like a bunch of hubris to say you can be smarter than the competition in the space in which we compete,” he said.

“I don’t know that’s likely individually; maybe it’s likely at an organisational level. Maybe we can build smart organisations that draw connections among individuals and can invest in a way that really demonstrates unique insights. But gosh, this was really tough.”

Rubin said it was clear, however, that CPP could be better connected than many of its competitors.

“This is a good one for us,” he said. “We have, by virtue of developing our organisation in the way that we have, great connections with partners, with counterparts around the world. I think this could be a real source of edge advantage.”

Being better run than the competition presents a genuine challenge, Rubin said.

“Can we actually create a clearer, a better empowered, a better developed organisation that allows us to invest in ways that will deliver outsized returns relative to competitors in these markets in which we invest?” he said.

Rubin said the work CPP is currently undertaking is designed to help it identify how it can be “very, very clear and deliberate to ensure that everywhere we’re investing is being done so with some advantage”.

“This is effectively what we have determined we need to be as an organisation in order to effectively invest a trillion dollars and continue aspiring to deliver the most investment return we can, at our targeted level of risk for that very clear objective,” he said.

Next year, Railpen, investment manager for the £35 billion UK railways pension schemes, will focus engagement and AGM voting on affecting corporate change around cyber security, climate transition, biodiversity, workplace treatment and mental health. The asset manager will also enhance its voting and engagement positions on dual class share structures (which give company founders more votes per share) fair pay, the treatment of gig economy workers and modern slavery.

Railpen’s decision to integrate mental health into its voting policy follows research which found that only 13 per cent of UK listed companies’ annual reports discussed mental wellbeing in relation to health and safety or risk assessment, despite the clear materiality of mental health to a company’s ability to attract and retain employees.

An engaged, motivated, and supported workforce is vital for sustainable financial performance, and Railpen expects portfolio companies to engage meaningfully with their workforce and demonstrate a healthy corporate culture, said the asset manager in a statement.

Rather than outsourcing stewardship, engagement at Railpen is in the hands of its own internal team to better align stewardship with its ESG objectives, particularly its ambitious net zero targets. It’s a level of control that is particularly important when it comes to timing engagement and knowing when to escalate.

“This year we have explicitly flagged our expectation that portfolio companies look after their entire workforce, including both directly and indirectly employed workers, and effectively communicate to shareholders the steps they are taking to do so,” says Caroline Escott, senior investment manager at Railpen.

“Our previous research with the CIPD, PLSA and High Pay Centre found that many of even the largest UK companies fail to appropriately discuss their support for indirectly employed workers. This is an issue for many firms, but especially for those in the ‘gig economy’ where it is particularly important for investors to be able to gauge the rights granted and level of support provided to workers.”

The latest voting policy reflects Railpen’s ongoing corporate governance themes of board composition and effectiveness, remuneration and alignment of incentives and shareholder rights, and risk and disclosure.

Pre-declaration

In another step, Railpen will consider pre-declaring voting intentions on specific resolutions. The idea being to send an important signal to the company and the market. “Railpen values open dialogue with companies and therefore will continue to notify companies of voting intentions in advance to support effective engagement, where they are priority holdings,” it said.

A key 2023 priority is ensuring that net zero pledges are turned into real action. Next year’s voting policy also sets out Railpen’s belief that a good transition plan should set out a company’s decisions on decarbonisation and adaptation in a comparable way with clear quantification of interim targets and milestones.

Corporate transition plans should also focus on material actions, activities and accountability mechanisms, account for biodiversity loss, natural capital impact and social impact as key externalities, clearly link targets, financial planning, and capital allocation and, where offsets are used, adhere to best practice principles.

Railpen will also urge portfolio companies to consider how they can better appraise and account for nature-related risk and redirect capital allocation decisions towards nature-positive outcomes. They will consider voting in support of resolutions which encourage companies to address drivers of biodiversity loss.

Although mindful of the ongoing challenges in accessing the best possible data, reporting and analysis of these types of risk is evolving and to support its assessment of companies’ transition plans, Railpen will use its proprietary framework and the UK Transition Plan Taskforce (TPT) best practice guidance.

Cybersecurity

Railpen will also urge companies to do more to counter rising cybersecurity risk. Building on its longstanding engagement with at-risk companies on cybersecurity (both directly and as part of the UK Cybersecurity Coalition) in 2023 Railpen will ask companies to explicitly disclose the governance and oversight structures in place to identify and manage cyber risks, as well as provide timely reporting of any breaches and the measures taken in response.

Where these risks are not deemed to be appropriately managed, the pension fund will vote against audit and other committees, and consider voting against reports.

“The world is constantly adapting, and we need to ensure that we are ahead of major sustainability and governance challenges so we can effectively engage with portfolio companies on behalf of the members of the railways pension schemes. Laying out a clear, defined voting policy allows us to highlight our expectations of performance on key ESG risks in a way that is accessible to our portfolio companies, our external managers, and our beneficiaries,” said Michael Marshall, Raiplen’s head of sustainable ownership.

“In the 2023 AGM season, we will continue to exercise our votes on those resolutions where we believe our vote will have the most impact. We take our role in enhancing the long-term investment returns of our beneficiaries extremely seriously, and doing so in a way that benefits the world around us and the needs of our members now and in the future,” he concludes.

 

 

The credibility of transition plans is under scrutiny because while sustainable investing is booming real world impact is going in the wrong direction. In response investors need to innovate on the nature of investment mandates says Colin le Duc, a founding partner of Generation Investment Management.

Innovating on the nature of investment mandates is the next stage of sustainable investing, said a founding partner of London-based sustainable investment pioneer Generation Investment Management, as rising carbon emissions – despite booming sustainable investing – lead to growing criticism of the ESG universe and its real-world outcomes.

Climate-led or impact investing is the next stage where investors take climate objectives as their “north star” and optimise risk, return and impact, said Generation founding partner Colin le Duc, speaking on the Top1000funds.com podcast.

This is distinct from the old view of sustainable investing which aims to deliver long-term financial returns in a sustainable way, le Duc said. Impact investing enables investors to tackle difficult issues more directly, rather than merely picking the “low-hanging fruit with…investment mandates [that] work today.”

“So, you know, not just investing in de-risked renewables in North America, for example, or not just buying the Tesla stock or whatever it might be,” le Duc said. “You actually need to focus on the hard-to-abate sectors.”

Carbon emissions continue to rise, he said, noting emissions will increase 2-3 per cent this year and are projected to rise up to 10 per cent by the end of this decade, at a time when they need to go down by 50 per cent.

Podcast host Amanda White, director of institutional content at Conexus Financial, pointed out only 10 per cent of capital flowing into climate is going to the solutions for the highest emitting, hard-to-abate sectors that create more than half of global emissions. 

Le Duc welcomed criticism of ESG as part of the “maturation of the sustainable investing and the ESG investing idea and space” and a pushback against greenwashing.

And he praised the “radical transparency” brought by Al Gore-backed initiative Climate TRACE, which moves away from voluntary reporting and tracks the biggest sources of greenhouse emissions for a more accurate– albeit uglier–view of progress on carbon reduction.

Climate TRACE had delivered news that is “very, very bad on actual levels of emissions, which are much, much higher than has historically been reported,” le Duc said.

“Real world impact is going the wrong way, even though sustainable investing is booming,” le Duc said. “So there’s a mismatch there, which I think is starting to play out in all of this greenwashing, and the pushback, and the confusion around what ESG and sustainable investing is.”

But while more reliable data is critical to understand the systemic risk the financial system is running with its carbon dumping, he warned that “perfection can be the enemy of the good,” and that “if we wait for perfection on reporting, every day we’re missing the 1.5-degree window.”

Systems need to be put in place concurrently with fixing the problem, he said, and “being directionally correct is actually better than waiting for perfection on data clarity.”

Unlike harder-to-define measurements such as human health or poverty, climate at least has a well-understood and broadly accepted metric to measure it, which is a ton of CO2, le Duc said.

The United Nations Climate Change Conference, known as the Conference of the Parties or COP, “probably needs a bit of a reboot…but it is the best we’ve got in terms of a global forum to talk about a global issue,” le Duc said, and it would be “extremely dangerous to dismantle it because…there’s no other forum like it.”

Collaboration is critical when facing a systemic challenge like climate change, le Duc said, and initiatives like the Glasgow Financial Alliance for Net Zero (GFANZ) encourage corporates to “put their neck on the line and say: ‘This is what we believe in, in terms of the climate transition.’”

Questions remain about whether these entities will stick to their commitments, he said, particularly in light of the wide-ranging challenges 2022 has brought to global markets, and there are signs some parties are “backtracking” or “push things a little bit to the right.”

With extremely high short-term energy prices, investors are weighing up whether they should “leave money on the table to stick to climate commitments,” he said.

“I think there’s a real focus on credibility of transition plans right now,” le Duc said.

 

Good quality, holistic research is more important than ever when assessing emerging markets investments with a sustainability lens, argues a portfolio manager at Newton Investment Management.
With volatility a strong theme of markets and economies over 2022, some investors have de-risked their portfolios and lost their stomach for riskier emerging markets investments. But a portfolio manager at Newton Investment Management argues emerging markets still offer value if you know how to find it.

Alex Khosla, portfolio manager in the emerging markets and Asia equities team at Newton Investment Management, said emerging markets cover a heterogeneous group of countries where four in every five people live today, accounting for about half of global GDP despite being serviced by about 10 per cent of equity allocations in the world.

There are also compelling reasons for sustainability-focussed investors to be in emerging markets, Khosla said. “Two-thirds of the world’s investment needs for a sustainable future, according to the UN, need to happen in developing countries,” he said.

Speaking with Conexus Financial managing editor Julia Newbould on podcast series Market Narratives, Khosla said Newton begins its search for emerging markets investments by looking at companies and asking three questions: What need is the company addressing? Is the company providing a new or innovative solution to that problem? Can you feel alignment, integrity and competence among the people running it?

 

Newton looks broadly at the industry and its relevance to the country and the region, asking questions like whether the company is investing capital in a way that will lower pricing to consumers, provide a particularly innovative solution or reach a new group.

This could include looking at whether offerings such as food or medicine or travel are a particularly pressing need in the targeted markets. Is the country facing problems with financial under-penetration? Are there negative externalities a venture, such as water intensity or biodiversity risks, and do they outweigh the benefits of the project? Is the company leading or lagging its industry in addressing these problems?

Newton also has well-resourced teams looking more broadly at things like geopolitical risks and their potential impact on different asset classes, leading the group to avoid or be particularly wary about investments in some countries or regions.

“Where you have weak institutions, that can result in things like kleptocracy and things like war, they’re often not great environments for businesses that are looking to try and sustainably solve and address needs in a society,” Khosla said.

Looking at management purpose involves analysing the alignment, integrity and competence of the people at the company, which helps ensure the company stays focussed on sustainable growth.

“Assessing management purpose is very hard, and it’s very qualitative but we do think it’s critical,” Khosla said. “We also think it’s why it’s important to have a team of investors that are trained across a wide degree of skill sets because some of these more qualitative things are difficult for investors trained to build spreadsheets.”

As an example of differentiating companies based on management, Khosla pointed to the solar industry which is increasingly important for renewable energy, and also increasingly crowded. But among the myriad companies in this space, it is a smaller number that are truly committed to innovating to reduce the cost curve, he said.

“Some companies are just there to empire build, and some companies are more interested in scale for scale’s sake, rather than really identifying where they can improve the industry’s cost profile by doing specific things around innovation,” Khosla said.

There are also examples of emerging markets companies “where the owners or the management of that company really found themselves in that industry because of some sort of patronage or some sort of link to a government that wasn’t because of their competence, it was because of other things,” Khosla said. “And we tend to believe that in the very long run those businesses are more likely to be found out.”

Differentiating between companies can be harder in some emerging markets, with limited data or limited voting posing difficulties for sustainability in particular. But these obstacles aren’t insurmountable, Khosla said.

“We do think there’s enough data now to–as long as you work hard and you keep plugging away–to start really trying to track company progress on whether they’re delivering…those sustainability goals.”

Active engagement on sustainability issues can also help drive emerging markets companies in a positive direction, he said, and also gives the investor the chance to analyse the management’s response.

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.”

Transition assets

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.