The decade ahead promises to be one in which purpose gets to be much more widely entrenched and influential. And asset owners have a role to play in the path to purposeful capitalism.

Decades reveal things that our normal yearly check-ins can miss. I would characterise the 2010’s decade as one in which investment institutions and the companies in which they invested were very focused on the financials but started to take an interest in the concept of wider purpose.

The momentum in this theme suggests that we can expect the 2020’s decade may be one in which purpose gets to be much more widely entrenched and influential.

Corporations and purpose

The transition from shareholder capitalism to purposeful capitalism is complex. It is also paradoxically simple. The state we have emerged from is widely attributed to Milton Friedman’s 1970 article which mobilised thinking in corporations under a singular emphasis on shareholder value.

The supporting act in this that has played out for more than four decades has been the contribution of measurement which has been faithfully reciting the mantra that ‘figures don’t lie’. This simplification gave organisations a convenient excuse for avoiding a lot of inconvenient challenges, including fulfilling a wider social purpose.

But this allure of the measured over the meaningful has been both unhelpful and unhealthy and has resulted in an oversimplification of business realities and responsibilities. Most notably that corporations, and their institutional owners, have been drawing on a finite pool of natural resources in an unsustainable fashion. Greta Thunberg’s statement at the UN Assembly that ‘…we are talking fairy tales of eternal economic growth…’ is entirely accurate.

The responsibility of asset owners and corporations for some part of the climate-change problem is clear-cut, given their consumption of natural resources and considerable carbon footprints; past, present and future. As this becomes a stand-out issue in the 2020’s agenda – number one in my view – it will be critical for these organisations to play their part in its resolution.

Corporations’ responses to this problem, and other societal stresses, need to result in transformational changes to business models that make them purpose centred. They need to strike a new balance between: societal contribution; employee experience; and client-value proposition, while introducing into the corporate mix: more supportive cultures; integrated thinking and reporting; and value creation. The latter urgently needs to be seen in a new way where well-being, created as a consequence of purposeful value creation, ranks alongside wealth creation. A complex concept – yes, but critical to the future.

This is already out there as a concept – the US Business Roundtable, the UK British Academy, and the letters from Larry Fink,founder of BlackRock, have been arguing in this direction.

Ideally the purpose of corporations should express a cause that is resonant – engaging, meaningful, and impactful and is respectful – inclusive and serving. In moving in this direction, organisations have much inertia to overcome, notably the fundamental priorities of their stakeholders: owners, employees, clients, and society. They must settle on an alignment of collective vision and mission by socialising it deeply and widely. And they must adapt their strategies and communications to fit new priorities and the changing zeitgeist. This is massive change and it will surely take a decade to achieve the transformation, but it can be done in that time-scale.

Sustainable corporations of the future will quickly recognise and respond to the new drivers and incentives in the system. First, they will acknowledge that most planet-earth inhabitants want these sorts of changes; second they will see governments needing to resolve public policy tangles through these sorts of changes; and third that responsible asset owners want to effect these sorts of changes. Some history will help position asset owners’ current role.

Asset owners and purpose

The interpretation of fiduciary duty has been asset owners’ parallel problem to Friedman’s shareholder capitalism. It has focused substantially on measured short-term return not on sustainable long-term outcomes. A new interpretation of sustainability is needed to advance a better purpose.

In tandem, big asset owners (identified as ‘universal owners’ which own a slice of the world economy) must confront the principle that future investment returns will only come from a system that works; and will only be valuable in a world that is pleasant to spend it in. Those that do, choose a path of enlightened self-interest that supports the financial system, and its components, through an evolution to purposeful capitalism. This is also critical soft-power leadership for the corporations they own.

The 2010’s launched the asset-owner master class. I would cite Adrian Orr at New Zealand Super and Hiro Mizuno at Japan’s GPIF as two particularly inspiring leaders of highly progressive organisations that have laid the foundations for more purposeful asset-owner practices.

A Harvard Business School case study of the GPIF – should a pension fund try to change the world? – is the best example, in my view, of universal ownership principles in action. Hiro Mizuno is seen as the stand-out favourite of all their case studies and there is broad agreement that pension funds armed with universal-owner thinking should try to change the world and might well be successful. This conclusion is really encouraging.

The above exemplars herald an emerging string of leadership – and impact-minded asset owners that, in the 2020s, can bring greater purpose, well-being and wealth into the lives of four billion savers and investors and to the other four billion or so people on the planet that are downstream from their actions.

The simple reality is that these hugely influential organisations, in shining a light on a stream of problems, can reveal them as a torrent of opportunities. They are too important to fail in this mission.

Roger Urwin is global head of investment content at Willis Towers Watson.

In The Pension Regulator’s (TPR) recent governance and trusteeship consultation, we asked how we could help UK trustees improve the diversity of trustee boards, something we believe is crucial. We made clear we don’t support the introduction of quotas to broaden the narrow type of individuals currently seen on trustee boards.

We have now published our consultation response having found some respondents challenged what we are trying to achieve by focusing on diversity. Some also asked us what we mean by diversity. While many responding to our consultation were supportive of reporting on diversity, it is clear we have more to do in building a consensus on the way forward, what we mean by diversity and how it should be realised.

Research that we have conducted within TPR, and external academic research, all point to the fact that diverse groups achieve better decisions through debate and challenge. Our own research on gender points to a strong correlation between gender-diverse trustee boards and those boards which score highest against our measure of quality governance.

But does including one female in a board of all males, a young trustee among a board of older trustees, a trustee with a marketing or HR background against a trustee board of financial professionals – achieve diversity? Does inclusivity within the board make a difference? Trustee chairs often tell us that they have no influence over who is appointed to the board. Members elect member-nominated trustees, and the employer commonly appoints employer-nominated trustees and often any independent or professional trustees.

This could be one factor impacting the diversity of the trustee board, leaving some people thinking they can’t be trustees, and unwilling to put themselves forward as trustees. To some degree, the current lack of diversity and lack of role models for different characteristics must be a barrier, and influence those who would be prepared to put themselves forward.

Every trustee chair, I am sure, would welcome any new trustee with the right knowledge and understanding, or an enthusiasm to gain that in the timeframe permitted by law – as would every other member of the trustee board. But chairs and trustees are people, and people tend to socialise and gravitate to people like themselves. We all have unconscious biases. Thinking about, and being aware, of those biases and putting in place mechanisms to welcome and accommodate people with different characteristics to the current make-up of the board could be a welcome first step in creating an environment where a broader range of people might be encouraged to apply.

Including one woman among a board of men, or a young trustee among a board of older trustees, will have challenges. These include new members’ ability to persevere and contribute effectively if the board is not “open,” or if the board hasn’t grappled with any inherent biases and seems unwelcoming or resistant to the different opinion and voice that they bring.

To my mind, an effective trustee board needs to be inclusive, aware of any unconscious bias it currently has because of its make-up, and understand whether board meetings are conducted in a way that enables individuals within the trustee board to contribute to their fullest extent: to be themselves. Trustee boards lack diversity because there is a lack of role models, because breaking into a non-diverse trustee board is challenging and unwittingly hostile. And because trustee boards and their chairs are not sufficiently inclusive, recognising the individual diversity that each member brings to the board.

The challenge is to focus on diversity and inclusivity. If we focus on inclusivity, trustee boards could naturally become more diverse. We need to tackle both to create a sustainable difference. The pensions industry must play its part, and I welcome the Pensions and Lifetime Savings Association’s (PLSA) recent commitment to launch a made-simple guide for schemes about how they can recruit and retain diverse trustee boards.

TPR is also keen to make a significant change to the current position on diversity and inclusion on trustee boards, and will take time to deliver a more substantive and sustainable change. We will establish and lead an industry working group to find ways of supporting schemes to take steps to improve both diversity and inclusivity. We will create clear definitions of what is meant by diversity and inclusion in a pensions context, and deliver good and best practice guidance on both board composition and how boards can make the most of the pool of potential trustees they have available to them.

David Fairs, is executive director of regulatory policy, analysis and advice at The Pensions Regulator

The largest pension fund in Europe, the €450 billion Dutch ABP, which has long been a leader in sustainability, set out its sustainability and responsible investment plan for 2025 last month.

The plan sets out long-term objectives – in line with the goal of a climate-neutral economy by 2050 – as well as the short-term steps to achieve that.

It says that by 2050, the global economy should be climate neutral and ABP wants to bring its portfolio in line with the goals of the Paris Agreement by 2030.

The fund achieved its 2020 sustainability goals, set in the strategic plan of 2015, which saw it reduce its carbon footprint by 30 per cent compared to 2015 levels and commit €10 billion to renewables. The new plan will lift those goals to 40 per cent and €15 billion respectively in what is a continuous target.

Diane Griffioen, who is head of investments at ABP and has responsibility for investment policy, says the 2015 sustainability policy – that saw the fund set targets for CO2 reduction, investment in renewables and investment alignment with the SDGs for the first time – was a decisive moment for the organisation but that the new policy has a much stronger ambition.

“The 2015 policy was a turning point, it was ambitious and was hard work. APG did a really good job implementing that for us. At the same time, when we were setting this new policy we decided it was better to take a longer horizon. So we’re not just looking at a five year vision but further into the future – the ambition is for 2050, 2030 and the shorter term goals for the next five years. That was a real difference,” she says.

The fund first set clear policy, principles and objectives around sustainability back in 2008 but the policy in 2015 set quantitative targets for the first time.

According to Claudia Kruse, managing director global responsible investment and governance at APG, the biggest impact of those concrete targets was that it triggered a cultural shift in the organisation.

“Back in 2008 our view of investments was about risk, return and cost with an underpinning of ESG. Since 2015 that has become a quadrant. Every portfolio manager has to carefully consider every investment decision in that quadrant,” Kruse says.

For example now, under the fund’s inclusion policy, portfolio managers can only invest in companies identified as ESG laggards if they engage for change.

“So engagement becomes a pre-consideration for investment, this guides the organisation and changes the way we invest. It’s the principle of making conscious choices, and alters the way we make investments.”

The portfolio managers also now have insight on a daily basis of the portfolio’s carbon footprint with much work having been done in the IT and operating systems to embed ESG data into the core system.

Implementation

ABP is the pension fund for employees in the government and education sectors and has more than 2.9 million members. It now has 40 staff of its own who are tasked primarily with strategy and policy. The execution of the portfolio is done by APG which is the fund’s sole pension investment provider.

The development of the sustainability plan was done in collaboration between ABP and APG but also external stakeholders including NGOs, financial institutions, employers and unions.

“We are proud we have this sustainability policy, but also confident of its execution. It’s an ambitious policy but we have a strong operation, and I’m really proud of the cooperation between ABP and APG, the process has been energetic,” Griffioen says.

Kruse agrees the connection with beneficiaries and collaboration with stakeholders sets ABP apart.

“The collaboration that was seen in the development of the policy will continue as we implement the policy. You need to invest in line with what your constituency expects of you and your fiduciary duty,” Kruse says.

The new 2020 sustainability plan sets out a target of a 40 per cent reduction in the portfolio’s carbon footprint, it is currently down 30 per cent since 2015, and this is implemented by giving portfolio managers a carbon budget and the freedom to decide how to approach it in their portfolios.

“This is about active management so it’s not about a more limited universe,” Kruse says.

But Griffioen points out the goal is not just to focus on equity investments.

“We want to have a net zero economy and a net zero portfolio,” she says.

This means moving beyond just equities and next year ABP will set new targets to include other asset classes, which will most likely start with the credit portfolio.

The fund also has nearly €10 billion in renewables, with a new target of €15 billion in renewable and affordable energy, a slightly expanded definition consistent with the SDGs.

The fund’s infrastructure portfolio has been a great source of clean and renewable energy investments and other private markets will also be a target.

“We want to make sure everyone in the organisation is aware of this target and is active in it,” Kruse says. “We always have to meet the same risk return requirements, but the more you are on the look out, the more you able to select them. We have been into renewables for a long time, and many more investors are now interested. We would definitely like to see more of these investments coming to market that are structured so we can invest in them as a large institutional investor.”

Expansion

The 2025 strategic plan does more than just set targets, it takes the sustainability leader into the next decade and beyond, expanding the scope beyond climate to include resource scarcity and digitalisation.

ABP says the transition to a circular economy is essential to achieve a climate-neutral global economy by 2050  and it wants to accelerate this transition so that by 2030 efficient and socially responsible raw material supply chains are common practice in companies. It has said it will invest more in companies with circular business models and innovative solutions for food and natural resource scarcity.

The theme of natural resources was chosen as a result of member demand.

“One thing our members mentioned is scarcity of materials. It was also on our list but they specifically mentioned it. It’s a recognition that if we don’t work in a more sustainable way then we won’t have any natural resources, it’s broader than climate,” Griffioen says.

It has also connected sustainability and digitalisation, saying that by 2050 digitalisation should lead to responsible value creation and provide solutions to challenges such as climate change and the scarcity of natural resources. One of ABP’s goals is to have more invested in companies that can demonstrate a contribution to this by 2025 and it will also set criteria to assess whether companies respect the digital rights of employees, consumers, and users.

Another of ABP’s goals for 2025 is to have 20 per cent of assets invested in SDGs, this figure currently sits at around 14 per cent.

“This is a huge step, but we really wanted to make a strong statement and stimulate APG to find new SDG investments. We want our full portfolio to be sustainable and responsible, but we’ll also have 20 per cent dedicated to the SDGs which means the products those companies make are directly correlated to impact around the SDGs. We really wanted to grow in that without sacrificing risk and return,” Griffioen says.

In the next few years ABP will focus on specific investments in the SDIs and will also strengthen the assessment criteria for company inclusion in the portfolio.

“At the moment we have laggards and leaders. The criteria companies need to meet to become a leader will come under three themes – climate, digitalisation and resource scarcity –and if they don’t meet the criteria, then we can’t have them in the portfolio,” Griffioen says.

It will tighten its assessment criteria of companies so that they will align with the UN guiding principles for business and human rights. This is described by Griffioen as more of a necessity and focuses on how companies approach human rights, treat employees and the impact on society.

It’s a bold step for a fund already at the forefront, and another indicator of what sustainability leadership looks like.

In the Chinese language, the word “crisis” is composed of two characters — 危机 (weiji): where危 (wei) means crisis or danger, 机(ji) means opportunity.

Crisis to be sure, China is in a deep one. As of early February 2020, there were approximately 60,000 known and confirmed Novel Coronavirus Pneumonia (NCP) cases and over 1,300 deaths worldwide. At least 28 countries and territories have been affected with no sure sign of peaking. The virus rampaging across China is already more damaging than SARS which killed 349 people in the country.

Can this crisis be turned into opportunity?

Today, much of mainland China remains shut down as authorities try to limit the spread of the virus that started to emerge in early December. The outbreak started in Hubei Province’s Wuhan, a city of 11 million people and a major transportation hub. What made things worse is that it happened just when the country’s most important holiday — the Lunar New Year — was about to start with hundreds millions of people travelling across the country, forming part of the world’s largest annual migration projected to represent 2.5 billion people migrating across many regions from January 10 through February 9.

China is also more integrated into the global economy than in 2003 when SARS broke out. Back then, China’s GDP was only 4.3 per cent of the global economy, while by 2019 that number had increased to 16.3 per cent. During the SARS period, lockdown measures were not taken by any city in China (including the epicenter in Beijing). This time, well over half of the country is locked down for weeks. Businesses started to slowly reopen on February 10, but the government is advising further postponement for a week or more and most schools will not open before March.

The services sector saw its biggest impact in over a decade. While the Lunar New Year is traditionally peak season for restaurants, retailers, online e-commerce, entertainment and tour agencies, lockdowns have abruptly brought these businesses to a standstill ever since leading Chinese CDC expert Zhong Nanshan announced the contagious nature of the virus on January 21.

By then the virus had been spreading throughout the country with roughly 5 million people leaving Wuhan for the holiday season.

Oxford Economics forecasts that the US alone will experience a loss of 1.6 million visitors from mainland China this year, translating into 4 million hotel room nights.

* Data as of Feb. 11, 2020. Source: WHO, Chinese CDC, IMF, National Bureau of Statistics, Huang Zhong.

 

When SARS broke out in 2003, China had entered the WTO just a year prior and the economy was able to recover back to double-digit growth. When the coronavirus broke out, China had just signed the Phase One Trade Deal with the US and the economy had already experienced its slowest pace of growth in three decades to 6.1 per cent in 2019.

The Shanghai Stock Exchange was finally able to resume trading on February 3 after the Lunar New Year and the benchmark Shanghai Composite Index lost 7.72 per cent, the biggest drop since 2015. Some economists have predicted a full half percentage drop of GDP growth from 2019. A few even project a 1.5 per cent drop to 4.6 per cent for all of 2020. Some have accepted the proposition that a 0 per cent growth rate might be the reality for the first quarter of this year.

Because of China’s increased integration with the global economy, the ripple effects from China are much wider than during the SARS outbreak, particularly to Asian countries that benefit from China’s insatiable demand for materials largely coming from the upgraded lifestyles of the growing Chinese middle-class population, the largest in the world.

The crisis is far from over. In fact, the peak of this crisis has yet to show itself.

But it’s never too early to start reckoning as to what went wrong.

For its part, China needs to seriously look at its governance practices, and issues repeatedly criticised by the West.

When ophthalmologist Li Wenliang, 34, passed away in the midnight of February 6 after “futile efforts at resuscitation,” it sparked an outcry on Chinese social media about the Communist Party’s attempt to censor information on the epidemic.

He was one of the eight whistleblowers “reprimanded” by police for “spreading false rumors and misinformation” — information that turned out to be largely true — a month before Zhong Nanshan officially recognised the novel coronavirus’ vicious nature of person-to-person transmission.

Li was hailed as a hero on Chinese social media for his bravery in speaking up. But internet censors wasted little time trying to tamp down the buzz. The deletion of commemorative and criticising posts has further fueled anger over censorship behind the Great Firewall which most “netizens” have already gotten used to. But now such censorship attracts enormous pushback across the country. “What else can you do other than delete our posts?” one post asked.

Environmental, Social and Governance (ESG) criteria are a set of standards used by responsible investors to screen a company’s operations, but most people don’t realise that a sophisticated ESG model can also be applied to evaluate the sustainability of governments.

Responding to environmental and social demands from the public is any government’s intrinsic responsibility.

China has made a lot of great, ongoing efforts to tackle its environmental issues such as smog, polluted water and the carbon-intensive energy sector. It’s becoming the largest green bond market and the world’s leader in new energy vehicles and related technologies. It is also determined to eliminate absolute poverty by the end of 2020, effectively having lifted over 800 million people from humanitarian crises within 40 years. [See the forthcoming book on Modern China available April 2020.]

Governance has been used by investors to understand that a company uses transparent methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that corporate strategies in management structure, employee relations, consumer protection, board diversity and human rights are sustainable even under extreme external and internal crises.

Should the Chinese government and its ruling party have applied some basic sustainable investment principles, it would have taken a very different approach towards critical stakeholders such as Dr. Li and potentially avoided some of the negative consequences.

After all, sustainability is “development that satisfies the needs of the present without compromising the capacity of future generations, guaranteeing the balance between economic growth, care for the environment and social well-being.” (From the seminal Brundtland Report)

Time and again, China has proven itself capable of pulling off large scale initiatives for the betterment of the country’s economic, social and environmental conditions.

By learning ESG strategies from successful investors, the country can truly become a world model for achieving the sustainable development goals (SDGs).

Learnings from this crisis are also bi-directional: China should learn to be more transparent and give its current governance strategies a deep and honest review, while the rest of the world should learn from China and its ability and speed to mobilise, learn, adapt, innovate and build.

The Chinese government, an authoritarian regime, was able to build the 1,000-bed Huoshenshan Hospital within seven days, and the 1,500-bed Leishenshan Hospital within 10 days, something that the West arguably never imagined could happen. Once the government decided to act, its response and response capabilities have shown what China can do.

The central government quickly mobilised the entire country to host patients from Hubei province whose healthcare system was already overburdened and is on the brink of total collapse. Using a strategy called “one province — one city”, the country is quickly sending thousands of confirmed patients from 16 cities other than Wuhan to their “helping provinces”. For example, Jiangsu is taking in patients from Huangshi City; Guangdong and Zhejiang province taking patients from Jingmen City.

This large scale, cross-territory mobilisation and cooperation is exactly what the world needs to solve large, complex, imminent and consequential threats such as climate change.

While the crisis is still ongoing, entrepreneurs in China have already been thinking about how to integrate IoT, automation, and AI into traditional “low-tech” manufacturing processes.

For example, a mask manufacture in Suzhou has already started experimenting full-automation for its N95 mask product line to replace labor intensive processes such as manually gluing mask straps. The product line only needs one worker instead of five. This conversion only took five days to happen, instead of five months.

The Huoshenshan Hospital is another example of how China is pioneering advanced AI and robotic technologies to try to be “contactless” between infected patients and health caretakers to reduce the risk of exposures to the deadly virus.

In between, you have innovations such as Kentucky Fried Chicken and Alibaba’s Hema food delivery service trying to add App features for contactless delivery, allowing couriers to leave orders in convenient places for customers to pick them up, without requiring interaction.

Businesses across the country are also learning to “home office” or “cloud work”, which few have tried before even though internet connections are almost ubiquitous. Government offices are also quickly moving many of their bureaucratic, mundane and often unnecessary face-to-face procedures online, which also improves efficiency and transparency.

Masks are a relatively low-tech product, but these new production techniques already demonstrate further possibilities for applying more advanced automation and IoT technologies to be “smart,” flexible and economically useful. While other countries are still monitoring the situation, practical innovations are already happening and scaling up at “China Speed” to become real opportunities that the rest of the world can benefit from.

Climate change, poverty alleviation, zero hunger, air and water pollution, biodiversity, sustainable cities and communities are all environmental and social sustainability imperatives which require massive global coordination and grassroots innovation. Transparency and better governance are prerequisites not just for individual corporations, but also to every responsible country and their governments and ruling parties.

China must learn from its past and current epidemic crises and other social crises such as SARS and the Hong Kong protests.

Transparency, sharing and cooperation are the only ways to solve pressing global crises that may very well threaten every country and person on this planet.

China and the rest of the world are much more integrated than they were 17 years ago, and they will only bind more tightly going forward. In a decade, China will be the world’s largest economy. It will inevitably assume more leadership roles on global affairs.

Will China seize the opportunity it has in hand to become the country most able to solve global sustainability challenges?

 

Cary Krosinsky and Huang Zhong are from the Sustainable Finance Institute.

Krosinsky was also on the New York State Common Decarbonization Advisory Panel

 

 

Internationally only a handful of pension funds have committed to achieving net-zero emissions by 2050 and have developed an approach to achieving that goal.

In July last year, the Governor of New York State  Andrew Cuomo passed the Climate Leadership and Community Protection Act which sets out ambitious climate plans including net zero emissions by 2050.

The pension fund for the state’s workers, the $210 billion New York Common Retirement Fund has a long history of addressing climate change in its portfolio and has been ranked by the Asset Owners Discloure Project as third in the world, and number one in the US, in addressing climate change-related investment risks and opportunities. (Sweden’s AP4 and the French sovereign wealth fund, FRR were ranked first and second).

The state comptroller, Thomas DiNapoli who is the sole trustee of the pension fund, has made addressing climate change risks and opportunities a priority for the fund. Following the recommendations of a Decarbonisation Advisory Panel, set up by Cuomo and DiNapoli to advise the fund on a path forward, the fund’s 2019 climate action plan outlines action including identification and assessment, investment and divestment as well as engagement and advocacy.

One of the panel’s recommendations was for a specific climate-focused program and resources for such an effort. The fund has since committed to creating a formal, multi-asset-class Sustainable Investment-Climate Solutions Program (SICP), similar to the emerging manager programs common at public pension funds, with dedicated funding for sustainable investment strategies. It will also hire investment staff including a senior sustainable investment officer and formally integrate climate risk assessment and engagement into investment processes.

New York Common currently has a $10 billion commitment to climate investments and has a goal of doubling that commitment over the next decade.

The Canadian C$325 billion CDPQ, also recognised as a leader in reaching net zero by 2050, has committed to factoring climate change into every investment decision it makes. Back in 2017, the fund set an aim of $26 billion invested in low carbon investments by 2020 but this was achieved by 2018, so a revised target of $32 billion was fixed.

It also set out to reduce the portfolio’s carbon footprint per dollar invested by 25 per cent between 2017 and 2025. To do all this, it is focusing specifically on reducing higher carbon intensive assets, acquiring low carbon assets, and improving the practices of portfolio companies. It has made many significant investments in renewable energy including solar and wind assets.

To support its position on climate change, CDPQ has also resolved to become carbon neutral by offsetting the carbon emissions arising from its energy consumption and from employee business travel.

To this end last year HESTA, the Australian superannuation fund for health workers, became the first and only fund in that country to be certified as carbon neutral under NCOS for its trustee operations. This measures electricity, staff commute, electricity, waste, water and transport including taxis and air travel. HESTA’s key initiatives to reduce emissions in the past year included improving lighting controls, introducing energy education programs and improving labelling and signage of waste streams. But despite the good effort HESTA has made in its own operations, and the leading position it has taken on SDG integration, it has not made the same impact in its investments: with Australian equities and international equities exposures 1 per cent more carbon intensive than the benchmark; and property 5 per cent more carbon intensive than the benchmark.

In 2018, the Australian fund for construction workers, Cbus Super, published a Climate Change Roadmap which set out metrics and targets. Under that roadmap, Cbus has set a target for all its property holdings to be net zero emissions by 2030. It currently holds around A$5 billion in property but because of its growth those assets could be as high as A$10 billion by the time the deadline comes around. Property fund managers have been given until this year to outline their roadmaps for net zero emissions holdings targeting 2030.

Australian and New Zealand investors are enthusiastic about climate aligned investment strategies but few have set specific targets, a report commissioned by the IGCC has shown. [The chair of Cbus’ investment committee, Stephen Dunne, is also chair of the IGCC.] The report, which looks at Australian and New Zealand investors with funds representing more than A$1.3 trillion in assets, shows that only 35 per cent have set specific targets for their whole portfolio and just over 40 per cent of real estate investors and less than 25 per cent of listed equities investors have set targets.

From a total portfolio or multi-asset view, the A$24 billion VicSuper has embarked on a pathway towards a net zero emissions portfolio but has not formally set a deadline.

VicSuper was one of the first Australian super funds to measure the carbon intensity of its equities portfolio and as at June 2019, VicSuper’s equities investments had a weighted average carbon intensity of 240 tonnes of CO2e/A$M against a benchmark of 245 tonnes.

The fund has an international equity customised carbon strategy and has reached its target of A$3 billion in sustainable outcomes. The fund reports carbon intensity on equities, fixed interest and real assets in recognition of a net zero emissions target by 2050. Some of the investments the fund has made in the past year include a reduced carbon intensity of small cap strategies working with existing small cap Australian managers to achieve a 25 per cent reduction in carbon intensity. It also invested in a waste to energy company, ESG Australian and global bond index funds, and a real estate office fund.

In July this year the merger between VicSuper and First State Super, to create one of the country’s largest superannuation funds with A$125 billion in assets will be finalised.

Meanwhile the largest pension fund in the US, the $402 billion Californian fund CalPERS has recently made a commitment to achieve net-zero by 2050 by becoming the first US investor to join the Net Zero Asset Owner Alliance. CalPERS, which was a founder and convenor of Climate Action 100+, has been a leading voice advocating that climate change is a systemic risk for investors and is active through mediums such as the SEC’s Investor Advisory Committee and the International Financial Reporting Standards Advisory Committee. It also annually joins the Global Investor Statement on Climate Change.

CalPERS’s goal is to have 100 per cent of its investment policy and procedures integrate sustainability factors, including climate change, across the total fund portfolio by 2021 as part of the strategic plan on sustainable investment.

Last year, it also announced it would pilot research by Wellington Management and Woods Hole Research Center to research potential links between climate models and financial risks and how to develop investment insights.

CalPERS has also estimated carbon foot printing for three out of four asset classes – global equity, global fixed income, and real assets – representing 90 percent of the fund’s investments by value.

The UK government is looking at whether to require pensions to disclose their climate change strategies under the Taskforce on Climate-Related Financial Disclosures, but many of the UK’s largest funds are not waiting for the directive.

The £30 billion Brunel Pension Partnership set out a comprehensive new climate policy in January that goes way beyond its own actions and includes a five-point plan for building a financial system that is fit for a zero-carbon future. This includes working with policy makers, encouraging more investable climate-related products and a promise to ensure all its external managers integrate climate change.

As an example of how seriously the fund is taking this, it just carbon footprinted all 20 managers shortlisted in a global high alpha mandate, from which five won mandates.

Under the Paris agreement, the EU has committed to carbon neutrality by the second half of the 21st century and it’s Europe that leads the world in terms of institutional investor action to reduce climate related risk.

The Dutch funds, APG and PGGM, as well as the French, Swedish and Danish funds are leaders in sustainability.

The Danish pension sector has committed to invest €47 billion in the green transition by 2030, supporting the government’s climate ambitions of reducing greenhouse gas emissions by 70 per cent. It represents about one sixth of the total private pension assets in that country.

Looking at the activities of Sweden’s AP4 shows how far behind other large institutional investors currently are. AP4 has been investing in low-carbon strategies since 2012 and was the founding pension fund member of the Portfolio Decarbonisation Coalition which has now mobilised $800 billion for low carbon investments.

AP4’s target is to have 100 per cent of its global equities portfolio invested in low carbon strategies. In 2014 it set a target of 10 per cent and by 2017 just over 30 per cent of the global equity portfolio was in low carbon strategies. And as far back as 2014, the carbon footprint of AP4’s listed equities portfolio was 28 per cent lower than the benchmark index.

When AP4 initiated its low carbon equity initiatives, there was a lack of suitable investment products for large institutions but that didn’t stop its progress. Instead it worked with providers to become instrumental in designing indexes, and an early investor in strategies, in order to help build the market.

At the beginning of 2019 new investment guidelines for the Swedish AP funds stated that special emphasis must be given to how sustainable development can be promoted.

Most recently the largest pension fund in Europe, the €450 billion Dutch ABP, which has long been a leader in sustainability, set out its sustainability and responsible investment plan for 2025 this January.

The plan sets out long term objectives – in line with the goal of a climate-neutral economy by 2050 – as well as the short term steps to achieve that.

The fund achieved its 2020 goals, set in the strategic plan of 2015, which saw it reduce its carbon footprint by 30 per cent since 2015 and commit €10 billion to renewables. The new plan increases those goals to 40 per cent and €15 billion respectively in what is a continuous target.

But the 2025 strategic plan does more than set targets, it takes the sustainability leader into the next decade and beyond, expanding the scope beyond climate to include resource scarcity and digitalisation.

ABP says to achieve a climate-neutral global economy by 2050, the transition to a circular economy is essential and it wants to accelerate this transition so that by 2030 efficient and socially responsible raw material supply chains are common practice in companies. It has said it will invest more in companies with circular business models and innovative solutions for food and natural resource scarcity.

It has also connected sustainability and digitilisation, saying that by 2050 digitalisation should lead to responsible value creation and provide solutions to challenges such as climate change and the scarcity of natural resources. One of ABP’s goals is to have more invested in companies that can demonstrate a contribution to this by 2025 and it will also set criteria to assess whether companies respect the digital rights of employees, consumers, and users.

It’s a bold step for a fund already at the forefront, and another indicator of what sustainability leadership looks like.

 

 

I chat with Paul on derivative pricing, the application of mathematics within financial services and the implications for society due to AI.

Nothing on this podcast is to be considered investment advice or a recommendation. No investment decision or activity should be undertaken without first seeking qualified and professional advice.