Two of the world’s most influential institutional investors are hitting a brick wall in their attempts to engage with Amazon’s board on workplace safety. Every time the Netherland’s APG and the office of New York City Comptroller, fiduciary to New York city’s five pension funds, try to engage with the board at the tech giant in which they own a combined $6.5 billion they get push back from management.

The duo began engaging with the company about a year ago, in search of a better understanding of Amazon’s workplace safety during the pandemic. Their priority remains exploring the disconnect between what they have heard from workers and in the press, and the information the company puts out, explained Anna Pot, head of responsible investment, Americas, at APG and Mike Garland, assistant comptroller, NYC Comptroller’s office speaking at “Sustainability Digital; A Planet in Trouble.”

The institutional investors want to know what metrics the board is using to ensure staff are safe as a consequence of the company’s well documented investment in measures like masks and COVID tests.

“We have tried to correspond with the board, but every time we try, we receive a response from management,” said Garland. “We have been told in a letter from management that [board] directors meet with investors, but can’t honour all requests.”

 

APG’s engagement with Amazon has involved reaching out to the company and looking at the measures it is taking to safeguard the workforce. The process has revealed that the company has invested a significant amount in social distancing measures, masks and associated health benefits, said Pot.

“It is great to see these measures, but what are the outcomes?” she questioned. Both investors want to see what methods the company uses to oversee the effectiveness of the measures it has put in place; last December they compiled a shareholder proposal, but it didn’t “get the response” they sought.

Garland told delegates that because “the same person” was speaking for the board and management, it was impossible for the investors to have a window into the board’s oversight.

Describing APG as an engaged investor and its stake in Amazon as “significant” with ensuing responsibility and leverage, Pot said the asset manager would continue to engage.

“We want Amazon workers to be safe,” she said. Adding that APG “won’t stop” here but will continue to engage on improving labour conditions in a commitment to progress. Moreover, Pot said she believed engagement will ultimately yield access to the board for further discussions.

“We started a year ago and the company is responding to our requests,’ she said. “They are opening up a bit.”

Both investors’ engagement activity is also focused on the auto sector. Here dialogue is based around how companies are supporting their workforce in the transition to a green economy. A low carbon economy holds consequences for the future size of the sector’s workforce, and the investors are asking questions around how companies are equipping workers with new digital skills and how workers can become part of fast-changing companies.

Garland concluded that although all companies tout their workers as their most important asset, few disclose information about what this means, and how they actually manage their human capital.

Investors from Brunel, Wespath and Robeco talk about the challenges of shaping their net zero portfolios including data, benchmarks and holding managers to account.

The decarbonisation of UK asset owner Brunel Pension Partnership’s £30 billion portfolio, managed on behalf of 10 local authority pension funds, involves multiple strategies, tools and careful manager selection.

Most recently it has come with ramped up due diligence around which investee companies are on a transition pathway, said Faith Ward, chief responsible investment officer at Brunel.

Speaking at ‘Sustainability Digital; A Planet in Trouble,” she told delegates that one of the challenges was aligning the portfolio’s different asset classes to Brunel’s net zero ambitions, most recently a multi-asset credit portfolio.

She cited the importance of ensuring net zero ambitions don’t limit managers and strong stewardship tools. Advocacy at a policy level and via the fund’s membership of collaborative organisations like Climate Action 100+, an investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change, are other important tools.

“It is not just about protecting the portfolio; it is about shifting the portfolio,” she said. Positive allocations to companies leading on energy efficiency or green transport is just as important.

She said one of the biggest challenges is around the availability of net-zero glide path benchmarks. Even when a manager says they are benchmark agnostic, benchmarks still drive behaviour and Brunel is working on how benchmarks drive manager behaviour and how to ensure that it is towards net zero.

At Wespath, which provides retirement plans, investment solutions and health benefit plans rooted in the principles of the United Methodist Church, achieving net zero in the portfolio is now enshrined in investment beliefs.

Other initiatives include working with BlackRock to reposition the passive portfolio to low carbon investments, said David Zellner, chief investment officer at Wespath Benefits and Investments and Wespath Institutional Investments.

“We are trying to identify and tilt to companies on the transition and ensure our investment managers actively consider ESG in their decision-making process,” he said. “We have guidelines for our asset managers on how they should vote and align with a good climate strategy.”

Data

Technology and data are driving research at Robeco, said Victor Verberk, chief investment officer, fixed income and sustainability. The asset manager finds corporate winners and transition ready companies’ sector by sector, finding those with the technology to stay on decarbonisation pathways and with the ability to adapt.

“It is very hard work, you have to make sure you understand companies on the fundamental side,” he said.

In another development, Robeco has launched the first Paris-aligned bond fund. It complies with EU rules on what constitutes Paris-alignment and has involved working with data scientists and developing forward looking indices and sectoral pathways in what he described as the holy grail in actively managed Paris-aligned funds. One learning has been around investing in carbon allowances.

Access to data has also been a key challenge; buying data from all vendors is expensive but essential for portfolio managers. Storing and making the data easy to access and communicable for the whole team is the other challenge.

Robeco has also developed a framework that links companies to the SDGs.

“It is one of our best-selling products,” said Verberk. “As more regions adopt the SDGs there is more client engagement around SDG products.”

Brunel’s Ward referenced new guidance to investors on how best to reach net zero from the Institutional Investors Group on Climate Change (IIGCC) via its new Net Zero Investment Framework (NZIF).

The framework outlines strategic asset allocation, strategy design and asset class specifics across listed equity, bonds, infrastructure and private equity for net zero. It is a comprehensive framework, covering all bases and equipping investors to take next steps, she told delegates.

The conversation also touched on the importance of holding managers to account. At Wespath this involves manager reviews, questionnaires and holding them to account.

“We identify areas we can improve,” said Zellner, adding that the goal is to ensure investment managers understand Wespath’s beliefs and views.

Ward concluded that Brunel has made a commitment to a Just Transition, ensuring those that are impacted by the economic shift inherent in net zero are not left behind. The fund has joined a coalition that works to finance a Just Transition, allocating capital to support it.

“We have metrics to allow us to evaluate a company’s response to a Just Transition,” she said.

Sustainability bonds issued by sovereign governments in developing and emerging markets offer exciting investor opportunities. The proceeds are used for impact and allow investors to target real change in sectors like health and education.

Sovereign debt investors in emerging economies are increasingly changing strategy to integrate sustainability, said Farah Hussain, senior financial officer at the World Bank Treasury which has issued debt in the capital markets to help developing countries finance their economies for more than 70 years.

Speaking at ‘Sustainability Digital; A Planet in Trouble” she observed a huge investor shift towards sustainability, outlining the bank’s work with both investors and the finance and debt management offices of sovereign governments in emerging economies to help them to understand their financing options.

She said that building an ecosystem that will attract investors involves developing green bond regulations and taxonomies.

“It is really heartening to see how the green bond market has developed and attained a critical mass,” she said. “Add to this social and sustainable-linked bonds, and we expect this market to really blossom.”

However, she noted that the market only accounts for a small share of total emerging market issuance and that state-owned industries in emerging economies particularly need to connect with investors to channel finance to sustainable activities.

Furthermore countries need to do more to connect with investors on sustainability. She urged debt management offices in emerging economies to capture the moment with timely data and information.

“It is very important that public debt management officers and finance ministries engage with investors and ensure they have the most up to date information,” she said.

She highlighted Uruguay’s high positioning in ESG indexes because it proactively and consistently provides good quality ESG information for investors although it has never issued a sustainability bond.

Mary-Therese Barton, head of emerging market debt at Pictet Asset Management, described institutional investment in sustainable emerging market fixed income as the missing part of the ESG jigsaw.

Encouraging signs of change include more detailed reference to ESG in emerging market sovereign bond roadshows. For example, investors recently questions Saudi Arabia on female participation in the work force, she said. Other signs of progress include Chile announcing it will only issue sustainable Eurobonds in the future.

“It is setting the scene for ESG integration in the emerging bond world,” she said.

Panellists said it requires a new level of investor research and dialogue – and sovereign engagement. For example, investors will need insight into school funding programs in South Africa, or health initiatives in Brazil. It’s a new process for investors, many of whom have historically said it is too hard to integrate ESG into sovereign bond allocations where there are no voting rights.

The World Bank’s Hussain noted other encouraging signs of change like local pension funds in markets like Mexico increasingly buying their own sovereign sustainable debt.

The discussion espoused the importance of stewardship, governance and transparency. If governments create strong frameworks to ensure transparency in the use of proceeds, sustainable bond issuance could unleash a wave of finance that bypasses short electoral cycles. The panellists discussed how investors have often struggled to navigate risk in emerging markets, but in a win-win, sustainable bonds could unlock the growth that makes emerging markets less risky. It would override volatile electoral cycles and target funds in social areas like education and climate change that have held back development with a material impact on growth.

Hussain explained that many investors have a lack of knowledge of the asset class. A large part of the World Bank’s role is working with regulators to help build understanding of the investor benefits, particularly around diversification, pricing and impact. She said for smaller emerging economies it is particularly hard to access the right investors. Elsewhere, the World Bank helps investors navigate the currency mismatch and argues the case for these types of bonds to be part of their strategy.

Barton added that sustainable bonds could attract mainstream bond investors. She urged practitioners to tool up and take ESG integration to the next level. She noted that much of the volatility in emerging markets is linked to fast money, but emerging market debt investment is long term and dampens volatility. As for illiquidity concerns, she said sustainable bonds are outperforming counterparties offering investors performance with purpose and attracting more capital.

Hussain concluded that the World Bank is currently working on developing three taxonomies designed to give investors more clarity and comfort about what they are financing.

“We have done a lot of work in this area,” she said, adding that the work involves addressing benchmark concerns and working with small economies. “There will be a number of ground-breaking transactions from emerging market sovereigns this year. We are very hopeful about this asset class,” she said.

Targets, allocating to diverse managers and acting on calls for change from diverse staffers are just some of the ways asset owners are boosting diversity in their own organisations. Investors at the Kresge Foundation, AP2 and AIMCo talk about their diversity, equity and inclusion action.

The $4 billion Kresge Foundation, which works to expand opportunities in America’s cities through grant making and investment, has pledged to have 25 per cent of its assets managed by diverse investment management firms by 2025.

Speaking at “Sustainability Digital; A Planet in Trouble,” Adrian Ohmer, who joined Kresge as investment director in 2020, said that moving the needle involves much more than “calling up” diverse managers. It also means Kresge must shine a bright light on its own diversity record.

“Diverse firms know if you are just dialling for dollars and diverse GPs are just as annoyed as we would be if we were on the other side. It is also hard to have conversations if it is not a two-way street.”

Ohmer said that researching and allocating to diverse managers has involved breaking out of Kresge’s small network and unconscious bias, to find managers that it would fit into its normal hiring practices but it may never have come across before. It requires more intentionality.

As for internal efforts to boost diversity, Ohmer works with headhunters to identify candidates and hire at a senior level. It involves clear guidance on the number of diverse candidates the firm wants in the final pool. And echoing previous panel sessions, including comments from chief executive of IFM Investors David Neal, he stressed the importance of inclusion.

It means listening to diverse candidates, and not expecting them to change their behaviour to accommodate typical corporate behaviour they may feel uncomfortable with.

“It is incumbent on you as a leader to find something to bring them into the loop. Expecting a diverse person to change their behaviour to accommodate you, exacerbates the problem,” he said.

Diversity is one of four focus areas that sits within sustainability at Sweden’s AP2 and has been a priority since 2001.

The pension fund has focused on increasing the proportion of women on boards and in management positions, said Ulrika Danielson, head of corporate governance at AP2.

“Diversity is much more than gender, age or background,” she said. “Gender diversity is easier to measure, but we need to broaden our work to include all aspects of diversity.”

Danielson added that AP2 still has much work to do improving its own diversity record. Having said that, 34 per cent of the fund’s employees are female, 33 per cent of the executive management team are female and 44 per cent of the board are women. Elsewhere she highlighted internal mentorship programs and diversity training as key policies.

Diversity at Canada’s C$119 billion AIMCo is evolving from “picking low hanging fruit” gifted by Alberta (where 90 per cent of the fund’s employees live) being a frontier and diverse province.

“Hiring a diverse group is not difficult,” said chief executive, Kevin Uebelein. Now the asset owner is striving to do more in a plan driven by human resources and owned by all executives that is shaped around what he calls relentless measurement of diversity within the firm, and among its partners.

Uebelein also noted the particular challenge of building gender diversity given more women than men fall away.

“It’s stopping the fund from moving the needle,” he said.

Strategy to boost diversity includes interaction with investee companies and third-party managers – AIMCo manages over two thirds of its portfolio internally.

And regarding investee companies, Uebelein said AIMCo is turning up the heat on board diversity, demanding 30 per cent women on boards.

Uebelein also argued his preference for engagement and staying invested in both investee companies and with fund managers to best effect change. Importantly AIMCo has set goals for diversity and inclusion at senior management level among its third-party managers.

For example in private equity, conversations with GPs dominated by white males involves tough questioning and targets he said.

“We ask if they believe in the power of diversification and if diversity adds to potential returns. We ask them what they are prepared to do about it,” he said.

Moreover, because AIMCo will invest over a seven-year period it can chart and push for change ahead of re-upping.

“This is a language they speak, but you have to back it up with action,” he said.

Integrating diversity in investments

AP2 integrates diversity in its investments via internally developed indexes with exposure to ESG factors including diversity.

And over the last five years companies with women in senior positions within the index have shown strong returns, said Danielson

“This factor contributes to positive returns, particularly in developed markets,” she said.

Elsewhere AP2 invests in a debt fund that lends to female entrepreneurs and has invested in social bonds issued by the World Bank to fund diversity and projects to support women and girls. AP2 evaluates sustainability in its private equity portfolio using 25 assessment points that includes diversity and inclusion.

Meanwhile panellists noted that investors in different regions think differently about diversity, necessitating a thoughtful approach.

Uebelein said how his priority is to unleash the power of AIMCo’s diverse employees to really find out what they think. It involves setting up resource groups and forming councils to tap their expertise.

“Once you ask for that assistance, they will make demands on the organisation,” he said.

He also flagged the importance of cognitive diversity, warning that institutions often hire diverse candidates that still think and behave the same as all other employees.

“Cognitive diversity is messy and makes decision making harder. But it gets better results and outcomes,” he concluded.

As a global macro investor, our goal is to build a deep understanding of how economies and markets work, and to convert that understanding into high-quality solutions for our clients’ most important priorities. Because environmental, social, and governance considerations affect how economies are evolving and how markets are priced, we seek a deep understanding of the ESG issues that are pertinent to our investment approach.

Below is a selection of research on ESG-related dynamics that are important to our understanding of global economies and markets.

Click here to view more on sustainable investing from Bridgewater

The ultimate goal of economic policy is simple and timeless—to ensure prosperity and maximize living standards. Broad macroeconomic measures such as GDP growth, the unemployment rate, and inflation had for decades been a good proxy of rising prosperity, so they have dominated economic policy making and are enshrined in most central bank mandates. But even before the COVID-19 crisis, it had become clear that traditional economic measures have increasingly diverged from social outcomes. The economic expansion of the past decade was a success according to traditional measures of full employment, but it was accompanied by deteriorating social conditions across a variety of measures (inequality, health and safety, educational attainment, infrastructure quality, housing affordability, and so on). With the COVID-19 crisis, the pressures have come to a head as the worst economic downturn in decades is hitting the most vulnerable the hardest.

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