Investors in Canada and Australia have joined the Dutch funds, APG and PGGM, in making their intention of an AI-driven SDG investment platform a reality.

The two Dutch funds set out in September last year their intention to establish the platform which allows asset owners and their managers to connect around the shared objective of measuring and understanding their investments’ contributions to the sustainable development goals (SDGs).

Now British Columbia Investment Management Corporation and AustralianSuper have joined the Dutch funds to jointly established the Sustainable Development Investments Asset Owner Platform (SDI AOP).

Claudia Kruse, the managing director of global responsible investment and governance at APG, said in an interview that the platform uses the definitions and taxonomy defined by the asset owners, which feeds into Entis, the technology platform, which turns those rules and methodology into classifications for 8,000 companies. The standard in the underlying data gets distributed by Qontigo and will be available for asset owners to use, like other data services.

“The benefit for asset owners is they are aligned with others with a standard definition. Asset owners can integrate this data across all investment processes – quantitative and fundamental – and monitor, map and steer their portfolios.”

Kruse said investors can also use the data to monitor external managers, and for asset allocation.

“This is a data source and a standard that truly aligns with the SDGs, based on financial data rather than sustainability data – and is auditable,” she said.

Rather than measure a corporate’s conduct or progress on sustainability, the platform looks through a different lens. It rates companies on the extent to which their core business activity helps create, for example, sustainable cities (SDG 11) or generate clean energy (SDG 7) in a novel approach that brings a new level to standardisation and efficiency to SDG portfolio management.

“Our definition is not based on company conduct such as an energy efficient oil refinery, but the products and services that contribute to SDGs. So we have to look at a company’s core business and how it is composed, what parts of the business contribute to the SDGs. One good example is Acardis  which we have been engaging with on disclosures, they report on products and services that contribute to SDGs,” Kruse said.

“Some companies are very straight forward, such as in renewable energy, but there are others for example in the pharma or consumer goods sectors that you need to get the contextual information to understand the products and services and what contributions to the SDGs they make. This is why AI is so important because it can process vast amounts of data and patterns.”

APG has set target of 20 per cent of its AUM to be aligned to the SDGs by 2025 and Kruse said that sustainable development investments also have to meet risk/return requirements and there are no concessions made for that.

“The data can help to inform such requirements,” she said.

Going forward Kruse said the intention is to have a stronger emphasis on forward-looking metrics to get insight into how well positioned a portfolio company is for the future.

“We don’t call ourselves an impact investor even though we want to make positive contributions. Measuring “outcomes” is more descriptive.”

The AI SDG platform will be broadly available in the market and a virtual event on September 10 will provide interested investors with additional insight into the workings of the platform.

“This is not open source because we have put substantial resources towards it. Our goal to define a standard to contribute to and invest in the SDGs.”

Forget traditional portfolios of stocks and bonds, in portfolios of the future, low yielding bonds could be ditched for cash suggest FIS2020 Digital panellists.

Conventional 60:40 investment portfolios divided between stocks and bonds could shift to 60 per cent allocations to equity and 40 per cent allocations to cash.

“You may find bonds don’t’ play a role,” predicted Stewart Brentnall, CIO at NSW Treasury Corporation, the investment arm of one of Australia’s state governments. Speaking at FIS 2020 Digital, Bentnall said investors should “wake up” to the impact of low yielding bonds in their portfolios, and noted that cash allocations allow governance teams to “to sleep at night” as an alternative to conventional fixed income.

Such new-look allocations could form part of what Brentnall called “transition portfolios” that incorporate measures for the future.

He said asset prices today poorly reflect the risk they carry. Moreover, Covid-19 has acted as a catalyst in highlighting the differences between mature (US and Europe) and less mature (China and Asia) markets that will impact benchmarks. Regarding globalisation, he welcomed the idea of production moving to new and alternative countries expressed by Nobel prize winner and professor of finance at MIT, Esther Duflo but said globalisation in its current form “would not flip on a six pence.”

Elsewhere, he said improving pollution levels and less environmental degradation because of the global lockdown could be a catalyst for investors to take positive action. Similarly, the “rising heat” on social justice issues can no longer be ignored. He said today’s low inflation could shift to inflation or stagflation and urged investors to bring their “mission” and “governance” arms together, citing NSW Treasury Corporation own efforts to look again at the mission of its clients and their ability to invest long term.

History tells us that global growth will continue. Charting the growth of per capita GDP through the centuries shows the persistent engine of “fundamental human ingenuity and productivity,” said Geoffrey Rubin, senior managing director and chief investment strategist at Canada’s $420 billion CPP Investments. Despite today’s handwringing and challenges, he said looking back into the past gives confidence that economic development will stretch into the future too.

Diversification will be key, while investors will also need to look “deeper than labels” to try and understand performance drivers. Elsewhere, low interest rates and the impact on government bond yields will see investors hunt for more opportunity in real assets and infrastructure. Regarding China, Rubin said the Canadian pension fund is moving towards a 20 per cent allocation to the country and said building exposure to the engines of Chinese growth was an “imperative” for both returns and diversification.

Angela Rodell, chief executive officer at Alaska Permanent Fund Corporation, believes that investment in technology will be a key driver in the years to come because COVID-19 has proven its link to GDP growth. She shared panellists’ concerns about low yielding bond allocations and rising inflation, noting counter strategies could include “looking at commodities differently” or allocations to gold or even crypto currencies.

She flagged the risk of getting “left behind” as “technology changes so rapidly.” Alaska will also focus on how it invests in healthy supply chains, exploring particularly how technology will help manage inventories and risk, she concluded.

To listen to the podcast with Geoff Rubin from CPP Investments, click here

 

FIS 2020 Digital delegates heard how the monetary response has successfully managed many elements of the crisis so far. Getting the next phase of the policy response right, particularly navigating fiscal policy, will be more challenging.

Monetary and fiscal policy has been popular so far, but it could become less so going forward, warned an expert investor panel speaking at FIS 2020 Digital.

“Policy makers will have to think hard how policy plays out in the court of public opinion,” warned Kate Barker, chair of the United Kingdom’s British Coal Staff Superannuation Scheme, chair-elect of USS, and formerly at the heart of monetary policy as a Bank of England committee member.

Governments have a balancing act ensuring demand doesn’t weaken and navigating how to tax industries and businesses that have done well in the crisis without damaging incentives. She added that these policies work well when people trust politicians, but echoing comments made by Bridgewater’s Co-CIO, Greg Jensen, trust is low in the UK and US.

In the wake of the crisis monetary policy has concentrated on keeping borrowing costs low, ensuring debt issuance is digested and liquidity maintained. Going forward the focus will shift to corporate solvency and managing inflation (here she flagged stagflation as a particular worry) where the policy response grows more complex.

“Putting rates up to dampen economies when there is so much borrowing is going to be very difficult,” she warned adding that setting interest rates could “become a bit of nightmare” for policy makers.

Amongst all the talk of policy, Barker also urged delegates to remember the private sector. The private sector has adapted well to the crisis – don’t kill it with tax changes in the wrong direction, she urged.

“The pandemic has led to the most difficult investing period I’ve ever experienced,” said James Davis whose investment career spans 30 years, most recently as CIO of Canada’s $22 billion OPTrust. A cacophony of risk from stagflation, zero and sub-zero interest rates and uncertain fiscal policy have made for unprecedented times. After four decades of interest rates heading steadily lower, monetary policy has become a “blunt instrument” and reached peak effectiveness. Now the levers are likely to shift in favour of fiscal policy “playing a much bigger role” and brining new risks, he said.

He urged for robust debate on the governance that sits behind fiscal policies and cautioned against past mistakes. For example, in the 1930s and 1940s stimulus deployed to lift the US out of the Great Depression met the brake of tightening monetary policy causing “a significant economic set back.” Similarly, a risk in the COVID-19 response is that policy makers, worried about debt bubbles and deficits, stop fiscal measures but monetary policy fails to fill the gap.

As for solutions, OPTrust, which runs a hedging portfolio and a return seeking portfolio with a focus on private markets, is looking at ways to counter the fact defensive assets no longer bring returns as interest rates head ever lower. The fund is increasingly exploring how to use private market assets in a more resilient way: real estate and infrastructure are more resilient in inflationary and deflationary environments, he said.

“The only way to deal with this is to build a portfolio that is as resilient as possible. But this is getting harder and harder.”

Fellow panellist Olivier Rousseau, executive director of France’s Fonds de Reserve pour les Retraites was equally pessimistic. Reflecting on a pervasive “exhaustion” he said policy options are exhausted, there is “no juice” in asset classes leaving investors choosing “the least ugly,” adding that trust between nations is also exhausted.

France’s FRR is also having to navigate other challenges. The French government has drawn €5 billion from its €30 billion portfolio to help finance the Covid-19 crisis. Positively, Rousseau said the fund has now got authority to invest in more risk and illiquid assets with a long enough time horizon to model “a return to the mean for equity valuations.” The fund also has more room to invest in more illiquid investments, although this is mostly confined to France.

Reflecting on the wider geopolitical backdrop, Rousseau said the “Chinese miracle” has been a “delusion” leading to neither democracy nor China striking fair economic relationships with the rest of the world. Here he referenced Africa and China’s growing military power in the South China Sea as examples.

He noted that Europe, “on the losing side” of the 2008 financial crisis and now also suffering greatly in the wake of the pandemic, is facing particularly tough times. Something he attributed to the challenge of uniting northern and southern Europe.

“We are not a nation,” he lamented, adding that the continent is stuck between the US “which is letting us down” and China “which will not be a better master than the US.”

Barker noted purposeful companies will become a key theme for equity investors in the coming years. Equity analysts will need to know “the granular stuff” about companies from how they motivate employees to their treatment of suppliers. ESG is no longer a “glossy document” but a living thing, she said. She added that consumers must also drive change; if customers revert back to buying the cheapest products in the wake of the pandemic, progress on purposeful companies will stall.

Before lockdown, some 100 staff worked from home every day at giant Dutch asset manager PGGM. Come COVID-19, that changed overnight to all 1400 employees needing to work from home. It called for a rapid system upgrade, strengthened firewalls and mass adoption of technology like Microsoft Teams in a sweeping IT operation, said Arjen Pasma, chief risk officer, investments at PGGM.

Speaking at FIS2020, Pasma told delegates how a skeleton treasury staff remained in the office (PGGM had to prepare special passes for these staff to leave their homes) to ensure that trades were cleared and settled and that margin calls were met.

“Those in our treasury function had a really busy time,” he said. Elsewhere, the asset manager went to lengths to furnish staff with laptops, stationary – and office chairs, he said.

April Wilcox, director of investment operations at US pension fund CalSTRS described moving an entire organisation to work from home as a “whirl wind.” In the beginning staff remoted into the pension fund’s network in coordinated shifts, she said. She described investment staff having to use their personal cell phones to call brokers to close and settle trades against the backdrop of extreme market volatility, huge trading volumes and liquidity worries, and a rush to set up Zoom and Webex accounts.

Meanwhile staff juggled poor home WiFi connections, home schooling and often cramped working conditions. In two weeks the whirl wind calmed, turning efficient and smooth-running, thanks particularly to strong governance structures, she said.

Fellow FIS panellist Geoff Hodge, president at Milestone Group, told delegates that the combination of factors caused by the pandemic made for unprecedented risk. He also noted how the pandemic has triggered re-shoring of some accounting activities: some back-up plans didn’t hold up, he said adding that state-of-the art operation centres in third countries are not necessarily the right thing “if you can’t go there.”

All panellists flagged how the pandemic has increased cyber risk.

“It’s going up the charts in terms of attention,” said Hodge. The risk comes from using personal devices and not operating within the usual “corporate perimeters.”

He also noted that challenges caused by the pandemic and the need to work from home have come at the same time as a regulatory focus on resilience, particularly regarding outsourced relationships and external supply chains. He said there is a need to have a “Plan B” if supply chains are interrupted.

Meanwhile, PGGM’s appetite to onboard new managers and service providers has slowed. The pandemic has made carrying out due diligence on new managers challenging, said Pasma.

PGGM is always on the lookout to “provide liquidity” and invest in opportune times, but challenges around measuring risk like excessive leverage and the correct valuation, particularly in private real estate, make due diligence all the more crucial. The fund won’t allocate where it does not feel comfortable, he said. CalSTRS is also working on creative ways to expand its due diligence. One area of real concern is cyber risk among its managers where the pension fund is asking its vendors to come up with solutions.

As returning to offices becomes an increasing focus, CalSTRS is also drawing insight from its external managers, said Wilcox. She said CalSTRS has continued with external manager searches through the crisis but said the pension fund has not allocated any funds yet.

PGGM has conducted face-to-face final interviews with new hires and is planning outside events to bring staff together.

“People miss each other; work is a social thing.” Pasma also predicted that offices will be more “a place where employees meet” rather than the default location to work.

CalSTRS has also kept hiring through the pandemic via video interviews, and the pension fund’s HR department has created a remote onboarding process. Wilcox concluded that maintaining culture, trust, team building and emotional wellbeing amongst staff is a key challenge.

Globalisation will be replaced by a new regionalism with Asia at its heart. Coupled with automation and AI increasingly replacing traditional labour-intensive production, emerging economies with a youth bulge face challenging time ahead.

The pandemic has accelerated the pace of change in globalisation, hastening trends that were already underway, said Ian Goldin, professor of globalisation and development at Oxford University. Speaking at FIS2020 Digital, Goldin said technological change was already seeing robotics in supply chains operated by skilled labour reduce calls on cheap labour in far-off locations. Elsewhere, growing customisation and demand for individual products from “cars to shoes” is adding fuel to the fire of greater automation, while demand for immediate delivery and super-fast supply chains means production is shifting closer to the big markets.

Goldin told delegates to expect more regionalisation whereby neighbouring countries trade with each other in a model led by Asia. This new regional world has worrying implications for weaker countries and regions like Africa which benefit most from a rules-based, global trading system. While countries “plugged into China” will continue to benefit, small countries and trading blocs will be unable to compete with large regions and will face uneven terms of trade.

In what he called a “different dimension to globalisation” Goldin said the Asian focus will have “Chinese characteristics” of which automation will be a key feature. Automated supply chains will have a negative impact on developing countries. Although digital leapfrogging has bought benefits like mobile banking, automation of production will erode employment chances in some developing countries, effectively ending a model that gave Asia its route to development in recent decades.

For example, labour intensive jobs in manufacturing and services like call centres will be automated; elsewhere digitisation of companies’ back office provision now means giant servers on site rather than service centres oversees.

“For countries with youth bulges, where are the jobs coming from?” he asks.

Bullish on China

Goldin said he was “bullish” on China’s ability to recover from the pandemic. China has demonstrated its capacity to manage the impact of COVID-19, and domestic consumption will rebound sufficiently to reduce dependency on exports, he predicts. He also noted that the impact of China’s aging population on growth will be offset by the rise in robotics and AI.

Goldin said that technological leadership will come from Asia in the coming years, with Europe trailing third behind the US – or even fourth behind an emerging India. Challenges to America’s technological dominance include the US government’s increasingly mistrustful relationship with Silicon Valley. Reflecting on digital interdependence between China and the US, he noted Chinese graduates now have senior positions in many US tech companies.

“AI recruits and machine learning recruits come from China; Chinese grads are running these systems,” he said. “The idea that we are not interdependent is a nonsense, and to sever this link would be a set-back.”

He noted that the cold war between China and the US is forcing countries to take sides, already evident in 5G technology. He also cautioned that a Democratic US President would not necessarily have a different stance on China, although the relationship would be handled with more “sophistication.”

Role of government

Goldin noted a “total rethink” on the role of governments with “old taboos” around debt and deficits thrown out with dramatic implications. This will mean higher tax rates going forward – “clearly government is back big time,” he said.

He also noted how governments must now navigate complicated shifts between generations given the young have sacrificed much to protect the old during the pandemic. Here he forecasts a payback in the way we regard young people. He said politics was uncertain and called for stronger global institutions, urging for the same kind of consensus and institution building that followed WW2 and led to Bretton Woods, the United Nations and the creation of welfare states.

Travel

Goldin predicted a reduction in business travel as companies seek to save costs while tourism, which has already started to rebound, will bounce back. Regarding travel, he expects safe corridors to open between countries that could result in “safe terminals” at international hubs. They will provide corridor routes and multispeed travel to prevent mixing with “riskier” populations. The absence of a global authority has left “airlines the new conveyer of Covid-19” he said.

Casting into the future, Goldin said that the next crisis could come from an extreme climate event. He also flagged that new regulations like Solvency II and Basel regulations now have a “rear view” focus. Many parts of the financial system are not subject to this regulation, and still hold risk, he warned.

He also noted the need for geographical diversification in companies’ physical assets.

“Knowledge and assets focused on one building or one city are vulnerable. Too many corporate headquarters are located over the street from each other.”

Finally, Goldin flagged the need to educate stakeholders that resilience has a cost, and counselled that successful medium-term strategies might be wrong in the short-term.

The connection between investors and policymakers is not working as it should if the recovery is to be sustainable and inclusive with concrete reforms. As policymakers consider policy interventions to support the recovery, investors should be engaging policymakers by providing technical expertise and allocating capital to sustainable investments. This report identifies indicative policy options, which PRI will root in its ESG and climate program, and presents a series of recommendations for investor policy engagement and indicative proposals for action.

To access the report Sustainable and inclusive: COVID-19 recovery and reform, click here.