Jonathan Grabel, CIO of the $87 billion Los Angeles County Employees Retirement Association, believes good processes form the bedrock of successful investment. Processes govern how investors identify the best opportunity and underwrite investments; they shape liquidity management, operational effectiveness, building the team and how staff provide information to the board, he tells Top1000Funds.com from the investor’s Pasadena offices.

“Investment involves an uncertain future state. Good processes don’t necessarily guarantee the best outcomes, but they are critical.  Strong processes, likely, increase positive outcomes by reducing impacts from uncompensated risks – mostly operational ones,” says Grabel, who has overseen America’s largest county pension fund since 2017.

Perhaps the most important element of the process is strategic asset allocation, where LACERA staff completed implementation of the latest asset allocation in January. The new allocation has built out investment grade fixed income and credit (both now 13 per cent) and reduced the allocation to global public equity to 28 per cent.

The adjusted portfolio allows LACERA to draw a greater contribution from higher interest rates both in terms of return and diversification and is the culmination of the triennial re-appraisal of multiple factors including changes in capital market assumptions, new philosophies to emerge in terms of asset allocation or best practice, and any movement in LACERA’s liabilities where the mature fund’s benefit payments exceed contributions.

“Our current asset allocation is set to perform in a period of heightened uncertainty. If you look at the environment over the last five months, you hear the word uncertain a lot and the best strategy during times of uncertainty is diversification. You never know what markets are going to do, but we take comfort in the excellent process behind our SAA that supports building and monitoring the portfolio,” says Grabel.

LACERA allocates to asset categories comprising a 48 per cent allocation to growth (global equity, private equity and noncore real estate) a 15 per cent allocation to to risk mitigation (core real estate, natural resources and infrastructure and TIPS) and a 24 per cent allocation to risk reduction (investment grade and government bonds, diversified hedge funds, and cash) as well as the 13 per allocation to credit.

The cash overlay (1 per cent) also showcases process in action.

LACERA created a cash overlay in 2019 to support liquidity needs and eradicate cash drag in a low-interest-rate environment. The overlay was also created to support rebalancing and help reduce over and underweights on a daily basis to better adhere to the strategic asset allocation. It was put in place as a risk mitigant rather than a source of alpha, but the overlay has generated over $500 million of gains.

“The cash overlay allows us to best manage liquidity by being able to hold more than our 1 per cent allocation yet no be penalised by a drag on performance. The cash we hold above 1 per cent is equitised based on our SAA so we can offset under and overweights at the functional asset category level.”

LACERA has also introduced a 90-day rolling cash forecast to ensure it has at least three months of cash equivalents on hand for benefit payments, operations and investment purposes. “It’s something we have maintained since 2020 and ensures we have sufficient liquidity at all times,” he says.

Staff must ensure their direct portfolio does its job and performs based on the mandate, without losing sight of the indirect asset classes that influence their portfolio and the wider contextual environment, he says. For example, a good private equity investor needs to understand the cost of capital and credit markets because it’s a key component of financing private equity.

Gabel says the biggest driver of the whole portfolio is beta, which sets the direction of the portfolio’s performance.

Sources of alpha

That said, the most important source of alpha has come from LACERA’s 13 per cent allocation to credit, the best-performing functional asset category for the last three years. The allocation doesn’t differentiate between private and public credit (analysis showed that the private allocation was actually more liquid) and focuses on moderate risk, eschewing distressed assets.

“A key return component is yield.”

The standalone allocation was set up in 2019 when Gabel brought all LACERA’s disparate credit exposure and benchmarks that spanned high yield to syndicated bank loans, hedge funds and real estate debt into one allocation with a single benchmark to mandates to 12 key relationships. The core element of the portfolio is allocated to separately managed accounts in evergreen structures rather than having to continuously invest in funds. Benefits include hard fee hurdles and more profit retention for LACERA than investing in funds, he says.

Elsewhere, numbers show alpha is much higher in private equity co-investment rather than fund investment, but in another example of process at work, the allocation to funds supports co-investment and is an example of LACERA using “all the tools” at its disposal. LACERA has a 17 per cent target allocation to private equity, divided between direct (co-investments and secondaries) and fund investments.

The benefits of investing with emerging managers

LACERA allocates to emerging managers in credit, public equity and hedge funds, and is about to roll out emerging manager mandates in real estate and real assets for the first time. Relationships are based around revenue sharing and securing capacity rates for subsequent investments.

“The goal of the emerging manager program is to enhance returns for the fund as a whole. By investing with emerging managers, we aim to find opportunities that might be capital constrained or more niche. We don’t want to just enhance returns, and we also seek investments that mitigate risk. Our goal is to have these programmes outperform underlying categories and hopefully secure future investment rights for LACERA,” he says.

Allocating to smaller firms that are earlier in their cycle is supported by policy statements and a belief that inclusive and equitably run firms that diminish groupthink will outperform because they tap into human capital alpha.

“LACERA’s investment policy statement says that effectively accessing and managing diverse talent leads to improved outcomes. We want to tap into human capital alpha. It is a dimension of our underwriting across the entire portfolio that reflects that we think that people matter. We believe that we have a fiduciary duty to have the best collection of people manage assets on behalf of our members.”

The C$86 billion ($62 billion) Investment Management Company of Ontario (IMCO) is re-considering its portfolio’s US exposure as the Trump administration’s trade war and ballooning US debt and deficits threaten the US market’s long-term outperformance.

The fund’s record annual return of 9.9 per cent was driven by surging equity markets last year despite an underweight position in the Magnificent Seven. However, CIO Rossitsa Stoyanova says the fund is now carefully deliberating its geographical weights, given question marks around the role of the US in capital markets.

The 9 July deadline that the US set for completing trade talks is rapidly approaching, but the Trump administration has only secured two trade frameworks – with the UK and China – with a dozen more to be completed in the next 10 days.

IMCO is heavily invested in North America with 52 per cent of its investments across all asset classes in the US and 29 per cent in its homeland of Canada. Its US exposure is more dominant in its equity portfolio, accounting for 60 per cent of the exposure, followed by the Asia-Pacific (16 per cent), Europe (12 per cent), and Canada (9 per cent).

“We were pretty comfortable to have a pretty big concentration to the US, and it worked great until February,” Stoyanova tells in an interview with Top1000funds.com. “Now we are considering whether we should have a US target… which we don’t. We need to figure out how comfortable we are to be exposed to the US.”

Equities (which make up 23.2 per cent of the fund’s assets) returned 24.2 per cent for the year against the 27 per cent benchmark, with an underweight position against the Magnificent 7 one factor that dampened returns, although IMCO then employed a portfolio completion overlay strategy to bring its Magnificent 7 portfolio exposure closer to the benchmark.

“The portfolio was very resilient during April – a lot of the things that we set up for the portfolio worked: we had enough liquidity so we didn’t have to sell. We have a rebalancing methodology which is very systematic. So some of the systems and processes that we put in place worked as intended.

“What I’m certain of today is that we should have a US exposure target, which we don’t. We need to figure out how comfortable we are to be exposed to the US.”

Similarly, Stoyanova and her team are assessing their approach to currency. The appreciation of the US dollar against the Canadian dollar contributed to the 2024 returns. Now, the fund’s exposure to the US dollar and US treasuries is attracting more scrutiny, given they may no longer offer the same diversification benefit in a downturn.

“Our expectation today for the long term is that the US dollar will depreciate from where it is today, and this is a long-term trend. So we’re considering how much we have in US dollars, and also what other assets could be used as a diversifier and as s safety in a downturn or in that crisis.”

Central to the fund’s activities is its regular thematic analysis of global markets – the IMCO World View. It pinpointed 12 themes which inform its long-term investment strategy, including accelerating deglobalisation and addressing inequality trends, as well as decelerating climate change and sustainability.

“The trends have materialised – what we didn’t expect is this massive acceleration of the trends,” Stoyanova says.

A growing focus on private markets and internalisation

Private markets are central to IMCO’s strategy to weather this environment of potentially higher volatility and inflation, given its long investment horizon and tolerance for illiquidity and complexity.

IMCO’s exposure to global credit, infrastructure, and private credit has tripled in the past five years with private assets now almost half of the total portfolio.

“Private markets will remain a focus for the fund. We think they bring diversification that we cannot get in the public markets.”

While the absolute performance of IMCO’s private market portfolio was strong in 2024, its net value-add was 244 basis points below its benchmark, largely given the outperformance of public markets in comparison. However, it expects those valuations to converge over the long term.

The organisation also now runs about half of its private market portfolio internally to save on fees and invest in assets that align with its worldview. Its mid size means it co-invests alongside its managers and now has an expedited process to approve smaller investments under C$50 million.

“We are very clear on what kind of co-investments we like to do. We’re nimble and we are reliable, and they appreciate that, which means that they know exactly what we’re looking for. So when they offer it to us, we’ll either quickly say ‘yes’ or ‘no’, and if we say ‘yes’, we’re going to be there in the time frame that they need and that’s important.”

IMCO will co-invest alongside its partners but does not have the scale of other Maple 8 funds to take full ownership of assets. It recently identified a need for more exposure to infrastructure utilities but deal flow is lumpy and requires larger investments than it typically makes (IMCO does own 10 per cent of Australian energy transmission network AusNet).

IMCO has instead taken a novel way to meet that goal through publicly-listed proxies.

“We do a program with our public equity factor team that invests in public US utilities. It’s a diversified basket of stocks that sits in infrastructure, and it fills that need that they identified in the portfolio for utilities. We might do more of that in privates.”

Similarly, IMCO’s private equity and credit teams work closely together given they’re investing in the same kind of companies, just across different areas of the capital structure.

“I think it’s going to become more important because the public and private worlds are coming closer and closer together. So these artificial definitions might make less sense in the future.”

Strengthening advisory role, a more nimble approach

IMCO has faced more than its share of challenges since it was created in mid-2017 to manage the assets of local public sector bodies.

“We had Covid,” says Stoyanova. “We had the first war in Europe. We had inflation for the first time in a long time – and Liberation Day.”

They not only created a challenge to performance, but also made it difficult to build internal investment teams during such volatility. Yet the fund has taken those setbacks in its stride to build a strong foundation and culture.

“With that volatility, our portfolio and strategies have done really well – 2024 was our best year of performance,” Stoyanova says from the fund’s offices in Toronto.

“We’re big enough at C$86 billion ($62 billion) to help our clients and do interesting things that are not just investing in an index, but we’re also small enough that we all sit in one room. It’s a big room, but we still fit in one place.”

IMCO last year added four new public sector clients, joining long-term clients such as the $C31.7 billion Ontario Pension Board – a defined benefit plan for Government of Ontario employees – and the Workplace Safety and Insurance Board, an insurer which helps Ontario people get back to work after a work-related injury or illness.

The majority of its clients are now also taking IMCO’s strategic asset allocation advice, shifting from overweight allocations to underperforming assets such as real estate to newer asset classes like global credit and private equity.

Stoyanova says it is now talking to clients about taking a more responsive asset allocation approach given the increasing pace of change across markets.

“We don’t market time, but we’re market aware, which means that we have a worldview that we think gives us an idea of what the world and the markets will look like for a medium time period, say three to five years – and guides our investing.

“One of our objectives is to – together with our clients – come up with a methodology where we can adjust the asset allocation more to respond to market conditions without going through an elaborate process every three years by doing the asset-liability study with them.”

It’s the goal of every allocator to deliver alpha and beat their benchmarks, and one way to achieve this is to home in on the amount of tracking error taken across different parts of the portfolio.

It’s why Frank Mihail, CIO of the $8 billion North Dakota Department of Trust Lands, a sovereign wealth fund that invests North Dakota’s oil revenues to finance public schools across the state, is rolling out a core-satellite approach to portfolio construction that he believes will have an instrumental impact on controlling tracking error.

Mihail oversees a diversified all-weather portfolio comprising a 75 per cent allocation to alternatives, divided between private market (45 per cent) and long short active management (30 per cent) with the remainder in passive strategies. In conversation with Top1000funds.com from the fund’s Bismarck offices, Mihail turns to North Dakota’s public equity book to illustrate the strategy in action.

The endowment has three line items in the US equity allocation – one passive large cap and two (large cap and small cap) actively managed long-short extension allocations, he explains.

“The idea behind the barbell strategy of passive, and long short extension strategies which come with more tracking error than traditional long only active management, is that it gives managers the tools to be able to make money in a bear market.”

The extension managers run at 6-8 per cent tracking error, but when this is blended with zero tracking error in the passive allocation, it reduces to a 3 per cent tracking error for the total US book. “This is where we feel comfortable right now, but if we want more tracking error next year, we can dial up by reallocating more from passive to active.”

Mihail, who joined North Dakota in 2023 from the Public Employees Retirement Association of New Mexico (PERA), introduced the same portfolio construction in the real estate portfolio that same year. The allocation had an investable benchmark from its fund of funds manager. This became the passive beta, or home base, for the allocation. Based on this, two satellite managers allocate to secular tailwinds like industrial and were then tasked with driving excess returns beyond passive beta.

The problem with infrastructure benchmarks

Mihail has now turned his attention to infrastructure, where North Dakota has a 7 per cent target allocation. Yet the core-satellite portfolio construction is more complicated in infrastructure because of the lack of benchmarks that accurately reflect the volatility and risks investors face in the asset class.

For example, public market volatility is often benchmarked to a private market portfolio which can destroy total portfolio alpha. Risk mismatch is another issue. “In infrastructure, there is a spectrum of risk from core to core plus, value add and opportunistic and investors want to home in on their target risk profile. The benchmarks available don’t’ meet the need for allocators for different reasons.”

To get around the problem, Mihail is working on developing a bespoke infrastructure benchmark on which to build the same core-satellite approach. He says the CFA Institute’s seven properties of a valid benchmark under the acronym SAMURAI are guiding a construction process where he is particularly mindful of the importance of making it investable – many benchmarks that get constructed are just theoretical and therefore don’t reflect a true opportunity cost, he says.

“The Russell 1000 is investable – you can go out and buy 1000 names and ETF products. One of the most popular infrastructure benchmarks is CPI +3 per cent, but you can’t buy this if you want to invest in it. Only with an investable benchmark that reflects a true opportunity cost is it possible for boards to measure outperformance and align incentives with staff. Investable benchmarks allow for incentive compensation to become a reality.”

Instead of throwing “darts at a board” and hoping for the best, investable benchmarks that reflect zero tracking error support consistent alpha generation and the wider goals of the portfolio, he continues. With a clear definition of how much active risk they want to take away from the benchmark, investors can target active managers who can deliver those excess returns.

“There is no alpha unless you can define what the benchmarked, or index beta, is first. This is the North Star, and once you have defined this, you can go and allocate to active managers that you believe can deliver excess returns. If these managers deliver more tracking error than you want, investing in passive beta becomes a portfolio construction tool that allows you to dial tracking error back to target.”

The benefits of only a few line items

Mihail attributes his ability to dedicate time to devising benchmarks and fine-tuning tracking errors to another unique characteristic of North Dakota’s portfolio: the lack of line items. There are only 40 in the whole portfolio so he is not buried in operational issues like setting up new accounts or issuing capital calls.

The administrative burden of investment is also contained by his preference for evergreen structures that don’t have the same operational intensity of closed-end funds, where managers return to market for repeated vintages.

In the venture capital allocation, the fund invests with just three blue chip managers across sectors and stages in a highly concentrated book and Mihail relies on the managers to provide underlying diversification via different products and sectors, seed and later stage exposure.

It’s a similar story in private equity which comprises just one line item with a fund of funds manager.

“The liquidity challenge is big in private equity right now, and a lot of our peers are overweight. We are not facing the same challenges partly because we don’t have any liabilities and don’t have to touch our principal to meet distributions.”

He recently expanded private credit (it has a 20 per cent target) with additional exposure to asset-backed and opportunistic strategies in the secondaries space.

Mihail concludes that the portfolio held up well during recent market volatility, partly because of the low allocation to public equity and being well-positioned for the rotation out of the US into international equity.

“The ACWI index is about two-thirds US one third international, we target a 50:50 split which positioned us quite nicely going into US sell-off,” he says.

While a potential new law in North Carolina will clear the way to invest up to 5 per cent of the state’s $127 billion retirement money in digital assets, state treasurer Brad Briner tells Top1000funds.com he won’t be piling into bitcoin anytime soon. 

Despite the enthusiasm around digital assets, propelled by President Donald Trump’s vision for a national bitcoin stockpile, Briner says North Carolina Retirement Systems is a “low-risk investor” and it “needs to see less volatility in the future for bitcoin to make sense”. 

“We already have exposure to digital assets because we own the S&P and stocks like Tesla have essentially become bitcoin depositaries,” he says in an interview, reflecting on the fact that companies around the world have gone on a bitcoin buying spree and stockpiled the digital currency. Around 130 listed firms hold a combined $87 billion of bitcoin, according to data from BitcoinTreasuries.net. 

“Maybe if the legislation is passed it will engender a period of low volatility in digital assets that will make it more compelling for a pension system like us.” 

The bill, named the NC Digital Assets Investments Act, passed the legislature in the House and is awaiting Senate approval. Its supporters argue that bitcoin investments would enable North Carolina to generate positive yields while also positioning the state as a leader in technological innovation. 

Briner says the legislative bandwidth is welcome, but the main reason for caution is that bitcoin does not behave positively in a crisis and is not resistant to shocks. 

“Framing bitcoin as anti-fragile and an asset that acts as a hedge against monetary debasement is not quite right. I need to know what role it will play in the portfolio until we decide to put it in the portfolio.” 

He also flags longer-term worries in the growth of digital assets. 

“Digital assets are also a worry because the country is opening a pandora’s box by removing the dollar as the reserve currency. It is 30-years off, but this would have a profoundly negative implication for our country.” 

Still, Treasurer Briner reflects that he is routinely surprised by how many people in a personal and professional capacity hold bitcoin. 

“Every investment professional I know owns bitcoin in some capacity or another. It’s such an interesting innovation, and they want to pay attention to it. There is always controversy around new asset classes, and any new financial innovation meets resistance.” 

Popular asset class 

North Carolina is not alone in opening the door to digital assets. It is one of around 16 US states including Texas to have crypto bills under consideration while some have already dipped a toe. The $143 million State of Michigan Retirement System has invested in Bitcoin ETFs and the State of Wisconsin’s Investment Board which manages $156 billion in assets for the Wisconsin Retirement System was also an early institutional adopter of the newly approved Bitcoin ETFs. 

At the end of last year, a report from pension specialists Cartwright said an anonymous UK pension fund had become the first UK fund to invest (3 per cent of its assets) in cryptocurrency for the first time. 

Elsewhere, Abdiel Santiago, CEO and chief investment officer of the Fondo de Ahorro de Panama, Panama’s $1.5 billion sovereign wealth fund, is also keenly watching the market develop from the sidelines. 

In 2022, Dutch investor APG’s chief economist Thijs Knaap and senior strategist Charles Kalshoven argued against investing in crypto. They said that long-term investors need to invest in assets that generate cash flows – stocks that pay dividends, bonds that pay interest and real estate for which rent payments are received. Cryptocurrencies, they argued, do not generate any cash. 

“The only way to make a return on cryptos is to sell them to the next investor who is willing to pay more than you did. In the meantime nothing happens, to us that makes investing in cryptos unattractive as well as unpractical,” they said. 

Knaap and Kalshoven argued that although pension funds do invest in other assets without cash flows (commodities and gold, for example) these assets have other appealing characteristics. 

“We know, based on data that sometimes goes back hundreds of years, how, for example, gold, moves along with the general price level and thus provides a good hedge against inflation,” they said. “Bitcoin doesn’t have a 200-year history, and neither does it have a strong correlation with other assets. Well, lately maybe with stocks, but that provides no diversification to our portfolio and no hedge against anything. So, in short: crypto currencies provide no cash flows and no hedges. From a technical investment perspective we therefore don’t see a reason to invest in them.” 

Details of the Act 

North Carolina’s provision limits investments to mutual fund equivalents of cryptocurrencies and prevents direct purchases of specific currencies. 

Key provisions of the Act stipulate that digital assets must be exchange-traded products with a minimum average market capitalization of $750 billion over the past twelve months. The bill also outlines strict guidelines for the maximum investment allocation, sets standards for their custody and investment management, and clear definitions and standards are provided to ensure that only qualified digital assets are included. 

The bill passed in a 71-44 vote with Democrats largely standing against the bill.  Supportive representative Mark Brody said, “With the U.S. dollar facing periods of inflation and devaluation, it is prudent to explore this new breed of assets which can offer a viable hedge against inflation,” according a report of the Act’s passage detailed in the Carolina Journal. 

“You’re investing in the hope that someone else will think whatever it is you bought is worth more than what you paid for it. Whether that’s a crypto, a stock, or a barrel of oil, it all works the same way,” said Republican Keith Kidwell. 

North Carolina’s Investment Management Division employs 20 investment professionals and oversee both the pension fund and the Short-Term Investment Fund (STIF) and the Ancillary Investment Programs. Around 58 per cent of the portfolio is in growth assets, 34 per cent in rates and liquidity, 9.8 per cent to inflation sensitive and diversifiers and 2.1 per cent t multi strategy. 

Canadian pension giants are grappling with the complex consequences of a national anti-greenwashing rule, which could leave businesses and investors more exposed to legal challenges for issuing environmental claims in marketing materials.   

The law, known as the environmental provisions under the federal Competition Act, was introduced in June last year.  

The country’s largest pension investor, Canada Pension Plan Investment Board (CPPIB), was criticised for recently backing down from the commitment to make its portfolio and operations net zero of greenhouse gas emissions by 2050. While it is the only known member of the Maple 8 to retreat from its net zero target, the move is an indication that the anti-greenwashing rule is causing compliance anxiety among asset owners, and that a divergence in climate reporting philosophies is emerging.   

Funds will be negotiating with the far-reaching impact of the law in the years to come as they are both users of portfolio companies’ ESG data and preparers of their own sustainability reports. Top1000funds.com canvassed key Canadian asset owners on what the new law means for their sustainability targets and engagement with companies on climate reporting.   

Climate anxieties  

In CPPIB’s explanation of the net zero backflip, which was quietly announced in the FAQs section on the fund’s website this month, it cited worries that “recent legal developments” in Canada are changing how net zero targets are being interpreted.   

In particular, it was said there is “increasing pressure” to adopt standardised emissions metrics and interim targets, many of which “don’t reflect the complexity of global investment portfolios”. CPPIB has never committed to interim targets since it introduced the net zero target in February 2022.   

The legal context

The new environmental provisions in the Competition Act essentially introduce the expectation that, from June 2024, any claims promoting products or business activities as having environmental benefits should be backed up with “adequate and proper tests” or “internationally recognised methodologies”. These terms are not defined under the act and leave plenty of room for interpretation – the methodologies could be developed by regulators, standards-setting bodies or different industries, for example.

Last week, another part of the provisions called the private rights of action came into effect. Individuals can now bring greenwashing allegation before the Canadian Competition Tribunal, which may accept and adjudicate the claims if it deems them to be “in the public interest”.

This means companies and funds can be dragged into drawn-out and costly legal battles over environmental claims, and many Canadian businesses have removed or are considering removing climate commitments simply because it is prudent to avoid the legal risks.

It previously used emerging markets as a reason. In a Harvard Business School case study in 2024, chief sustainability officer Richard Manley said CPPIB’s allocation to emerging markets “where net-zero was forecast by 2060-2070″ means its emissions would rise in the near-term, and setting interim targets would “constrain portfolio design”.   

While the fund was the only Canadian pension manager to explicitly include scope 3 emissions in its net zero goal, climate group Shift was critical of the fund for not including scope 3 emissions in its carbon footprint calculations. The fund cited a lack of information – only 30 per cent of its investee companies report scope 3 emissions – as the reason in its 2025 annual report.  

A CPPIB spokesperson said the fund wants to seek “coherence and consistency” in dealing with risks and opportunities of climate change, rather than being tied down to “targets disassociated from how we navigate through the whole economy transition and factors driving change whether interim, medium or quarter century dates”.  

CPPIB is not alone in questioning whether climate targets can truly reflect a portfolio’s sustainable impact. The UK’s largest pension fund Universities Superannuation Scheme says it will continue to measure its carbon emissions and plans to produce at TCFD report this year, but going forward the investor will spend more of its energy in engagement with government and corporates than producing reports. Explaining the decision, CEO Simon Pilcher said the fund would rather divert time spent on reporting to ratcheting up pressure on policymakers to facilitate policies friendlier to climate solutions.  

“Our portfolio has decarbonised significantly, but to put it bluntly, it’s not made a jot of difference in the real world and our focus is on a real-world impact rather than window dressing of our own portfolio,” said Pilcher. 

Divergence 

But most of CPPIB’s Canadian peers have doubled down on climate targets. Weeks after CPPIB’s decision, Québec’s CDPQ published its next five-year climate strategy, which reaffirmed its commitment to net zero. The fund has $58 billion invested in so-called “low-carbon assets at the end of 2024, and is running ahead of its 2017 goal to reduce the portfolio carbon intensity by 60 per cent before 2030.  

CDPQ is often hailed as a sustainability leader among institutional investors, including in an annual pension fund ranking by consultancy Global SWF. Its global head of sustainability and head of CDPQ Global, Marc-André Blanchard, was recently appointed chief of staff for Canadian Prime Minister Mark Carney, fuelling hope that climate progress will be higher on the new administration’s political agenda.  

CDPQ’s new target in the next five years is to reach $400 billion invested in “climate action” by 2030, including companies committed to decarbonising their activities and climate solutions, the fund said.  

But standing by existing climate commitments from this point on will not only require genuine belief in the impact of sustainable investment, but also rigorous compliance practices. Among measures to help keep track of CDPQ’s portfolio transition status in 2024, the fund adopted a real estate tool to monitor alignment with the Paris Agreement-complied carbon trajectory, as well as enhancing its in-house data compilation process and sustainability rating methodology. Whether more funds would similarly put additional resources into the management of sustainability data remains to be seen.  

HOOPP, OMERS and BCI also confirmed commitments to their existing climate plans to Top1000funds.com, while PSP Investments declined to comment. OTPP and AIMCo did not respond to requests for comments.    

Ontario’s OMERS said managing climate risk in the portfolio is part of its fiduciary duty for almost 640,000 members and it remains committed to reporting progress on a yearly basis. 

Unintended consequences 

In another sign of the Competition Act’s side effects, British Columbia’s BCI told the Competition Bureau in a public consultation that as investors, pension funds are both users and producers of company climate reports. While the act’s anti-greenwashing rule applies to consumer-facing marketing information, not investor-facing materials, the fund is worried that the distinction is not sufficiently clear to assure Canadian companies that historical company data will not be interpreted as environmental claims. 

Jennifer Coulson

The country’s biggest bank, the Royal Bank of Canada, walked away from its environmental promises in May and triggered speculation that more companies will quietly abandon their commitments.  

BCI’s proxy voting guidelines state that it will vote against directors at companies that do not provide climate-related information, and it will not accept companies using the bill as an excuse, the submission said.  

“We’re disappointed that it has prompted some companies to pull back on their sustainability disclosures – an unintended consequence for investors who rely on access to material ESG data to inform investment decisions,” Jennifer Coulson, BCI’s senior managing director and global head of ESG told Top1000funds.com.  

The fund will engage with companies to bring their climate reporting up to global standards, but it is pushing for stricter mandatory climate disclosure requirements in front of the country’s market regulator Canadian Securities Administrators (CSA). The legal development around that is on pause the CSA is worried that the mandatory climate disclosure would make the Canadian market uncompetitive amid ESG pullbacks in the US, but Coulson said “there is no substitute” measures.  

International learnings 

Australian pension funds have been facing similar anti-greenwashing pressures from their members and the market regulator, the Australian Securities and Investments Commission (ASIC).  

In 2020, the A$93 billion Rest Super was sued by a member who argued the fund breached its fiduciary duty by not properly considering the risks posed by climate change. The case resulted in Rest Super issuing a public statement acknowledging the significant financial risks of climate change, as well as committing to a net zero carbon footprint by 2050 and regular progress reporting. 

Meanwhile, ASIC made anti-greenwashing one of its top enforcement priorities in 2024, and various super funds were caught up in its legal crackdown. The A$65 billion Mercer Super was fined A$11.3 million by the Australian Federal Court last August for including fossil fuels, alcohol and gambling companies in its ‘Sustainable Plus’ investment options, while the A$15 billion Active Super was penalised with a A$10.5 million fine for investing in fossil fuel, gambling and Russian entities while claiming their exclusions in ESG screening.  

There is similar criticism that “nuance is missing” in the Australian regulator’s approach, with the PRI calling for more engagements between ASIC and Australian asset owners to recognise the uncertainties in financing climate transition and the reality of how sustainability goals are translated into investment portfolio.  

But for their Canadian peers, perhaps the key takeaway is to “do what they say, and say what they do” when it comes to sustainable commitments if they want to avoid being called out on climate misrepresentation.

 

This article was corrected on 27th June to clarify that USS has no plans to stop TCFD reporting.

Norges Bank Investment Management (NBIM) is using an internally developed engine powered by AI to monitor and measure its portfolio managers’ skills, aiming to identify behavioural biases, improve decision making, efficiency of trades and save costs.

The system, called the Investment Simulator, currently covers all internal active portfolio managers in NBIM’s sector strategies as well as external fund managers of the $1.8 trillion investor. The result is information that helps them reflect on their trading patterns and identify strengths and weaknesses, according to NBIM head of Singapore and co-head of equity trading Sumer Dewan.

As the world’s largest investor, the fund makes around 49 million transactions per year, trading around the clock with its Singapore, Oslo, London, and New York offices’ coverage.

NBIM started expanding the tool’s usage in equity trading as a part of its three-year company plan which began in 2023. It stated at the time that the goal is to “promote psychological safety so that our portfolio managers dare to be contrarian and avoid herd behaviour”.

The tool provides a behavioural score of stock pickers based on historical order records. While Dewan declined to identify specific factors the scorecard tracks, one basic example is whether a portfolio manager holds onto their losing companies for too long, or their winners for too short.

Eventually, the fund wants the tool to become “agentic”, giving more real-time feedback and suggestions, instead of just after-the-fact.

“[The Investment Simulator] will be there soon… the speed at which this can be made [happen] is just incredible,” Dewan tells Top1000funds in an interview.

“Even where I sit, when a new trade comes in, I see who has sent it – let’s get a behavioural analysis of them.

“[It can also] tell me everything I need to know about this company very quickly, discuss current market conditions, and make recommendations of the best way to transact.”

There is also another version of the scorecard for NBIM’s traders and index portfolio managers, who have shorter trading time horizons compared to portfolio managers in sector strategies.

“But both scorecards are multidimensional in nature – timing, sizing, positioning, trading around and responding to events,” Dewan said.

“Traders also have tremendous discretion about how they trade so there are lots of variables we can look into.”

AI integration fund-wide

NBIM is well-advanced in its integration of AI in investment processes. The fund’s chief executive, ex-hedge fund manager Nicolai Tangen, is leading from the top with a clear message that using AI is not an option, but a must.

The fund has “AI ambassadors” scattered in different offices who Dewan says are volunteers spreading knowledge about the technology and helping people “unlock the door”. Departments and investment units in the firm are also encouraged to conduct their own AI projects with the ambassadors’ help.

Claude, a family of AI models and assistant developed by US firm Anthropic, is the main AI tool at NBIM, with the chatbot integrated across all devices in the organisation.

Dewan says that through the help of the internal ambassadors, he has transformed how he uses the tools and the information they provide, with tailored reporting and enhanced project management including recommendations.

There is the obvious cost-saving benefit of AI, too. For example, the technology can reduce unnecessarily trades by predicting future orders and opportunities to transact internally.

As the world’s largest sovereign wealth fund with 71.4 per cent of its AUM invested in equities, NBIM has a significant passive exposure and hence the need for constant rebalancing.

Tangen previously touted that the AI tool is already shaving $100 million off the fund’s trading costs every year and the ultimate target is to save $400 million, but Dewan says he “wouldn’t be surprised if we went beyond that number”.

“[With] the size of the fund and the holdings, there is a significant amount of internal crossing… that can be done – that itself is cost free,” he says.

“So right then and there, you are able to – by bringing your left and right hand talking together – fully analyse, anticipate and predict how your inventory looks and how it will look.”

These tools are still a “work-in-progress” but being able to test their effectiveness in a risk-controlled environment helps.

“We don’t just think our way forward, we build our way forward. We prototype, and that is very much in the DNA of the firm,” Dewan said.