Infrastructure investment is particularly suited to integrating the Sustainable Development Goals (SDGs) because of its long-term nature, said Kevin Uebelein, chief executive of Canada’s Alberta Investment Management Corporation.

“Infrastructure investment is successful only if we are successful as a society,” he told delegates at the PRI in Person in San Francisco. Uebelein said infrastructure investment was an umbrella to many of the SDGs and that without sustainable infrastructure, other efforts to pursue the SDGs were often hampered or unsuccessful.

“If there isn’t clean electricity, you won’t be able to see through the fog to drive your electric car,” he said.

He added that AIMCo wanted to make sizeable investments in infrastructure that helped meet the UN’s SDGs. He noted that when the pension fund “crosses the Rubicon” and becomes an owner of an infrastructure asset, rather than just an investor, it wields much more influence.

“Once we are an owner with a seat on the board, we can begin a strategic conversation,” he said.

But the SDGs challenge for-profit investors. Uebelein noted that despite the overwhelming infrastructure gap, the availability of “investable” infrastructure remains small. “There is a large pile of infrastructure capital chasing too few investable projects,” he said.

Scott Mather, CIO, US Core Strategies, at PIMCO told delegates he is pushing for the development of SDG bond issuance.

“The green bond market is growing but this could [instead] be a subset of an SDG bond market to address a broader swathe of issues,” Mather said. “Sustainable bonds that meet the SDGs would be bigger than the green bond market.”

He said fixed income, the largest capital market, had a lead role in meeting SDGs because of its long-term nature.

“Bond issuers come to the market every year and have a unique ability to influence what goes into the marketplace,” Mather said.

He also advocated that companies report according to SDGs and advised investors to have a “focused approach” when drawing related information from companies.

“It is easy to have an impact that will reduce risk,” Mather said. “There is so much low-hanging fruit; narrow your approach.”

Maya Chorengel, partner at private equity group TPG, which runs the $2 billion Rise Fund, offered insight into ways of measuring impact in SDG investment. Rise invests across multiple sectors, spanning healthcare to energy and education, and has developed a unique methodology to express impact that involves collecting data from companies to extract line outcomes. A third party audits the impact, which is presented to investors along with the financial returns.

AIMCo is working on how best to measure the impact of SDG investment, Uebelein said. The process is made difficult because the fund is still developing its own SDG reporting processes.

“When engaging with companies, we are encouraging them to think about the SDGs and how to report, but we need to walk in this market ourselves first,” he acknowledged.

Collaboration between public and private investors to meet the SDGs is vital because the demand for capital is so huge. Development institutes by themselves can’t solve the SDGs, said Sérgio Pimenta, regional vice-president, Africa and the Middle East, at IFC – the World Bank’s private-sector arm – which focuses on crowding private-sector investment into impactful efforts.

East Capital chairman and CIO Peter Elam Håkansson talked about the creativity needed to invest in sharemarkets according to SDGs, noting the opportunities in China particularly.

“There are lots of solution providers in China that have responsible owners,” Hakansson said. “We are outperforming the Asia index and also doing good for the environment.”

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It is possible to invest in infrastructure with a purpose that goes beyond financial return, said Kristian Fok, CIO of Australia’s A$44 billion ($34 billion) Cbus Super, a pension fund for the construction and building industry, speaking at the PRI in Person conference in San Francisco.

Fok said infrastructure investment had an important role in illustrating the practical integration of the UN’s Sustainable Development Goals (SDGs) and ESG, and that pension fund investment in the sector was growing as governments realised they could not fund their infrastructure needs themselves. Long-term ownership makes it easier to create and sustain an impact, and a smaller number of shareholders enables decision-making, he said.

ESG and sustainability in infrastructure investment are often pushed by governments, who remind investors that the infrastructure is for a community purpose. Government involvement can drive ESG integration in areas such as caps on fees or performance requirements that draw penalties when they’re not met.

“As an owner, you meet these minimum standards and think about the asset in a much longer-term way,” Fok said. “It means the asset is run better, and people use it more.”

Infrastructure can leave owners much more exposed to reputational risk than other asset classes.

“When you are a private owner of an asset, your reputation as an owner is on the line,” Fok said. This requires real thought on the appointment of contractors, health and safety, and supply chain risk. “If you don’t think about this, your good intentions will be undone.”

Delilah Rothenberg, operating adviser, ESG and impact, at Pegasus Capital Advisors, told delegates that infrastructure investors should gauge risk in emerging and developed markets in the same way, expressing a preference for the IFC Performance Standards and EHS Guidelines for all markets.  Currently, the Equator Principles framework requires these standards only in developing countries.

“In terms of ESG risk, there is little difference between developed and developing markets,” Rothenberg said. Frameworks help investors mitigate the environmental and social risks associated with infrastructure investment.

“You can’t have a net positive impact without mitigating ESG risk,” she said. For instance, banks may not fund if certain standards are not met, or local communities may not support projects, causing such projects to lose their social licence to operate, she said.

Infrastructure investment often allows the integration of multiple ESG elements or SDGs. Cbus investments include the UK’s Manchester Airport, where the pension fund is developing renewable energy use via biomass, creating jobs and reducing pollution. Similarly, its ownership of UK water utility Anglian Water has involved developing recycling initiatives that generate electricity and green bond issuance – the first from a UK utility. At Brisbane Airport, Cbus has installed solar panels, investing to remove volatility in energy prices in a win-win, Fok said.

“It is about doing the right thing and making money – doing more sustainably to reduce costs,” he said.

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The importance of disclosure frameworks that allow investors to measure ESG risk accurately has come to the fore. Making sense of raw data is a challenge, particularly since the 17 Sustainable Development Goals (SDGs) and sub-objectives have introduced multiple, wide-ranging points on which to score and measure corporate behaviour.

Investors need to be able to apply data to their investment process and have access to information that allows them to target their corporate engagement where it will be felt most keenly.

Better disclosure also allows investors to hold their asset managers to account, delegates heard during a panel session at the PRI in Person conference in San Francisco.

“We need to be more discerning between greenwashing and those managers that are taking ESG to heart and doing it,” said California State Teachers’ Retirement System (CalSTRS) CIO Chris Ailman, who observed that asset managers often say they have ESG teams that, in reality, are “across the street in a little corner”.

Asset owners can prevent greenwashing by asking their portfolio managers to peel back the layers and look closely at implementation. For example, Ailman said that when managers have a core product offering and separate ESG product, it means ESG for them is more of side issue or fad, and observed that ESG integration at managers was also “an age thing”.

“I look at Millennials and they get it,” he said.

Greenwashing will also wash out if asset owners do more to articulate their ESG strategy for asset managers to respond to it.

“Asset owners need to be clear about their goals,” Payden & Rygel vice-president Peter Beer said. The panel also noted that many US asset owners still perceived ESG only in the context of exclusion and that managers could do more to expand the concept.

Delegates heard how the Sustainability Accounting Standards Board (SASB) is providing a vital framework to make sense of unstructured data.

“Our investable universe doesn’t have plug-and-play data,” Beer said. “The SASB framework allows us to take information and make sense of it in a rigorous way.”

He said it allowed investors to compare investment between regions, standardise returns and work with different data providers.

“Everyone can plug it in and talk the same language,” Beer said.

Panel members stated that consistent, uniform and high-quality ESG data from issuers that met investor standards would emerge as ESG moved mainstream. More demanding investors would not tolerate data with holes in it, Calvert Research and Management chief executive John Streur said.

“The pressure on data increases as the audience expands,” Streur said. Observing the contrast and difference in ESG data quality, he noted: “If there was the same inconsistency in reporting corporate earnings, it would be a disaster.”

He said the SASB guidelines had aided in the gathering of SDG data in a meaningful way that was relevant to “performance orientated investors. We can map KPIs that are financially material,” he said. “Nailing down the SDGs that are relevant to corporate financial results is critical.”

Global Reporting Initiative director Bastian Buck also said corporate reporting around the SDGs had become more uniform and consistent.

“The SDGs add a new perspective,” he said. “Discussions are accelerating around water disclosure.”

In another example, the GRI is looking at tax payments companies make to governments. “We are developing the first global standard for tax payments by country, Buck said.

Asset managers also need to step-up their gathering of corporate information, the panel stated. Corporations have often spent more money and time on integrating ESG into their businesses than investors realise.

“A lot of ESG information is not getting through to Wall Street,” Calvert’s Streur said. “The information is there but Wall Street is lagging behind.”

Similarly, CalSTRS’s Ailman stated how many companies complain that investors are not interested in the information they are producing. Corporation say they remain in the dark about how their disclosure affects their cost of capital.

“When CEOs see how this information affects their cost of capital, there will be levers for change,” Ailman said.

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The $37 billion Utah Retirement Systems (URS) will allocate to private equity managers directly, rather than through funds-of-funds, for the first time since it began investing in the asset class 35 years ago.

Private equity is the only asset class where URS still doesn’t control manager selection. The fund has 9 per cent allocated to private equity, which has returned 10.9 per cent over 10 years.

The move to picking its own managers is a bid to improve risk-return and will involve reducing its manager roster and focusing on larger investments in more concentrated portfolios. URS is still unsure about the number of key manager relationships it will whittle down to for private equity but knows it has way too many now.

The 2017 URS annual report shows the fund spent $4 million on private equity investment advisory fees that year. It uses Albourne Partners as a consultant.

Going directly to select managers means URS will move away from so-called gatekeepers, the funds-of-funds that make commitments on behalf of clients. URS’s 2017 annual report states that, “the majority of the private equity partnership investments are managed by two gatekeepers”.

As part of the change, URS is looking internally at what its value proposition to general partners might be.

“Managers say, ‘I can take money from anywhere, so why should I take it from you?’ ” URS chief investment officer Bruce Cundick says. “We are going to lose in the fee game and in aligning interest if we can’t give them a value proposition.”

Utah has invested in alternatives since the early 1980s, so it has a long tail of lessons it has learnt. This has taught Cundick, who has been at the fund since 2001, that success in the alternatives allocation depends greatly on implementation. The fund has 40 per cent across private equity, real assets and absolute return.

Across alternatives, URS looks for a couple of things in the managers with whom it partners; one of them is investments that use their personal capital. Observing managers’ reactions to the fund’s insistence on this point is insightful, Cundick says.

“If a manager says it isn’t going to put money into a fund it’s trying to sell, it shows me that it’s not motivated enough to be on our side of the table and it’s better for us to walk away,” Cundick says.

URS’s manager due diligence involves in-depth qualitative research modelling new managers’ returns onto URS’s portfolio to analyse how their strategy will affect risk.

“We scenario-test every manager to see what they will contribute on a risk basis,” Cundick explains.

Alignment involves other areas, too, such as insisting managers take on the duties that assure their good behaviour.

“We would struggle to understand how someone would outright refuse to be a fiduciary to the fund they manage,” Cundick says.

Fee negotiation hinges on three basic concerns: Is it fair, is it well aligned, and how capable is the manager?

Paul Polman, chief executive of Unilever for the last decade, describes his day job as running the global consumer goods company. His full-time job is trying to create a different kind of global capitalism. In an inspirational speech to delegates at the PRI in Person in San Francisco, he announced the changes he said society needed from the corporate and investment world.

Polman listed four challenges that lie ahead. He said the world needed to decarbonise the global economy and move to a circular economy, and he told delegates the biggest global economies were using more resources than the world could produce.

“If we all lived like Americans, we would need three planet Earths,” he said.

He also said financial markets needed to move to long-term strategies.

“We can’t protect oceans in a rat race of quarterly reporting,” he said. And he added that the world needed to create an economic system that was more inclusive.

“[About] 87 per cent of the wealth goes to 1 per cent of world’s population,” he explained. “People are left behind and in any system where people are left behind, they will rebel.”

Normally, governments would steer countries towards meeting these challenges, but global governance is in disarray, rooted in post-World War 2 institutions. Businesses always adapt their models but our institutions are still based on 1944 structures, he said.

Polman told delegates they possessed the tools to deal with the challenges that lie ahead.

“We have never been so forewarned and forearmed,” he said. “The key element missing is willpower.”

He also said businesses couldn’t be bystanders in systems that give them life.

One of the most important tools to emerge in recent years is the Sustainable Development Goals (SDGs). Drawn up in 2015, the 17 goals charting peace and prosperity by 2030 were signed into life by 197 countries.

“The SDGs are a perfect roadmap for how the world could run,” he said. Unilever is setting ambitious goals to meet the SDGs, which the company sees as a business opportunity.

Polman called on other chief executives to understand and integrate the SDGs, too. It was possible to take responsibility for value chains, become transparent, run factories at zero waste, stamp out child labour, ensure fair wages, end deforestation and work with governments to change governing frameworks that put a price on natural and social capital, he argued.

“There is nothing wrong with capitalism, but it shouldn’t be about a maximum return on financial capital,” he said. “We need maximum return on environmental and social capital.”

He noted important shifts in consumer behaviour that now account for the way companies act. “Companies are disappearing that aren’t adapting because consumers fall away,” he said. He also said employees now choose to work only with purpose-driven organisations.

“Millennials want to work for companies that have a purpose,” he explained.

A company’s worth is now tied up in intangible assets, which now account for 80 per cent of their value, he said. This demands a different strategy that understands new values such as employee satisfaction and reputation.

“The real value of companies now can’t be measured; look at how quickly companies that get it wrong lose market capitalisation,” he said. “Companies are getting caught with their pants down because they don’t understand they are there to serve society, not just their shareholders. They can’t load costs onto others and dodge responsibilities.”

He urged the investment community to challenge companies on their ESG record with tough questions, seeking out the companies able to give answers.

“If you see a murder being committed and don’t do anything about it, you are as guilty,” he said. “Generosity is better than greed, including in your investments.”

Society will solve its problems only if it becomes more focused on the long term, he argued. Nowhere is short-termism more prevalent than in corporate offices, where the average tenure of a public company CIO is five years. Polman urged investors to adopt long-term strategies over short-term thinking, to swap a focus on symptoms for one on causes, and to move boundaries so that behaviour changes. He said short-termism has created under-investment in companies and that economies were not growing because companies were not growing.

He urged asset owners to stop delegating responsibility for their investment to asset managers but to become actively involved in where they invest. Japan’s $1.4 trillion Government Pension Investment Fund’s proactive interaction with its asset managers on ESG showed how to do this, he said. The responsibility lies with asset owners to demand more from their managers, Polman said, and he criticised sleepy trustees and boards for not doing more. Boards don’t understand that fiduciary duty is to the long-term existence of the organisation or company and involves multiple stakeholders, he said. Incentive systems also needed to reward executives for long-term real performance, beyond financial performance.

Polman was encouraged by a new generation of chief executives coming through, particularly in the tech sector.

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Halting deforestation is essential to reaching the goals of the Paris Agreement, an expert panel argued at the PRI in Person conference in San Francisco.

Forest restoration is a natural way of reducing carbon emissions, yet 17 per cent of South America’s Amazon rainforest has suffered deforestation and been cleared. Scientists say the tipping point at which deforestation is irreversible is 25 per cent clearance.

If the tipping point were reached, about 60 per cent of the forest would fall into degraded savanna, they estimate, releasing more carbon into the atmosphere and destroying the climatic stability of the region. It would be irreversible because new rain forest wouldn’t be able to spring from the degraded area.

“If we want to be on the safe side, let’s stop Amazon deforestation and bring it to zero completely,” argued Carlos Nobre, Institute of Advanced Studies, University of São Paulo, and senior fellow of World Resources Institute Brazil.

The agricultural sector has an enormous global footprint, Nobre said. It takes up 40 per cent of the earth’s surface, consumes 70 per cent of water resources and pumps out greenhouse gas emissions linked to deforestation. Deforestation is running at the rate of one football pitch of clearance a second, attributed to palm, soya and cattle production, Nobre said.

The destruction of South America’s savannas is also a grave problem, he said. These mostly flat, forested plateaus are being lost to industrial-scale agriculture, particularly soya production driven by automation and shifting diets away from animal protein – despite low productivity in Amazon lands for soya and cattle.

It is not only farming that’s putting the Amazon at risk. Global warming is accentuating the problem, changing the crucial “short episode” rainfall patterns on which the forest depends and heightening the risk of fire, particularly through more lightning strikes.

“The dry seasons are becoming longer,” said Nobre, who added that unprecedented periods of drought and flood in recent years illustrated the changing climate and instability in the system.

At €486 billion ($568.5 billion) Dutch asset manager APG, the position is that combating deforestation is part of its fiduciary duty to ensure an orderly transition to a low-carbon world.

“When investors talk about climate change, they talk a lot about fossil fuels and energy, but forestry, land use, food and farming [are] a huge part of climate transition,” APG Asset Management’s Lucian Peppelenbos said.

But investing to combat deforestation and in support of sustainable land use is challenging. It involves navigating land use and country risk.

“We need to bring down the risk profile of land use,” Peppelenbos said. Nevertheless, he does note a strong underlying investment case. “Farm and timberland have strong fundamentals in the transition to a low-carbon economy that make a great investment case.”

Together with other investors, the pension fund engages with companies on sustainable palm production and is now pushing its investee companies on sustainable soya and beef production. The fund also benchmarks companies on how they are addressing deforestation, particularly how they reach out down their supply chains.

Investment opportunities in the sector include new funds such as Amsterdam-based SAIL Ventures’ &Green fund, which invests directly in sustainable land use. It provides long-term stable capital that seeks a double bottom line of zero deforestation and a financial return from commodity production.

“Investors like how increased engagement on the environmental side reduces asset risk,” Sail Ventures CIO Johnny Brom said. “The &Green funds prove that commodity supply chains can be delinked from deforestation.”

Dutch agribusiness Bunge has a zero-deforestation commitment across its supply chain.

“We have to meet our commitments and apply policy regardless of complexity on the ground,” said Stewart Lindsay, vice-president, global corporate affairs, at Bunge, which operates in 40 countries.

Technology is allowing the company to monitor deforestation in new ways, access new suppliers and increase supply-chain transparency.

“We are spending more time doing independent satellite monitoring of farms where we buy palm oil; it gives us a closer independent look at where we are buying to monitor changes on the ground.”

This is allowing the company to integrate deforestation planning into its investment strategy, making decisions based on low environment risk and high agricultural return.

In another initiative to help combat deforestation, the company is offering 10-year finance to farmers in its supply chain. Lindsay observed that just because palm production is not certified doesn’t mean it isn’t sustainable and cited the need to increase downstream – or consumer – demand for certified palm.

“It is a premium product. If that demand doesn’t go up for certified products, [we] will have to maintain commitment in different ways.”

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