Nature is increasingly being viewed as a real economic asset – “natural capital”. Identifying the natural capital assets that can be used most effectively to offset carbon, such as land and forestry, can provide a real advantage in the path to decarbonising investment portfolios. This session examined the portfolio implications of transitioning to net zero with a specific focus on what benefit an allocation to natural capital can bring.

Click here to view Sarah’s slides 

Speaker

Sarah Bratton Hughes is the Head of Sustainability, North America. Her responsibilities include leading the sustainability strategy and ESG integration in North America. She joined Schroders in 2011 and is based in New York.
Previously, Sarah was an Investment Director at Schroders which involved supporting and representing the Schroders Sustainability Team as well as the Schroders US Small Cap and Schroders US Small & Mid Cap investment capabilities to clients and prospective clients. She was also responsible for ESG integration in North America.
Sarah was an Associate Product Manager at Schroders from 2014 to 2017, which involved supporting the US Equities teams and representing the Schroders US Small & Mid Cap and Schroders US Large Cap investment capabilities to clients and prospective clients. She was a product executive on the same team from 2011-2014.
Prior to joining Schroders, Sarah was a Senior Analyst Investment Performance at JP Morgan Asset Management from 2010 to 2011, which involved supporting investor and client inquiries relating to investment performance reviews. She was also a Client Service Associate at JP Morgan Chase from 2007 to 2010, which involved monitoring and implementing new account openings as well as maintenance of existing accounts. Qualifications: BA in Economics from St. Francis College; BSc in Business Management from St. Francis College.

Moderator

Tate has been an investment industry media publisher and conference producer since 1996. In his media career, Tate has launched and overseen dozens of print and electronic publications. He is the chief executive and major shareholder of Conexus Financial, which was established in 2005, and is headquartered in Sydney, Australia.

The company hosts more than 20 conferences and events globally each year and publishes three digital publications, including the global website and strategy newsletter for global institutional investors Top1000Funds.com, Professional Planner for financial planners, accountants and private bankers in Australia and Investment Magazine for Australian superfunds and institutional investors. One of the company’s signature events is the bi-annual Fiduciary Investors Symposium attended by global asset owners and hosted in the Americas and Europe.

Conexus Financial’s events aim to place the responsibilities of investors in wider societal and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes.

Tate served for seven years on the board of Australia’s most high profile homeless charity, The Wayside Chapel; and he has underwritten the welfare of 60,000 people in 28 villages throughout Uganda via The Hunger Project. In 2021 was appointed as a Member (AM) of the Order of Australia (General Division) for significant service to the community through charitable initiatives.

Investor Response

Bess Joffe is head of responsible investment for Church Commissioners for England and has just completed natural capital mapping of their portfolio.
The asset owner co-founded the Nature Action 100+ initiative, which is a biodiversity programme yet to be launched and modelled based on Climate Action 100+
As a member of the Science Based Targets Network Corporate Engagement Programme, the Church Commissioners will also play a role in co-designing nature targets.

Portfolio alignment is a hot topic and key area of focus for the TCFD review and COP26 private finance team. But what is it really telling us and how will it influence investment decisions? This session looked at the unintended consequences of the portfolio alignment metric, and how investors can incorporate forward-looking views into their analysis and how it affects investment decisions.

Speakers

Eva Cairns is the Head of Climate Change Strategy at Aberdeen Standard Investments and responsible for leading ASI’s climate change agenda to ensure a consistent and rigorous climate change approach is applied to our investments, solutions and communications. Eva leads the internal cross-asset class Climate Change Strategy Group and is responsible for TCFD reporting. She has published a number of climate related papers including ‘Investing in a changing climate’, ‘Climate change – Our approach Investments’ and more recently, she co-authored ASI’s climate scenario analysis white paper. Eva joined Standard Life Investments in 2010 from Halcrow Group Ltd (now CH2M Hill), a global engineering consultancy, where she worked as an Economist focused on environmental and socio-economic impact assessment of energy and transport projects. Eva graduated with an MSc in Economics with Distinction from the University of Edinburgh where her dissertation focused on the social cost of carbon.

Dominic Tighe is a policy advisor in the COP26 Private Finance Hub at HMT. This is small team of people supporting Mark Carney in a mission to build a private finance system for net zero, and make climate change a part of every financial decision, in the lead up to the COP26 summit in Glasgow.
Since joining early this year, Tighe has advanced the work of the hub on portfolio alignment metrics, and is a co-author of the TCFD technical paper on portfolio alignment metrics.
He is now playing a leading role in the engagement around the work, coordinating talks with industry, academia, policy makers and industry. He has spoken at numerous events to promote the use of alignment metrics including at the World Bank, UNFCC and NGFS.
Prior to joining the Hub, Tighe worked at the Bank of England, initially in data analytics and later on the policy around ‘too big to fail’. He completed an MSc in Central Banking & Financial Regulation from Warwick Business School during his time at the Bank of England, with his dissertation research on the green bond market.

Adam is the director of ethics and engagement for the Church of England Pensions Board, as well as co-chair of the Transition Pathway Initiative and a board member of the Institutional Investors Group on Climate Change, (IIGCC). He is also the co-lead, on behalf of CA100+, for engagement with Royal Dutch Shell that led to the 2018 joint statement on climate targets agreed between Shell and institutional investors.
He founded and now co-chairs the Transition Pathway Initiative (TPI) an asset owner-led and asset manager-supported global initiative which assesses companies’ preparedness for the transition to the low carbon economy (and publishes this through the London School of Economics). He is also the lead for the Church of England on the Mining and Faith Reflections Initiative (MFRI) a forum that convenes dialogue between mining company CEO’s and Church leaders.
Matthews also serves as a member of the Royal College of Physicians investment advisory board and on the Pension and Lifetime Savings Association (PLSA) stewardship advisory group.

Moderator

White is responsible for the content across all Conexus Financial’s institutional media and events. She is responsible for directing the bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. She is the editor of conexust1f.flywheelstaging.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 20 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly. She was previously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management. She has a Bachelor of Economics from Sydney University and a Master of Arts in Journalism from the University of Technology, Sydney. She was previously a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. White is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program consists of 22 fellows and seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Scenario analysis shows that the ability of pension funds to pay their pensions will be severely impacted by climate. Under different scenarios interest rates, GDP and bonds will all be negatively impacted with inflationary pressure rising. How can investors innovate and adjust their portfolio construction to protect their funded position from this inevitable threat?

Speakers

Innes McKeand is head of strategic equities at USS Investment Management, the investment management arm of the Universities Superannuation Scheme. He is responsible for all of USS’s listed equities portfolios across developed and emerging markets and is a member of the asset allocation committee. McKeand was previously head of equities at AustralianSuper, the largest superannuation scheme in Australia. His roles during his more than 30-year career have included head of equities at Kames Capital, chief investment officer at AIB Investment Managers in Dublin, and CIO at Scottish Life Assurance.

Barbara Zvan is the president and chief executive at University Pension Plan Ontario.
Formerly, she was chief risk and strategy officer for the Ontario Teachers’ Pension Plan (OTPP). Under her leadership, the strategy and risk team supported the plan’s sponsors in weighing plan design decisions, its board in setting appropriate benchmarks and risk tolerances, and its Investment division in designing a long-horizon total fund strategy. She crafted OTPP’s responsible investing and climate risk management strategy and directed its enterprise and operational risk management approach. After nearly 25 years, Zvan left OTPP in 2020 to pursue new opportunities.
Zvan is a fellow of the Society of Actuaries and the Canadian Institute of Actuaries, and holds an Institute of Corporate Directors designation and a Master of Mathematics degree from the University of Waterloo. She is on the board of the Global Risk Institute and the advisory board of the Queen’s University Smith School of Business Institute of Sustainable Finance. She has chaired the International Centre of Pension Management and the Sustainability Accounting Standards Board’s Investor Advisory Group, and sat on the boards of the Canadian Coalition for Good Governance, Cadillac Fairview, and the Chilean water utilities Esval (Essbio) S.A.
She was one of four appointees to the Government of Canada’s Expert Panel on Sustainable Finance, which delivered its final recommendations in June 2019. She also played a significant role in creating the G7 Investor Leadership Network, which represents over $6 trillion in AUM. Zvan is an honouree of Canada’s 2020 Clean50 and one of Canada’s Top 40 Under 40 for 2008.

Moderator

Tate has been an investment industry media publisher and conference producer since 1996. In his media career, Tate has launched and overseen dozens of print and electronic publications. He is the chief executive and major shareholder of Conexus Financial, which was established in 2005, and is headquartered in Sydney, Australia.

The company hosts more than 20 conferences and events globally each year and publishes three digital publications, including the global website and strategy newsletter for global institutional investors Top1000Funds.com, Professional Planner for financial planners, accountants and private bankers in Australia and Investment Magazine for Australian superfunds and institutional investors. One of the company’s signature events is the bi-annual Fiduciary Investors Symposium attended by global asset owners and hosted in the Americas and Europe.

Conexus Financial’s events aim to place the responsibilities of investors in wider societal and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes.

Tate served for seven years on the board of Australia’s most high profile homeless charity, The Wayside Chapel; and he has underwritten the welfare of 60,000 people in 28 villages throughout Uganda via The Hunger Project. In 2021 was appointed as a Member (AM) of the Order of Australia (General Division) for significant service to the community through charitable initiatives.

Indiana PRS’ five-year asset liability study has resulted in a newly approved target rate of return that CIO Scott Davis dubs one of the most realistic in the country, and a radically different asset allocation. Next on the agenda is a research project examining the fund’s sources of alpha which could have big implications for how it works with managers.

The $37 billion Indiana Public Retirement System completed a COVID-delayed five-year asset liability study in May resulting in a new asset allocation that assigns more assets to “everything outside of equities” according to CIO, Scott Davis.

The new asset allocation is more streamlined and simple, adding layers of diversification aligned with a liability-focused agenda.

“One thing we really focused on was how the assets integrate with the liability side,” Davis says. “We looked at what the ultimate objective is and not just an asset-only objective of hitting a return.”

This meant a lot of the asset allocation modelling centred around volatility and how that would impact employer contributions or a funding status.

“This allowed us to focus on the true risk you are taking on with the different portfolios,” he says.

This modelling combined with scenario analysis of different economic environments, with inputs and projections from a number of the fund’s managers and consultants, resulted in the asset allocation of 65 per cent to public assets, 25 per cent to private assets and 25 per cent to multi asset. It’s the first time the fund has transparently revealed its leverage by expressing its total exposures as 115 per cent.

Within the public assets 20 per cent is allocated to public equities, 20 per cent to fixed income, 15 per cent to inflation-linked, and 10 per cent to commodities.

While equities decreased slightly from 22 to 20 per cent, the fund also significantly increased its risk parity exposure which also contains equities, fixed income and commodities.

The allocation to risk parity, first appearing in the portfolio in 2012, has been doubled to 20 per cent, with an absolute return allocation of 5 per cent making up the multi-asset portfolio.

Davis says the risk parity portfolio – managed by Bridgewater, AQR and Panagora – has performed well for the fund and has achieved a couple of roles for the portfolio including inspiring a more balanced total portfolio allocation.

“The risk parity allocation started as a pilot program, to find the most diversified portfolio we could find,” he says. “With the rest of the portfolio outside of the risk parity allocation we have tried to get as close to balance as possible without leverage.”

Davis also points out it has been a difficult time for the strategy given the performance of equities, but it has proven that it adds value and provides a smoother ride.

In the absolute return portfolio, which has been halved to 5 per cent, the focus is on macro, technical trading strategies. Davis says the fund will still invest in those but with less managers and is working through which strategies “make most sense”.

The private assets allocation is divided between private equity, private credit and real assets with a dedicated allocation to infrastructure for the first time.

“This is a historic moment for the plan. We have so much confidence in this asset allocation going forward and the new target,” Davis says. “The board deserves a lot of credit for where we are.”

Alpha analysis

The next big project for the team is to analyse the various sources of alpha across all asset classes. The idea is alpha is unpacked across the various asset classes and viewed in a holistic sense so that the fund has access to the best alpha no matter where it sits in the portfolio. It will use a combination of Barra tools as well as some risk modelling on the private asset side by Aksia.

“We have done active versus passive analysis in our long-only portfolio in the past, but never comparing all alpha,” Davis says. “It could be that the result is we change where alpha lives, and what the structure of it is. For example, does it make more sense to have two unconstrained managers instead of 10 long-only active managers?”

Making cash work

All of the portfolio is managed by external managers with Davis looking to work closely with the managers in a strategic way.

An example of that is Parametric, which manages the fund’s cash overlay and helps it get some leverage in fixed income and equities.

“They are a real strategic partner and collaborate on what portfolios to build and how to manage our cash portfolio,” he says. “I’m really proud of the team and how we’re thinking about it.”

A few years ago Indiana PERS decided to maintain three-months of retirement payments as its cash allocation and use futures to overlay that. That was recently expanded to also include a 30 per cent drawdown buffer for margin calls in the cash overlay portfolio. So the fund has about $1 billion in cash.

“By having the overlay we have that money working for us. Our official allocation to cash is 0 per cent.”

The fund also looks at a more long-term approach to liquidity, particularly given a 25 per cent allocation to private assets.

“We look at what our five-year need is in terms of cash and we have about two times coverage today. So we are nowhere near having to sell assets, there is plenty of cushion.”

 

 

This conversation explored how global institutional investors are approaching the challenge of balancing financial and impact goals. As co-CIO for sustainability at Bridgewater, former CEO of ATP and current board advisor to GIC and Novo Holdings, Carsten Stendevad brings a broad range of perspectives from both the asset owner and alternative asset manager perspective. He shared insights garnered from his experience building sustainability assessment capabilities to identify current and future sustainability leaders, and engineering strategic and tactical portfolios designed to deliver strong financial and impact results.  

Speaker

Carsten Stendevad joined Bridgewater in 2017, and serves as co-cIO for Sustainability, overseeing Bridgewater’s overall sustainable investing efforts including the design and oversight of investment solutions with both financial and sustainability impact objectives. He is also a member of the operating committee and co-chairs the firm’s sustainable investing committee. Stendevad is a board advisor to GIC and its investment strategies committee, a board member of Novo Holdings, and a board member of the Danish Recapitalization Fund.
Prior to joining Bridgewater, he served as the CEO of ATP, Denmark’s national pension plan. Previously, Stendevad was a managing director in Citi’s investment banking Division in New York, with global responsibility for Citi’s corporate finance advisory team. Earlier in his career, he was a consultant at McKinsey & Company and an analyst at the Central Bank of Denmark. He served on the global steering committee for the Blended Finance Taskforce, and on the Danish Committee for Corporate Governance, where he led the development of a Stewardship Code for institutional investors. Trained as an economist from the University of Copenhagen, he also holds a Master of Public Policy from the Harvard Kennedy School of Government.

Moderator

White is responsible for the content across all Conexus Financial’s institutional media and events. She is responsible for directing the bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. She is the editor of conexust1f.flywheelstaging.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 20 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly. She was previously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management. She has a Bachelor of Economics from Sydney University and a Master of Arts in Journalism from the University of Technology, Sydney. She was previously a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. White is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program consists of 22 fellows and seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Investor Response

Jaap van Dam is the principal director of investment strategy at PGGM in The Netherlands, responsible for benchmarking and enhancing PGGM’s investment practice.
He is also the owner of VIA, VanDam Investment Advisory which helps asset owners and their investment managers to improve the way they invest in a strategical way – both the set up of the investment value chain and the conduct of the people who are part of the investment process.
He has a broad knowledge and experience in the field of investment strategy, investment policy formulation, asset allocation and value chain design. His other activities include chair of the VBDO, the Dutch Association of Investors for Sustainable Development, chair of European Chapter of the 300 Club and member of the research committee of the International Centre for Pension Management (ICPM). Together with Kees Koedijk and Alfred Slager he authored Achieving Investment Excellence: A Practical Guide for Trustees of Pension Funds, Endowments and Foundations.

Editorial coverage

The Florida State Board of Administration’s (SBA) commitment to venture capital over many decades has been a contributor to the fund’s performance. Last year the team had 340 meetings and calls, reviewed 109 funds, carried out due diligence on 26 and invested in three. Successful IPOs and SPACs, plus realisations from investments made in 2013/14, have led to a standout performance.

SBA’s venture allocation is predominantly early stage, comprising a two thirds bias to seed and Series A and B funding rounds in a strategy designed to try and secure better pricing.

“This is wholly intentional. We’ve seen significant valuation increases for later stage venture backed companies,” explains John Bradley, senior investment officer for $195.5 billion SBA’s 8.2 per cent private equity portfolio under which the venture allocation falls.

It is one of the consequences of bigger pools of capital – triggered in part by new legislation introduced in the US in May 2020 that allows 401(k) funds or DC funds to invest in private equity and venture capital – flowing into venture, creating crowding in the later stage.

The hottest spot is typically two years prior to a traditional IPO where trillions of dry powder now competes with the likes of SoftBank, Tiger Global and other funds paying sky high prices lest they miss out on the next unicorn.

“Late-stage valuations are at levels we have never seen before” says Bradley.

Early-stage investment has bought challenges for Florida despite the success of the allocation. None more so than its impact on the NAV or net asset value of the portfolio, resulting in venture currently accounting for 27 per cent of the private equity allocation. On a paid in capital basis, the allocation is still well within SBA’s 10 per cent target for the asset class, but strong NAV growth has sent venture ballooning above the upper boundary of the fund’s policy range, consistently outpacing paid in commitments as a percentage of the total PE portfolio. Unable to control distributions or liquidity as companies stay private for longer – while late-stage valuations climb ever higher – SBA must ride it out.

“If you look at venture capital exposure in the portfolio on paid-in capital basis it is 12 per cent allocation but if you look at it on a NAV basis it is 27 per cent. The real increase in valuations in venture is driving that exposure on, plus the fact that distributions have been lower relative to the other asset classes like buyouts,” explains Cambridge Associates’ Sheila Ryan, who advises Florida on the allocation and reassured council members that SBA’s performance in private markets outshines most peers in its 500-strong client universe. “The numbers are very strong on an absolute and relative basis,” she said.

The NAV factor leaves Bradley and his team of eight repeatedly probing the allocation to justify the reason for such a large exposure. Current discussions centre on whether to pull back or sell in the secondary market, he says.

That alongside navigating other trends in venture like the impact of longer hold periods between investment and final distribution, currently causing him to tweak with the pacing model.

“We continue to see hold periods lengthen,” he said. “Much of the success we are seeing in 2020 is because of deals done and rounds raised back in 2013/14.”

Getting in

The other challenge inherent in early-stage venture includes fierce competition for smaller, early-stage funds. Although SBAs commitments to venture have been relatively stable over the past decade (averaging 12.4 per cent of total PE commitments since 1998) accessing early-stage investment in healthcare and biotech funds has proved particularly challenging. It’s left the portfolio with an overwhelming IT bias and only 13 per cent in healthcare and biotech.

For sure, some potential opportunities in these sectors never passed Florida’s due diligence process, but others were quickly oversubscribed given their small size.

“You are looking at $500 million in terms of fund size,” says Bradley explaining that more often than not SBA will attempt to “get in at whatever we can” and then scale up over time. But even “a $10 million allocation to a $500 million fund that has $2 billion of interest is difficult.”

The bunfight for access has seen GPs cash in, offering a swathe of late-stage and follow-on funds. A competitive backdrop which surely informs executive director and CIO Ash Williams relief that SBA hasn’t been compelled to publish the finer details of its commercial relationships with investment partners.

Commenting broadly on the fees SBA pays across the portfolio at the beginning of the meeting, he says new laws had recently threatened to force the fund to publish fee details with its asset managers. Florida’s brand and scale and the longevity of some of its relationships means it has preferential fees compared to many other investors and keeping the details secret will continue to give SBA an edge.

“We get superior terms and if you are an asset manager you don’t want to telegraph to every potential client what a great deal you are giving Florida. There is no reason for other clients to have those terms.”

Building relationships with GPs scattered around the globe is an arduous process that takes years. Last year Bradley and his team had 340 meetings and calls, reviewed 109 funds, carried out due diligence on 26 and invested in three – all of which were private equity. A process supported by a Cambridge Associates’ index which measures the effectiveness of SBA staff in selecting managers.

SPACs

Bradley and Ryan also note how SBA’s venture portfolio got a boost from the SPAC (Special Purpose Acquisition Companies) craze, which holds both pros and cons for companies.

“About 50 per cent of the appreciation in the venture capital exposures over 2020 was driven by public company appreciation,” says Ryan describing SPACs arrival on the scene as “a big change” feeding into the growth numbers in venture.

As for strategy going forward, Florida is pulling back. This means sticking with core GPs and strategies and not putting any more dollars to work.

“We prefer to go in when venture is out of favour, get larger check sizes with better GPs and negotiate fees,” Bradley concludes.