Three large, sophisticated pension funds have named new CIOs. Here’s what you need to know about them.

Stephen Gilmore has been appointed CIO of the NZ$39 billion ($27 billion) New Zealand Super, following the elevation of Matt Whineray to chief executive after four years as CIO.

Gilmore (pictured) comes from across the ditch (Australia) and was previously co-CIO at the A$148 billion ($107 billion) Future Fund. Earlier this year, the Future Fund had a reorganisation, appointing Raphael Arndt the sole CIO with two deputies reporting to him: Wendy Norris on private markets and David George on public markets.

At NZ Super, native kiwi Gilmore will lead an investment team of 45 that looks after external investment managers, New Zealand and international direct investments, responsible investment, and asset allocation, including the fund’s tilting program.

NZ Super and the Future Fund have similar investment approaches; both employ a total portfolio approach to portfolio construction and allocation.

Also this month, Alex Doñé has been named deputy comptroller and CIO of the $200 billion New York City’s Bureau of Asset Management (BAM).

Doñé was previously interim CIO at BAM, where he had worked since 2012, predominantly in private equity.

In that role, he oversaw the roll-out of major new diversity initiatives, including the launch of a search for an investment manager to source and invest in first-time funds and early-stage firms with emerging managers across multiple asset classes. He also oversaw an expansion of BAM’s brokerage program for businesses owned by women and minorities.

Before joining BAM, he served for two years in US president Barack Obama’s administration, as a presidential appointee at the US Department of Commerce’s Minority Business Development Agency.

Doñé is leading an effort to diversify the NYC pension funds’ portfolios into co-investments. He replaces Scott Evans, who was CIO from June 2014 to June 2018.

BAM has also appointed a new head of private equity. J. David Enriquez has been elevated to that position.

The New York State Common Retirement Fund has still not named its new CIO after Vicki Fuller left the position in July. Anastasia Titarchuk is interim CIO.

Meanwhile, the largest fund in the US, the $360 billion California Public Employees’ Retirement System (CalPERS), is bringing Yu Ben Meng back into its fold, as the Californian was appointed CIO in September.

Meng, who was born in China, has spent the last three years as deputy CIO of China’s State Administration of Foreign Exchange (SAFE).

Prior to his time at SAFE, he spent seven years at CalPERS, with his last role as the investment director of asset allocation. He was also a portfolio manager in fixed income.

At CalPERS, he will look after nearly 400 employees and be responsible for investment policies, risk management, corporate governance standards, and environmental, social, and governance strategies.

Meng replaces Ted Eliopoulos who is moving to New York and has a position at Morgan Stanley.

Asset owners around the world are turning to Australia for judicial guidance on how to manage climate change risk when investing other people’s money.

In a world first, 23-year-old Mark McVeigh has filed a legal actionalleging the trustee of his retirement fund, the Retail Employees Superannuation Trust (REST), breached the fiduciary duties owed to him by failing to adequately consider climate change risks.

McVeigh is unable to access his superannuation until 2055. Climate risks are biting now, and his investment horizon is stretched. The claim does not allege financial loss. McVeigh seeks declarations from the court to establish the trustee breached its duty. He also seeks injunctions to prevent future misconduct.

The unique case has global ramifications.

With almost $40 billion under management, REST is one of Australia’s largest asset owners. It is in the top 150 pension funds in the world. A judgment will make law on how a major asset owner should address climate change risks when managing other people’s money.

McVeigh’s lawyers filed the case in the Federal Court of Australia in September this year.

It builds on a landmark 2017 public opinionby Noel Hutley SC, one of Australia’s most respected commercial barristers and president of the Australian Bar Association, and James Mack. They advised that trustees and trustee directors mustdo three things in the face of climate change:

  • inform themselves about the physical and transition impacts of climate change;
  • consider how those factors will impact the performance of the fund;
  • act with care, skill and diligence to address the risks.

According to the opinion, trustees should consider changing the composition or diversification of the funds’ investment portfolio to address climate risks. That, of course, can mean divestment.

In addition to reviewing the fund’s investment strategy through a climate lens, McVeigh alleges REST’s trustee should have performed additional acts.

The first is to comply with Task Force on Climate-related Financial Disclosures (TCFD) recommendations on disclosure and risk assessment. Notably, the TCFD wants funds to stress-test investment portfolios based on a world that limits warming to well below 2°C, in line with the Paris Agreement.

The second is to seek information from investment managers about investments’ exposure to climate risks and how those risks are being managed.

McVeigh’s case and Hutley’s opinion are both founded on principles of fiduciary duty that require fund managers to:

  • act in the best interests of beneficiaries, and
  • act with care, skill and diligence.

Asset owners around the world ought be familiar with those duties.

A case of this type has been expected for some time. Fund managers were duly warned in the 2015 Principles for Responsible Investment publication Fiduciary Duties in the 21st Century. The report synthesised legal advice from eight jurisdictions and reminded asset owners that being passive was not an option. It concluded that a failure to consider long-term investment value drivers such as climate change would be a failure of fiduciary duty.

It is no surprise then that major investors around the globe are paying close attention to McVeigh’s case. A decision should be forthcoming from mid-2019.

David Barnden is principal lawyer and head of the climate finance program at legal practice Environmental Justice Australia. He represents Mark McVeigh in Federal Court proceedings McVeigh v REST.

 

The attempts being made to expand the fiduciary obligations of pension fund trustees to incorporate ESG and, as yet, ill-defined ‘sustainability’ responsibilities are flawed and dangerous to the extent they weaken the obligation to maximise the financial interests of members.

Similar pressures on company managements need to be weighed against maximising shareholder value. CalPERS’ recent vote to oust an ESG advocate from its governing board illustrates what a sizeable group of pension plan members thinks is more important – being virtuous or protecting their future pensions.

ESG advocates, originally under the guise of ‘ethical’, then ‘socially responsible’ and ‘sustainable’, cannot have their cake and eat it, too. They can advocate investing for good causes and maximising financial performance but conflating the two is intellectually lazy, if not deliberately disingenuous. Virtue may come at a price.

Initially, ESG advocates simply argued that trustees of other people’s money – and company managers of shareholders’ money – had a responsibility to do ‘good’ as well as make money. This went beyond investing in accordance with national laws, which presumably reflect the public will, albeit sometimes imperfectly.  

English law on fiduciary duty gives primacy to members’ financial interests, however, so this advocacy did not gain traction beyond a few genuinely religious or ‘ethically’ driven funds where members’ values were relatively well defined.

The ‘socially responsible’ advocates then claimed that taking ESG factors into account improved investment performance. It seems plausible that ‘good’ companies, somehow defined, would be less risky and may even be valued more highly. But it is very hard to establish a strong connection to positive expected returns. Indeed, starving ‘bad’ companies of capital should lead to reduced investment and higher expected returns in the starved sectors. Thus, achieving the desired reduction in ‘bad’ activity also implies a return sacrifice.

Like beauty, ESG is in the eye of the beholder. The ESG ratings currently published by leading research houses are not closely correlated, demonstrating that views of corporate ‘virtue’ differ significantly – even among professional researchers.

Empirical evidence to date, using data sets that are publicly available, suggests G is a rewarded investment factor but not when other common factors are already included. ESG factors are likely to correlate with other widely used factors, such as quality, thus adding little, if any, reward. E and S, if anything, have been shown to detract from returns.

It is difficult to argue against doing ‘good’. It’s like ‘motherhood and apple pie’ or, more topically, the impact of climate change. But the lack of widely accepted definitions of ESG factors and their relative importance to investment performance, let alone to people’s sense of what is ‘good’, is a recipe for confusion and capture of weak trustees by zealous sponsors and interest groups. Added to the significant resources required to identify, measure and exploit ESG factors, this may be prejudicial to members’ financial interests.

 

Prudent approach

There is room for healthy argument about the extent to which trustees should pursue ‘good’ things and it is unconscionable to profit from doing ‘bad’ things, but the boundaries are hard to draw clearly in practice, notably in less developed countries. Trustees going beyond members’ financial interests must be sure they are reflecting their members’ non-financial interests, which is not a trivial matter to establish.

They need to know the costs of that pursuit and the extent of the financial risk it poses to members. Their founding beliefs should be honest about that. The approach of the New York City Employee Retirement System is to be applauded in seeking expert information about the likely financial impact of ‘decarbonising’ their portfolio so their members will be informed before such a decision is made. That is a prudent approach.

Active ownership and successful engagement with companies, whether on ESG or ordinary financial issues, is costly and risky. It requires influential stakes in companies, thus significant investment risk, or costly collaboration among shareholders and a lot of time and effort to change business practices. Passive-index investors, being ‘locked-in’ owners, should arguably take more responsibility when it comes to changing corporate behaviour, although that would raise their costs.

Active investment managers should only take account of ESG factors to the extent they improve their risk-adjusted return. If ESG factors are material to the way they generate superior returns, they would be failing if they didn’t reflect them in their process. But ESG factors are not unique in that regard. It is still active management – and finding winning strategies involves costly research.

Most managers emphasise some factors such as value, quality and momentum, to generate excess returns compared to a market-cap-weighted portfolio. They don’t have to use all known or suspected positive factors, however, only the ones they believe matter and can capture information cost-effectively. Conversely, it would be wasteful to require a manager to consider things that are not likely to improve their performance.

Sometimes doing ‘good’ comes together with maximising investment performance but it ‘aint necessarily so’. Those responsible for other people’s money should be clear about the cost and risk to members before embarking on an expensive pursuit of virtue or simply following the ESG herd. Managers touting ESG in their marketing should likewise be honest and careful about claims that performance benefits will flow. Virtue is its own reward after all.

 

Paul Bevin is the general manager, investments, of two New Zealand public superannuation funds, one of which has a statutory obligation to invest in a manner that is not prejudicial to New Zealand’s interests as a responsible member of the world community. That fund is a member of UNPRI, excludes certain investments and collaborates with peer investors to engage with companies potentially involved in ‘prejudicial’ activities. The views presented in this article are the author’s personal views.    

 

Climate Action 100+ is working, and it can become even more effective if investors and asset managers throw their weight behind it, according to Oliver Grayer, Project Director at the Institutional Investors Group on Climate Change (IGCC).

Speaking at the Principles for Responsible Investments (PRI) Climate Forum in London, he urged attendees to add their muscle to the five-year initiative. Climate Action 100+ aims to engage with the 100 largest greenhouse gas emitters to improve corporate governance, curb emissions and strengthen climate-related financial disclosures.

Most recently, Japan’s ¥158 trillion ($1.4 trillion) Government Pension Investment Fund (GPIF) joined the initiative, which is now backed by around 300 asset owners and managers with $31 trillion under management. The volume of investors getting involved has spurred unprecedented lobbying initiatives and activity, Grayer said.

So far, Climate Action 100+ has been most effective in engaging with supply-side companies in the oil and gas, mining and metals and utilities sectors. Grayer called for investors and managers to push engagement with companies on the demand side in construction, transport and steel where decarbonisation is challenging and complex.

“There are always individuals in firms that want the support of investors,” he said. “Asset managers need to help us drive through the changes required.”

 

One metric, one target

Companies need investor engagement to understand what investors actually want, and they need corporate leadership to listen and provide that information,said Marc Jacouris, head of investor relations at Norway’s state-owned oil company Equinor.

Equinor, formerly Statoil, owns oil and gas assets as well as renewables and carbon-capture and storage technology.

“The more investors ask for the same thing around metrics and targets, the more we will listen,” Jacouris said.

He said that the company found scenario analysis particularly challenging because every company has its own assumptions and parameters, making comparability difficult.

 

Data gaps

Seema Suchak, sustainable investment analyst at Schroders, told delegates that Climate Action 100+ sets out “really good” and “consistent” questions for investors to ask companies.  She added that the asset manager is targeting its engagement in Asia, but it has found that successful engagement is tempered by the pace of the regulatory environment.

“China wants to meet the Paris goals, but enforcement is not there yet,” Suchak said.

Schroders’ large allocation to active management helps give the asset manager good access to companies. However, emissions data, particularly in companies’ supply chains, is lacking; data on the location of companies’ assets is also hard to come by. More information on these data points would enable climate modelling tools to work much better, she said.

“We have developed a physical climate risk tool but, with data gaps, we have to rely on assumptions,” she said.

Schroders runs a “nimble” engagement strategy which it has adjusted and evolved.

“What works for some won’t work for others,” Suchak said.

Schroders has also begun to engage with non-executive directors.

Investors have called on policymakers to pay more attention to infrastructure reform and increase incentives for investment at a new, collaborative investor forum at the G20 leaders’ summit.

The investor forum is a joint public-private sector initiative to foster sustainable development and try to right the wrongs of globalisation.

At the G20 summit, some of the world’s most influential institutional investors, with collective assets under management of $20 trillion, travelled to Buenos Aires to discuss solutions with policymakers.

In the first ever G20 Investor Forum hosted by the World Bank and the government of Argentina, senior executives from Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers’ Pension Plan (OTPP) Japan’s Government Pension Investment Fund (GPIF) Washington State Investment Board, BlackRock, Aviva and many others called on policymakers behind closed doors to lead and collaborate to help build long-term, sustainable investment strategies.

“There are relatively few opportunities for the very highest level dialogue between the public and private sectors at a global level, and it was an eye-opening experience seeing how much there is to discuss,” said Svetlana Klimenko, the World Bank’s lead financial management specialist of operations policy and country services.

Klimenko co-curated the forum and spent a year compiling a packed agenda drawn from interviews with 34 global investors.

A call for policy leadership to help increase infrastructure investment resounded loudest. Investors explained that they have money to deploy and would rather invest in infrastructure than bonds. But they need government leadership and support via regulatory reform and market mechanisms that increase incentives and remove barriers.

“At the moment there aren’t enough big projects; many aren’t structured properly and need de-risking,” said Robert Eccles, Visiting Professor of Management Practice at Said Business School who helped compile the agenda.

In a day fittingly interrupted by two power cuts as the Buenos Aries grid stumbled under its daily load, investors said they needed support in emerging markets most.

Here, policy needs to help build and develop capacity, and investors need blended finance and guarantees.

In addition, political leaders need to write new rules and regulations to drive a sustainable economy.

None more so than introducing relevant pricing of CO2emissions, according to Niklas Ekvall, chief executive officer of Sweden’s AP4 where low-carbon investments date from 2012.

“Political decision-makers’ ability and decisiveness to create broad international accords and rules will be entirely decisive in steering towards more sustainable development,” he said sounding a hopeful note that policy leadership will materialise.

“Investors’ assessments of both risks and opportunities are based on an expectation that the political system will succeed in taking its responsibility.”

Indeed, driving new policy and regulation is an area where Eccles also believes investors ultimately wield real influence.

“Can investors influence Trump? No,” he said. “But the institutional investment community can influence central banks, regulators and accounting standards bodies.”

And the initiative has been enthusiastically endorsed by busy executives prone to forum fatigue.

“It is gratifying that AP4 has been invited to participate in the G20 Investor Forum. We are happy to contribute with our experience in order to promote long-term sustainable investments,” Ekvall said.

 

Avoiding distracting sprints

Similarly Theresa Whitmarsh, executive director of the $132 billion Washington State Investment Board, backed a collaborative approach.

“My belief and hope is that improved cooperation across the value chain of government agencies, companies, asset owners and asset managers will lead us collectively to focus on long-term sustainable growth strategies as opposed to distracting sprints toward short-term performance targets,” she said.

“The connection between prudent long-termism and responsible sustainability is gathering momentum globally, and this linkage was evident at the G20 meetings.”

There is also a belief that the setting and level of collaboration will lead to action.

“The discussions held in Buenos Aires are aimed towards making an impact and taking action on the important topics at hand, rather than just having high-level conversations,” said Sarah Williamson, chief executive of FCLTGlobal, a not-for-profit organisation that focuses capital on long-term investment.

Argentina made financing sustainable development and leveraging private sector capital key themes of its G20 presidency, but it’s not clear if the forum will extend this focus to other G20 meetings.

“We’ve had quite a lot of positive feedback from participants. Our objective is to continue and grow, but for now we are consolidating,” says Klimenko.

An important next step will be publishing a call to action, detailing the concrete decisions and recommendations from the forum and follow-up sessions via committees or working groups. Klimenko expects other events and collaborations to focus on the agenda’s themes of infrastructure and long-term sustainable investment.

“We don’t’ want to talk shop. We want to see things happen,” Eccles said.

 

A larger and better public sector is necessary to achieve economic prosperity, reach full employment and meet the needs of the population, according to former US Treasury Secretary, Larry Summers.

“We need government with more market power, a larger function, and that is more competent in carrying out the tasks required,” Summers said.

Summers, who is President Emeritus of Harvard University and was Treasury Secretary under President Bill Clinton, said it is the “task of the centre left to recognise it won’t just work out if everyone stands back”.

He spoke on the “profound structural changes that will and are transforming economies and to which policymakers need to respond” and said it is essential that government plays an active and forceful role in ensuring there’s demand for all the goods introduced.

“The industrial world has a problem it hasn’t acknowledged. People are saving more, there is inequality, and at the same time, capital goods are less demanded,” he said.

“How do we sustain prosperity? There needs to be greater acceptance of fiscal deficits, and policies regarded as imprudent will become necessary. There have to be significant and strong levels of demand, and this needs to be a concern of progressives because a strong economy is the path to the best social progress.”

Summers recently wrote a book on the end of economies built on mass-produced goods, The Post-Widget Society: Economic Possibilities for Our Children. He said it is not possible to rely on the private sector for economic success. For example a social network satisfies none of the assumptions for economic success; it has asymmetric information, imperfect information, and a monopoly position.

“We need a larger public sector that is going to need to do more to employ everybody. So much of economic debate focuses on strengthening the widget makers – [but] that doesn’t matter,” he said.

“In the US, the share of workers in manufacturing is lower than the share of farmers was in 1950. If you look at the jobs that the Bureau of Labour Statistics projects will grow, three out of four of the top categories are a version of a nurse or medical technician. We need a larger more effective public sector.”

Summers also called for more responsible nationalist approaches to global economic issues including corporate tax evasion and intellectual property.

“It is right that countries concerned with innovation pursue the protection of intellectual capital internationally,” he said. “Making sure the capital can’t run and hide and avoid tax plus intellectual capital issues are global economic concerns.”

But he said discussions about global economic cooperation should be broadened, rather than a handful of leaders at the World Economic Forum in Switzerland.

“The agenda we have is an elite agenda. We need an agenda that resonates with the concerns of those that have never heard of Davos,” he said.

“I’m pretty sure if we don’t find a way for global economic cooperation that resonates with local people, management of the economy largely outside the widget sector, and sustained economic growth, then there are elements of populism and authoritarianism that are ready to fill any vacuums.”

Summers was former chief economist at the World Bank and Director of the National Economic Council for the Obama Administration. He was speaking in Sydney at the McKell Institute.