For more than a decade, emerging markets (EM) debt has, in aggregate, lagged its developed market counterpart. But a constructive macro backdrop echoing the commodities super-cycle that began in the 2000s means that could be about to change, according to Patrick Zweifel, chief economist at Pictet Asset Management.

“Since the peak in April 2011, there’s been a slight underperformance, a slight loss of 0.1 per cent annualised,” Zweifel told the Top1000Funds Fiduciary Investors Symposium in Singapore. “And this is when emerging market local debt started to clearly underperform developed market [debt] as well as US Treasuries, and that has lasted for more than 10 years.”

“So the question that is often raised from investors is, is it still an asset class worth investing in?”

Zweifel thinks the answer is “yes”. But to understand why, it first makes sense to group different EM countries by the macroeconomic factors they’re exposed to: commodity exporting countries versus manufacturers; creditors versus debtors; open economies versus traders; and China, which sits alone.

“The main important distinction when we talk about emerging market debt is the distinction that we make between creditors and debtors,” Zweifel said.

“The reason why they’re very different is because the debtors economies would be much more sensitive to higher global rates and much more sensitive to the dollar, because part of their debts are actually issued in dollar terms.”

During the commodity boom, Zweifel said, commodity-exporting countries returned an annualised 18 per cent while debtor countries returned an annualised 15 per cent as the dollar declined and the US 10-year bond yield declined by more than seven basis points. During the lost decade that followed – when the dollar and 10-year bond yield both rose – the growth of both debtors and commodity exporters declined sharply.

Pictet looks at five macro factors to figure out what will drive the performance of the EM set. Local policy rates are at levels not seen since the commodity boom and are now declining towards neutral levels; global trade is rising, driven largely by EM countries (and Zweifel thinks that, as was the case with Trump 1.0, tariffs won’t curtail global trade but “redistribute” it, because EM markets now trade more and more with each other); and the relative strength of China’s exports.

The US dollar also looks overvalued, Zweifel said, with a possible trigger for reversion coming in the form of policy and growth divergence between the EM and DM countries, while a rebound in local manufacturing supported by rate cuts would be supportive of commodity prices.

“[In the super commodity cycle] all those five factors were positive,” he said.

“When all those factors are positive, it’s a super boom. We now have three out of two – which is not too bad – and two are neutral.”

Zweifel also discussed the outlook for India, the markets of which have become an increasingly popular destination for global capital as investors are drawn to its growth story. Zweifel pointed out that India is a closed economy, highly indebted and heavily indexed to manufacturing, and that, in terms of its debt, it “wouldn’t be the ideal country in which we would be right now”.

“But in terms of its evolution – the reason why you invest in emerging markets is to capture the gross dividend and because of the idea that a poor country will converge towards a richer one,” he said.

“India starts from a very, very, very low level. So despite the fact that it’s, again, a big economy and growing fast, it has a lot of catching up to do. I think there’s this long-term story regarding India that has made it very attractive, because they’re far from being even where China was in the early 2000s. It’s a very long-term story.”

Beyond the chaos, bullying, backsliding and myriad distractions of the second Trump administration, a fundamental and long-overdue rebalancing of the US’s relationships with its key allies is underway, and a “new equilibrium” will emerge. 

Global geopolitics expert Stephen Kotkin, a senior fellow at the Hoover Institution at Stanford University, told the Top1000funds.com Fiduciary Investors Symposium in Singapore that “there’s a lot to be optimistic about in this insanity of Trump and chaos and unpleasantness”. 

“It’s not pretty, but he’s an instrument of processes that are bigger than him,” Kotkin said. Ever-escalating demands for the US to project its power globally had become fiscally unsustainable, and something had to give. Previous presidents had tried and failed to find a solution but Trump – even if in spite of himself – may force the change that’s needed. 

“The US is 5 per cent of global population, 25 per cent of global GDP, and 50 per cent of global military,” Kotkin said 

“Europe is 7 per cent of global population, 17 per cent of global GDP and almost 50 per cent of global social spending. How long could that keep going? It went way longer than we thought. Europe has been pocketing $350 billion a year in US security assurance for more than 30 years, spending [it] instead on their quality of life. 

“I would have taken that deal, and they took that deal because the Americans gave them that deal. That deal is no longer affordable by the United States, and so the rebalancing is underway.” 

Kotkin said the “quality of life social-spending bender” undertaken by Europe but funded by the US could not last. It had to end, and “it took something crazy out of the social media, reality television, real estate, pro-wrestling, beauty pageant side of America that you maybe didn’t know as well, and you know all too well now” to end it, Kotkin said. 

“The rebalancing is making a lot of people angry, but it’s also galvanizing them in very positive ways. The idea that US is losing Europe is just bunk. Do you have any idea what the trade volume is, what the tech transfer is, what the [foreign direct investment] is, let alone the cultural ties? Do you think that’s going away because Trump is going to be in the White House for a few years?  

“No, none of that’s going to go away. It’s just going to come out the other side, with a different balance, a different equilibrium.” 

Right now, politics in the US “couldn’t look crazier,” Kotkin said, andit’s “very hard to understand, it’s very confusing, and Trump doesn’t really know what he’s doing”. 

But the chaos is not part of a cunning master plan. 

“There is no secret here. There’s no conspiracy. There’s no multi-move thing,” he said. 

“That’s not Trump. Trump is all thumbs, literally. And it’s news-cycle stuff, nothing strategic at all.”  

No retreat 

But Kotkin challenged the view that Trump’s posturing and the rebalancing that he’s set in motion signals that the US is retreating from the world.  

“This is not about America giving up its role in the world – all of that is social media rubbish,” he said. 

“This is about a rebalancing of the costs and benefits, and it’s happening, and it’s a mess, and Trump’s version of it is going to maybe even fail to produce a new equilibrium, but it’s going to break the current equilibrium that needed to be broken.” 

Kotkin said Trump is “an unwitting instrument of history” in this respect – and possibly also in others – but investors should look past the noise and the distractions to focus on “what could be the next equilibrium, and how we might get there”. 

“This is a positive story,”  

“Something [that] was unaffordable couldn’t continue, and there’s a rebalancing underway, and it’s going to be very difficult to get from point A to point B, but that’s the journey that we’re finally on.” 

Kotkin said the concept of the “global commons” form the foundation of global prosperity. It manifests in things like “the fact that you can sail a ship on the sea and have your stuff on it and get it delivered”, he said, or that there’s reliable global infrastructure for the internet and financial systems. 

“Everything you do, you’re free riding on the global commons. 

“You don’t pay for it. It’s not part of your cost structure, but it’s a colossal part of your revenue structure. The global commons is what some people are calling ‘the US-led international order’, the rules-based order.”
There is no alternative to the US-led order, Kotkin said, except for the loss of the global commons. The US-led order is imperfect, but it’s the best of all options. 

“If I had a choice, would I create things the way they are? Are things just? Is it an ideal order? Does everybody have a say? The answer is no, to all of those questions,” he said. 

“But you tell me what you got better that provides for the global commons, and then maybe I’ll take it, if you can show me what’s better.” 

The “fiscal insanity” of US deficits blowing out from $4.6 trillion to $7.6 trillion in the space of a single lifetime also had to stop. 

“I mean, seriously, where was that going to come from?” he said. “I don’t know how much economic growth you’re going to generate or how much inflation you’re going to use to pay that off. And remember, when it started, interest rates, you needed a microscope to see them, and now interest rates are normal again. We now spend in the United States more on interest payments than on our global military. Yeah, that’s not going to work. 

“There needs to be a fiscal realignment. The fiscal insanity can’t go on anymore.” 

But there is also a “struggle to the death over institutions” being waged between the left and the right of American politics – which tells us that the institutions must be worth having, and that they are resilient, Kotkin said. 

“The left is going to lose and the right is going to lose, and the institutions are going to win, because that’s what happens in America again and again and again,” he said. 

Trump’s actions and his manner of executing them has galvanised Europeans and Canadians like nothing before him, Kotkin said.  

“Now the Europeans are having these crisis meetings about what to do: 17 per cent of global GDP, can they protect themselves?” Kotkin said. 

“I think they could. There are countries with a lot less than 17 per cent of global GDP, like Russia with 2 per cent, that have a military. 

“How long has Canada been in the doldrums, and now Canada is going to stand tall. Trump has galvanized Canada. 

“This galvanization, long overdue, is fantastic. Again, does Trump understand that he’s doing this? Does he understand that he revived Trudeau’s party in Canada with the idiocy of the 51st state that will never happen? No, of course, he doesn’t understand that. But is it a potentially, really good thing? Certainly beyond doubt. It’s really good thing for America too, if Canada stands up.” 

Equity and infrastructure drove gains at C$473 billion ($329 billion) Caisse de Depot et Placement du Quebec (CDPQ), the Montreal-based asset manager which oversees the investment of Québec Pension Plan for more than six million Quebecers alongside many other pension and insurance plans.

CDPQ’s public equity portfolio was the standout performer due to the investor’s increasing exposure in recent years to growth and tech stocks that have been propelled by advances in AI. CDPQ also attributed gains to “holding the course on a diversified approach” and  “quality execution by portfolio managers.” The 25.5 per cent return surpassed the benchmark index’s 24.1 per cent.

Over five years, the portfolio’s annualised return was 10.5 per cent, just below the index’s 11.1 per cent, a difference CDPQ attributed to its significant underweighting in major US tech stocks in 2020.

Private equity shook off the impact of high interest rates that had impacted the portfolio in 2023 to rebound in 2024 generating a return of 17.2 per cent. CDPQ linked gains to sustained growth in the profitability of portfolio companies, particularly in the industrial and consumer goods sectors.

Infrastructure was another strong performer, returning 9.5 per cent off the back of the “excellent performance” of port, energy and telecommunications assets. Recent strategies in the allocation have included significant sales in the airport sector in Europe.

Amidst ongoing geopolitical uncertainty, Charles Emond, CDPQ’s president and CEO said diversification is more important than ever. 

“While uncertainty is high, particularly due to ongoing tariff negotiations, discipline and the sound diversification of our portfolio will remain key to delivering the long-term returns our depositors need. Their plans remain in excellent financial health, and our results for one, five and ten years have made a significant contribution, despite the turbulence,” he said.

Real estate woes

On the downside, CDPQ’s latest results flag “persistent headwinds” in the $41.8 billion real estate allocation given the fund’s above benchmark exposure to US offices in poorly performing cities New York and Chicago. Real estate suffered a 10.8 per cent loss, worse than the portfolio’s 2023 loss of 6.2 per cent and is the third loss in five years. Over five years, the portfolio’s annualised return was -2.2 per cent below the index’s 0.7 per cent return.

In contrast, CDPQ said the logistics sector and shopping centres have been resilient despite the global slowdown.

In January 2024, CDPQ announced plans to bring its real estate subsidiaries in-house to cut back on costs. In an ongoing process (it will take over two years), CDPQ has been integrating Ivanhoé Cambridge and Otéra Capital Inc. into its investment and corporate services teams, targeting an annual saving of C$100 million. The strategy also aims to increase the focus on investment expertise, maximise business relationships and partnerships and strengthen analytical capacity.

The latest losses come despite enduring efforts to overhaul the allocation. In 2019, two-thirds of CDPQ’s real estate allocation with Ivanhoe Cambridge was invested in office and retail assets. By 2023 two-thirds was invested in logistics and residential real estate alongside a growing allocation to alternative life sciences facilities and office and retail assets are in the minority in a complete reversal.

Focus on Québec

Investments in Québec have reached $93 billion, bolstered last year by C$4.3 billion in new investments and commitments that put the fund close to achieving the ambition of $100 billion in 2026.

Some of its investments in the province last year included a C$500 million investment to support National Bank of Canada in acquiring Canadian Western Bank and a C$158 million investment in WSP Global to help it buy U.S.-based Power Engineers. Elsewhere, CDPQ invested in Nuvei, a technology providers in the global payments industry, and QSR International, a key maritime logistics player headquartered in Québec City.

Less successful investments on home soil comprise a $150 million investment, now written down, in electric vehicle battery maker Northvolt. The Swedish firm, which announced plans in 2023 to build a factory outside Montreal, filed for bankruptcy protection last year.

Other Canadian investors that ploughed into the company include C$138.2 billion Ontario Municipal Employees Retirement System and C$699.6 billion Canada Pension Plan Investment Board and the C$77 billion Investment Management Corp.

Faced with the problem of deploying the £500 million ($645 million) of contributions that pours into its funds every month, the UK’s NEST did something that few asset owners have done: buy a stake in an external asset manager.

IFM Investors was established by a consortium of 16 Australian industry superannuation funds in 2004, and now manages circa $145 billion in private and public market investments on behalf of more than 700 institutional investors around the world. The deal was “serendipitous”, says chief investment officer Liz Fernando.

“Given the rate of growth we’re seeing we’re having to run really hard just to stand still,” Fernando tells Top1000funds.com. “So it was pretty obvious that we needed other mechanisms to help us get deployment capacity increased in a thoughtful and high-quality way.”

The strategic partnership is multi-faceted and allows NEST a unique vehicle to act on  its private investment ambitions. With the aim of increasing allocations to private markets to 30 per cent of the total fund, NEST has said it will allocate £5 billion through IFM by 2030 across infrastructure, debt and private equity. It is expected the assets of the fund will more than double to £100 billion by 2030.As a large shareholder, NEST gets to co-design products and will receive “founder’s rates” on new products.

Preferential fee structures are a feature of the institutional investment management landscape. But while NEST declined to comment on its fee arrangements, sources say that it can expect an even steeper discount on the global infrastructure debt fund it’s currently developing with IFM  than most managers would bring to even the biggest pension funds – though for new products in areas of the market where fees have already come down to a few basis points they’ll get the rack rate.

Other founding shareholders receive heavy discounts on IFM’s flagship global and Australian infrastructure products, paying less than 50 basis points with no performance fee (given NEST was not involved in seeding or designing these products, it will pay the rack rate).

The founder’s rates on these products are so attractive that a consideration in several of the Australian superannuation fund mergers that have taken place over the past few years has been whether they would pass on to the successor fund (Top1000funds.com understands the rates are generally transferable).

For NEST, the stake in IFM is held in its private equity portfolio and it will receive a dividend if IFM elects to pay one. Recent history has seen other owners encourage IFM to reinvest capital in the business to accelerate future growth rather than paying it out as dividends, which NEST is “supportive” of.

It’s another instance of the growing trend of big pension funds taking stakes in asset managers. The Oxford endowment and Commonwealth Superannuation Corporation (CSC) recently bought into a new sustainable credit business launched by Osmosis IM, after previously investing in Osmosis’ funds. In September 2024, West Yorkshire Pension Fund bought a 25 per cent stake in boutique natural capital manager Rebalance Earth, while the California State Teachers’ Retirement System invested with and took a strategic stake in “climate-as-an-asset-class” manager Just Climate as part of its collaborative model – which prioritises insourcing of asset classes like equities and fixed income, and partnering with external managers for co-investments –  in 2023. And back in 2021, Temasek took a minority stake in natural capital manager Leapfrog.

“Taking an equity stake is a long-term commitment and not one we took lightly,” Fernando said in an email response to a follow-up question. “As you’d expect, we considered multiple aspects of the investment as part of our due diligence – financial, regulatory, reputational, alignment on the ongoing management and stewardship of assets. Ultimately, particularly given the nature of IFM and our shared values, we were comfortable to proceed.”

Fernando believes that NEST fits neatly into the IFM shareholder register because it looks pretty much like everybody else there: defined contribution, profit-to-member, with a long investment horizon and a burning need to deploy more money. Other IFM shareholders include the $230 billion AustralianSuper, Australia’s largest superannuation fund, the $189 billion Australian Retirement Trust and the $63 billion Hostplus.

“We weren’t competing with other suitors because IFM was quite specific about what they were looking for,” Fernando said. “They were interested in adding a shareholder, but they wanted a like-minded shareholder and there’s not that many NESTs out there. It’s quite unique; it sits in the UK but it looks like a superannuation fund, for all intents and purposes, more than any other institution in the world.”

With a big global presence, and 13 offices around the world, IFM, which is headed by David Neal, former boss of the Future Fund, was already growing its UK presence. It will likely get a boost from its new shareholder as Fernando believes that the products IFM co-develops with NEST will be of interest to other DC plans and improve its distribution in the UK.
NEST sees the move as an extension of the strategic partnership model that it has pursued with other managers – though that pursuit has not, in the past, extended to buying a stake in them.

“We have few managers and we see them as partners,” said Rachel Farrell, NEST head of public and private markets. “We stick with them and they grow with us. If a manager isn’t particularly capital constrained, that’s a very useful way of having long-term capital that’s going to grow, because we tend to set up evergreen structures where we continue to put capital into that structure and it allows them to potentially fund multiple years of investments.”

The UK’s largest pension fund, USS, is going to spend more of its energy in engagement with government and corporates than producing emissions reports.

Between 2019 and 2023 University Superannuation Scheme, USS, the £78 billion pension fund for employees in the United Kingdom’s university and higher education sector reduced the carbon footprint of its portfolio by 35 per cent.

Well-documented strategies include tilts to climate-friendly assets, reduced exposure to companies that are poorly positioned to adapt, and direct investments in renewables, all carefully backstopped by the complex and time-consuming process of measuring and reporting emissions across the portfolio.

Yet global emissions have climbed relentlessly higher.

In an interview with Top1000funds.com, CEO of USS Simon Pilcher says the carbon reporting burden is distracting from more useful strategies like engagement to encourage others to act as long-term players. USS 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.

“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,” says Pilcher.

Time to step up the pressure

USS’s decision to divert time spent reporting to ratcheting up pressure on policymakers coincides with the link between carbon, temperature rises, and extreme weather becoming one of the most worrying and urgent investment themes for the universal owner and long-term investor.

Pilcher says a hot world in 20 to 30-years- time will result in “horrible returns” for pension funds that own small slices of everything and are unable to sidestep or diversify a way around. “All assets will struggle in a four degrees world, and we have realised in the last 12-18 months that we need to seek to influence not just the stocks we choose, but the environment in which we all operate.”

Policy change is a precursor to meaningful corporate change and USS wants to help create a landscape and economic framework within which corporates and consumers can choose lower carbon options. It’s not worth expending energy trying to persuade companies to do the right thing when the economic incentives remain so strong to continue to do the wrong thing, Pilcher continues.

“We encourage long term approaches, but it is daft to ask companies to do things that make little economic sense as they won’t do it. We need an environment where it makes economic sense to do sensible things, and one that removes the financial barriers to doing sensible things.”

Pilcher turns to the barriers USS has met battling to green one of its own infrastructure assets to illustrate how the UK’s planning system actively encourages companies to do the wrong thing.

The UK needs more electric vehicle charging infrastructure if the country is going to successfully increase uptake of electric cars. Yet there is currently a 10-12 year wait to get green power to motorway services like USS-owned Moto, the country’s largest motorway service station network. “We need a planning regime that will speed up the connection of offshore wind to the grid and the delivery of electricity to where it is needed.”

Elsewhere he points to energised colleagues who want to install air source heat pumps in their home but have given up because local authority planning makes it impossible.

Will they listen?

Pilcher reports a strong willingness from the government to listen and an understanding amongst policy makers of the need for long term investors to have policy certainty to deliver long term and sustainable benefits. Describing the conversations as constructive, sensible and calm, he says the government grasps that open pension schemes like USS offer real scale and draw international investors interested in partnering with them to the UK.

“Asset owners like USS don’t have much control but can and should talk to and encourage policymakers to create a landscape and economic framework within which corporates and consumers can choose lower carbon options. It may have got harder in North America, but that doesn’t mean the rest of us shouldn’t continue to speak calmly on this issue.”

However, he’s under no illusions that the absence of long term thinking makes achieving change difficult. Politicians are focused on four-to-five year re-election cycles which are now backdropped by geopolitical uncertainty and the prevalence of more extreme political positions in the US and across Europe that would not have been popular 20 years ago.

Corporates and asset managers are similarly focused on the short-term. Corporate management turns over every 5-10 years and companies are reluctant to take actions that will cost them money and risk shareholder discontent. Investment managers are also focused on making short-term profits, he says.

That lack of alignment with asset managers is one reason USS manages over three quarters of its assets internally. Managing assets internally allows for a clarity of investment strategy that is hard to replicate via a third-party mandate, he says. “We are not interested in market indices. We are interested in assets that meet our needs.”

It is also materially cheaper to manage private assets in house.

Around 10 per cent of the allocation to private assets is managed externally yet that 10 per cent allocation costs the same as it does managing the other 90 per cent of the portfolio – not only the other 20 per cent invested in private assets that are managed internally, but all the public assets in the portfolio, some of which are also externally managed.

“It gives you a feel for how much better value it is to do it in house,” he says, “When we look at the value to our members, we think our model is strongly aligned to our members needs.”

Testimony to his belief in internal management, USS will build out the 75-person investment team with another ten hires over the next three years. He has no plans to build out the allocation to private markets any further.

Pilcher says the portfolio is prepared for the shift in trade flows and end of “peak trade,” and has gradually moved to reflect this long-term structural reality to protect the portfolio. Last year the fund increased levels of inflation protection in the scheme by buying inflation linked bonds in the UK and US. Meanwhile higher interest rates have helped USS swing from deficit into a £9 billion surplus.

South Korea state pension fund National Pension Service (NPS) has delivered a new return record in 2024 driven by US tech stocks’ relentless rally, while its investments in global fixed income and alternatives also posted double-digit returns.  

This year, the world’s third-largest pension fund is gearing up to reduce coal investments to promote sustainability in the portfolio, and target riskier assets to ensure sustainability in funding.  

NPS announced a 15 per cent return on a money-weighted basis in 2024, which was its best-ever performance since it was established in 1988, according to a press statement. The gain brings NPS’ total assets under management to 1213 trillion won (KRW) ($842 billion).   

The fund’s last record return was set as recently as 2023, and it has only had two years of negative return since inception. It invested almost exclusively in fixed income before 2000.

NPS chair and CEO Kim Tae-hyun highlighted the fund’s ability to achieve two consecutive record returns despite uncertainties in local and global politics, and concerns around economic slowdown.

“We will continue to closely manage risks and bolster our investment capability and expertise by implementing the Reference Portfolio and the Next Generation Global Investment Integration System, as well as by attracting local talents, in a bid to deliver solid returns in the years to come,” he said in a statement. 

The global equity portfolio was worth KRW431 trillion at the end of 2024 and represented 35.5 per cent of the portfolio, according to a disclosure. It delivered a 34.3 per cent money-weighted return but was somewhat offset by weak performance in domestic equity which lost 6.9 per cent.  

Political uncertainty was one of the reasons cited for negative returns in domestic equity. South Korea is in flux as the nation waits for the court verdict in President Yoon Suk Yeol’s impeachment trial, which could be delivered as early as this week. It came after Yoon unexpectedly declared martial law in December last year, which resulted in nationwide protests and stoked volatility in the local equity market.  

NPS also cited “concerns over earnings of large tech companies” as a contributing factor in weak local results.  

Last October, South Korean electronics giant and the world’s largest memory chipmaker Samsung issued a public apology for a disappointing third-quarter results. The company was struggling to compete with local rival SK Hynix in the so-called high-bandwidth memory (HBM) area which is a crucial type of chip for AI training; and with Taiwan Semiconductor Manufacturing in contract and custom chipmaking

In other asset classes, global fixed income saw a double-digit return thanks to “robust interest income” and rising US dollar-won exchange rate. Domestic fixed income returned 5 per cent after Bank of Korea delivered two consecutive rate cuts in late 2024. The former represents 7.3 per cent of total assets while the latter represents 28.4 per cent.  

Alternatives constitute 17.1 per cent of the total assets and returned 17.1 per cent to the end of 2024. According to the NPS website, private equity is the biggest component, representing almost half (43.8 per cent) of the alternatives portfolio, followed by real estate (28.2 per cent) and infrastructure (26.2 per cent).  

Dialing back on coal 

This year, NPS will pare back its holdings in coal and divest from companies that derive more than 50 per cent of their revenue from coal-fired powered generation. 

NPS will begin divesting from this year in overseas companies. But a five-year engagement window pushes back any need to divest from domestic companies until 2030, during which time NPS will work with companies to develop energy transition plans and reduce coal sales or capacity ratios to below 50 per cent. 

NPS allocates almost 5 per cent of its global equity portfolio to the energy sector and has an estimated 7 per cent stake in South Korea state-owned utility Korea Electricity Power Company (KEPCO). 

The stricter climate policies have been a long time coming. NPS initially announced plans to phase out coal in May 2021. Further back in its 2020 annual report it detailed plans to “exit from coal finance to reduce carbon emissions”. 

“NPS will stop investing in the construction of new coal power plants at home and abroad and plans to establish phased implementation measures as a preparation stage to apply negative screening,” it said then.  

The fund’s slow progress contrasts with other large investors. For example, Norway’s parliament formally endorsed a move to sell off coal investments from its $1.7 trillion sovereign wealth fund in 2015. 

NPS’s size means it plays a leadership role in South Korea’s local asset management community and the fund’s continued investment in coal has influenced ESG attitudes across the whole market. 

Challenges with engagement 

Engagement is notoriously difficult in South Korea. PensionDanmark recently announced plans to step up pressure on Japan and South Korea to eliminate coal power by 2030. Elsewhere, APG Asset Management divested its holdings of KEPCO after years of struggling to effect change at the utility. 

One reason that engagement is difficult is because of the so-called 5 per cent rule which stops asset owners which collectively own more than 5 per cent of a company’s shares from acting in concert, stalling collective action. Meanwhile South Korean pensions funds are reticent to engage and don’t want to be seen as too active. 

The Korea Sustainability Investing Forum (KoSIF) reacted to NPS’s announcement by urging the Fund Management Committee (NPS’s dedicated fund management arm) to widen the exclusion to companies that get more than 30 per cent of their revenue from coal operations. It also called for NPS to begin calculating financed emissions, set reduction targets, and implement measures to achieve a net-zero asset portfolio by 2040. 

The KoSIF also criticised the “excessively” long engagement period NPS can conduct with South Korean coal companies on their energy transition plans that risk enabling greenwashing.  

The need for riskier assets 

Another initiative that will take place this year is the introduction of a reference portfolio approach. The decision was announced last May as NPS changed its target allocation of risky asset (which does not prescribe the asset class) from 56 to 65 per cent, as the fund aims to yield more investment income.  

The South Korean government previously sounded the alarm on NPS’ future sustainability. The fund is the world’s third-largest pension fund by AUM, behind Japan’s GPIF and Norway’s Government Pension Fund, but despite its mammoth size, official estimates showed the fund will be depleted by 2056 if there is no policy reform. 

South Korea is grappling with the demographic double whammy: a rapidly aging society, and the world’s lowest birth rate. Before President Yoon was impeached in December, he pledged to increase the pension contribution rate from 9 per cent to 13 per cent to be phased in for all age groups by 2040.

The reform plan also includes lifting NPS’ long-term average annual investment return from 4.5 per cent to 5.5 per cent, or higher.  

“In order to increase returns, we will flexibly improve the asset allocation system and smoothly promote investment diversification to stably operate the precious retirement funds of the people,” NPS chief investment officer Seo Won-joo said during the last May’s announcement.