The world’s 100 most sustainable companies pay an average of 27 per cent more in taxes, have three times as many top female executives, and generate six times more clean revenue than their global peers.

Analysis of Corporate Knights’ 2018 Global 100 Most Sustainable Corporations draws a direct line between the most sustainable companies and their longevity. The average age of the 2018 Global 100 companies is 85 years, while the average multinational has been around for less than 40 years.

There is also a link between value for society and superior financial performance, with the Global 100 Index outperforming the MSCI All Country World Index by nearly a third since its inception in 2005.

The Global 100 Index is drawn from a pool of 5994 publicly listed companies and assesses them on 17 environmental, social and governance indicators.

The top-ranked entity this year was Dassault Systèmes, the French multinational software company whose digital technologies assist companies and governments in reducing waste, adopting renewables and creating smarter cities. Dassault moved up from 11th place in last year’s list due to strong female representation on its board (six of 11 directors), a relatively low ratio of chief executive-to-average worker pay ratio (30 to 1) and a strong financial contribution to society (it paid taxes equal to 26.5 per cent of EBITDA over the last five years). The company also draws a quarter of its revenue from products and services that preserve the environment.

To put part of this in perspective, JUST Capital in the US reports for Forbes that, among the 728 members of the Russell 1000 for which it has compensation data, the average chief executive’s pay is 204 times what the average worker makes.

The criteria Corporate Knights uses to assess the companies are: energy productivity; carbon productivity; water productivity; waste productivity; research and development revenue; cash/taxes paid ratio; chief executive/average worker pay ratio; pension fund status; injury rate; number of fatalities; employee turnover; women on board; women executives; link between executive compensation and ESG; clean revenue; and clean air productivity.

 

The 14th– annual Global 100 was announced at the World Economic Forum in Davos, Switzerland. Here’s the list:

2018 Global 100 Most Sustainable Corporations in the World

  1. 1  Dassault Systèmes
  2. 2  Neste
  3. 3  Valeo
  4. 4  Ucb
  5. 5  Outotec
  6. 6  Amundi
  7. 7  Cisco Systems
  8. 8  Autodesk
  9. 9  Siemens
  10. 10  Samsung SDI
  11. 11  Aareal Bank
  12. 12  Enbridge
  13. 13  Merck
  14. 14  Natura Cosméticos
  15. 15  Pearson
  16. 16  Amadeus IT Group
  17. 17  Bayerische Motoren Werke
  18. 18  Companhia Energetica de Minas Gerais
  19. 19  Koninklijke Philips
  20. 20  Allergan
  21. 21  Honda Motor
  22. 22  Sanofi
  23. 23  McCormick
  24. 24  Commonwealth Bank of Australia
  25. 25  Vivendi
  26. 26  Intel
  27. 27  Itron
  28. 28  Telefonaktiebolaget LM Ericsson
  29. 29  Halma
  30. 30  Deutsche Börse
  31. 31  Kesko
  32. 32  Télévision Française 1
  33. 33  BioMérieux
  34. 34  AstraZeneca
  35. 35  Nokia
  36. 36  BNP Paribas
  37. 37  Eli Lilly
  38. 38  Storebrand
  39. 39  ABB
  40. 40  Svenska Cellulosa Aktiebolaget
  41. 41  Intesa Sanpaolo
  42. 42  Analog Devices
  43. 43  Applied Materials
  44. 44  Takeda Pharmaceutical
  45. 45  Schneider Electric
  46. 46  Shinhan Financial Group
  47. 47  Kering
  48. 48  Ingersoll-Rand
  49. 49  Banco do Brasil
  50. 50  Nestlé
  51. 51  Legrand
  52. 52  Engie Brasil Energia
  53. 53  GlaxoSmithKline
  54. 54  ING Groep
  55. 55  Sekisui Chemical
  56. 56  Acciona
  57. 57  H & M Hennes & Mauritz
  58. 58  Aberdeen Asset Management
  59. 59  NVIDIA
  60. 60  Daimler
  61. 61  Diageo
  62. 62  BT Group
  63. 63  Singapore Telecommunications
  64. 64  Novartis
  65. 65  Sandvik
  66. 66  Chr. Hansen
  67. 67  Coca-Cola European Partners
  68. 68  Nissan Motor
  69. 69  Texas Instruments
  70. 70  Ørsted
  71. 71  Allianz
  72. 72  Lenovo Group
  73. 73  Telus
  74. 74  Taiwan Semiconductor Manufacturing
  75. 75  MetLife
  76. 76  Banco Santander Brasil
  77. 77  HP
  78. 78  Sun Life Financial
  79. 79  Hewlett Packard Enterprise
  80. 80  National Australia Bank
  81. 81  General Electric
  82. 82  Verbund
  83. 83  AkzoNobel
  84. 84  L’Oréal
  85. 85  AXA
  86. 86  Nordea Bank
  87. 87  Orkla
  88. 88  Wärtsilä
  89. 89  Canadian Imperial Bank of Commerce
  90. 90  Renault
  91. 91  Syngenta
  92. 92  Johnson & Johnson
  93. 93  Posco
  94. 94  Suez
  95. 95  Umicore
  96. 96  Vestas Wind Systems
  97. 97  SSE
  98. 98  CapitaLand
  99. 99  Derwent London
  • 100  City Developments

 

Heavy snowfall in North Carolina left a depleted team at the Raleigh headquarters of the state’s $100 billion retirement fund this month, forcing many North Carolina Retirement Systems employees to stay home. But not Treasurer Dale Folwell, sole fiduciary of the fund. He was at his desk, despite the elements.

Being directly accountable for the performance, oversight and management of the complex portfolio, maintaining its celebrated 90 per cent funded status and navigating the prospect of lower returns alongside an ageing population would be a heavy responsibility for many. But Folwell, who was elected just over a year ago, is unwavering in his commitment to the challenge.

“I’m known for raising my hand for the toughest jobs, he says. “It’s what I’ve always done, and what I’m doing here today.”

Indeed, Folwell is adamant that having just one person ultimately in charge of the US’s ninth-biggest pension fund in a sole fiduciary model – long seen as outdated in terms of governance – is preferable to a board-supervised structure. He robustly defends North Carolina’s status as one of the last US public-sector funds, along with $171 billion New York City Retirement and $32.4 billion Connecticut Retirement Plans and Trust Fund, still run by individual treasurers or comptrollers.

“I think the sole fiduciary model is directly responsible for us having one of the best-funded pension plans in the US,” Folwell says. “If the accountability for something is expanded over a broader base, you don’t get a better result.”

Likening investment to politics, he adds: “Most of the time in government, when you spread out the accountability for something, I believe you get a worse result.”

Folwell explains that oversight comes from the fact each of the six funds that make up North Carolina’s pension assets has a board of trustees whose members are appointed by Folwell and other publicly elected state officials.

These trustees’ advisory role, and their votes on key investment issues, combined with input from the investment advisory committee, is enough of a check and balance, he argues.

“I believe more funds are thinking of going this way. I get called about it all the time,” he says.

Flying without a CIO

Right now, Folwell’s responsibility carries even more weight than usual. North Carolina doesn’t have a chief investment officer. Kevin SigRist, who was in the role four years, resigned in July 2017. Since then, investment operations have been managed by two interim directors in the investment management division.

The fund has just announced its search for a new CIO, but Folwell says he won’t be rushed into hiring. With caution born from North Carolina ploughing through seven CIOs in the last 14 years, he’s convinced it’s critical to get the right person, even if it takes a while. Besides, the fund has managed without a CIO in the past.

“Up until 16 years ago, we didn’t have a CIO and the plan had $70 billion then,” he says.

Folwell is bringing the fund’s US passive equity allocation in-house, in a change of strategy put into action before his arrival.

“We were one of the few treasuries in the US that didn’t have this capability,” he says.

So far, $100 million of the $12.5 billion portfolio is internally managed, but this will be extended to the whole allocation through 2018.

This allocation, plus the 29 per cent of the fund that’s in investment-grade fixed income, are the only internally managed portfolios. It’s an outsourcing strategy shaped around “letting managers do their job”. Rather than delve into the intricacies of particular portfolios, Folwell makes sweeping references in describing the plan. It “always looks through the eyes of the average participant” and prioritises “reducing complexity and bringing value to participants”.

Cutting fees

It’s a big-picture focus and Folwell has key targets in his sights; none more so than management fees.

North Carolina shelled out $422.2 million in fees in 2016, the year before he arrived, up from $377.8 million in 2013.

In 2017, the fund cut its fees by $60 million and is targeting a potential savings of $250 million over the next four years, from both internal passive equity management and reviews of its managers. Last March, Folwell terminated six equity managers running a total of $3.3 billion in active mandates that had collectively earned $17 million in fees during fiscal year 2015-16.

“When I took office, there were recommendations in the queue for active managers who had greatly underperformed expectations and their benchmark to go,” he says.

Hidden fees in allocations to private equity, hedge funds and real estate are next.

“I am not sure that all our fees are included in our fee schedule,” he says. “I think there are certain contracts that are written in such a way where the fee doesn’t show up as a fee.”

Folwell has faced criticism that he’s been slow to reinvest the money and make new commitments, missing out on the continued equity bull run and eroding what he’s saved in fees. Except for one $250 million real-estate mandate, he didn’t make any investments through 2017.

He responds that his predecessor, Janet Cowell, invested a record $6.6 billion in 2016, leaving the pension fund with $11 billion of uncalled capital at the start of last year.

“It was my duty to understand and evaluate those investments during my first year in office, on behalf of the public workers who rely on the pension fund,” he says.

His evaluation has left him determined to take managers to task over the lack of visibility around undeployed capital in alternatives.

“You give them four to five years to invest the money, but you never know exactly when the money is going to be put to work. I think [everyone] needs to change terminology with folks like me and start talking so [that we] know exactly when the money is going to work,” he insists.

 

 

Lower assumed rate of return

He’s also readying for another battle. In coming months, Folwell will reduce North Carolina’s assumed rate of return (ARR) for the second time since he took office. He cut it from 7.25 per cent to 7.20 per cent last April.

“I don’t think it’s being loyal to my participants to assume something that we have not achieved, on average, over 17 years, and I don’t expect us to achieve over the next 17 years,” he explains. The pension fund has returned 5.3 per cent a year over the last 10 years.

Lowering the assumed rate of return is made difficult by the fund’s healthy funded status.

“The better funded you are, the harder it is to adjust the ARR downwards. If I reduce my ARR 5 basis points, it costs the General Assembly [the state legislature] in excess of $70 million a year,” he explains.

Folwell insists he is not planning any changes in the current asset allocation, where the focus remains on growth assets.

Breaking down the portfolio

North Carolina’s 2016 annual report states the fund has a 58 per cent target allocation to growth assets, comprising public and private equity, non-core real estate and opportunistic fixed income. Public equity – targeted at 42 per cent of assets under management – is divided between US, non-US, global and hedged equity strategies.

Opportunistic fixed income, about 7 per cent of AUM, is a mix of credit-focused investment vehicles, including traditional corporate credit high-yield bonds and bank loans, distressed debt, hedged fixed income, and special situations including mezzanine debt, direct lending, and structured credit. A target 6 per cent allocation to private equity is wholly invested in limited partnerships.

Diversifying and inflation-sensitive assets account for 11 per cent of AUM, divided between natural resources and real assets. Investments span energy, agriculture, and infrastructure and real assets, include royalty-paying ships and aeroplanes.

It’s an asset allocation that will soon be informed by 20-year data on returns for the first time. Even though some of North Carolina’s pension funds date back to the 1940s, 2018 is the first year the investment division has had 20 years of data available.

“We are trying to figure out how to sustain this plan for the next 20 years, and it’s good to have a rearview mirror that goes back” that far, he says.

Keith Ambachtsheer wants a brighter spotlight on the behaviours and processes in the investment industry that lead to less desirable outcomes for the recipients of its services.

Ambachtsheer is an adjunct professor of finance in the Rotman School of Management at the University of Toronto, and a regular adviser to large pension funds and governments on pension design. He is on a quest to find the “better way”. And as his December 2017 Ambachtsheer Letter outlines, part of finding a better way means calling out non-performing people, practices and behaviours.

Ambachtsheer’s latest target is the Chartered Financial Analysts credentials and the CFA curriculum. While recognising that it is the most respected investment management designation in the world, he asks whether it is good enough.

Specifically, Ambachtsheer, who is on the CFA Institute’s Future of Finance Advisory Council, asks whether the CFA curriculum is future-oriented enough.

After reviewing all 18 volumes and 9000 pages of its reading material for Levels I, II and III, he concludes from a “reasonable sample” that the reference articles are, on average, 20 years old.

As a specific example, in the Level III material on asset/liability management in defined-benefit plans, the publication dates of the eight literature citations spanned from 1976 to 2004.

“A lot of stuff is outdated,” Ambachtsheer said in an interview. “In 2017, the data about corporate plans moving towards defined contribution and hybrid models is from 2002. Really? They can’t get a more timely update of the data?”

(A quick Google search finds a Willis Towers Watson report has data on this for 2015).

But Ambachtsheer says more recent data is just the tip of the iceberg in terms of what he’d like to see in an evolving CFA curriculum.

“The big thing for me is that there are a number of elephants in the investment management room that are not addressed in the curriculum,” he explains.

For one, he says, a thorough discussion of the problem of asymmetric information is missing.

“The retail market for active investment management is probably the largest asymmetric information market in the world,” the Letter states. “Most buyers of these services continue to have no idea that it is a zero-sum game, minus the typical 2 per cent a year cost of playing the game…the sellers don’t tell them.” The result is that customers pay billions in fees and transaction costs for no measurable value, relative to indexed funds.

Ambachtsheer says this is an ethical issue the industry needs to address.

The CFA Institute’s mission statement is to “lead the investment profession globally by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society”.

“If the CFA Institute wants its members to offer services ‘for the ultimate benefit of society’ shouldn’t this asymmetric information problem be clearly presented in the Ethics and Professional Standards sections of its Level I, II and III course material?”

Ambachtsheer also thinks more attention should be paid to the variety of organisational models in investment management, and in particular to the role of large, sophisticated asset-owning fiduciaries.

“When you look at the spectrum of organisations providing services, there’s a whole range of models. At one end of the spectrum, the asset owner becomes the investment manager (the Canadian model) and takes this mythical investment management firm, described in the [CFA] curriculum, out of the loop. This [Canadian model] is not mentioned anywhere in the curriculum, but is a growing part of the investment market, and needs to be acknowledged,” he says. “There is a mismatch between the curriculum idealisation and the reality that exists in the industry.”

Ambachtsheer also thinks that for the curriculum’s future focus to improve, it has to incorporate macro- and microeconomic models that consider sustainability issues such as climate change, food and water security, illiteracy, income and wealth inequality, and financial markets stability.

“The Institute has taken a very specific post-GFC position that we as an industry screwed up and we need to take responsibility for that and make sure it doesn’t happen again,” he says. “As part of this, we need to beef up our approach to ethics and the professionalisation of the industry.

“The CFA has been taking out full-page ads in The Economist, it wants to be the best certification and to recognise professionalism in investment management. This means it has obligations to look at these elephants in the room.”

Ambachtsheer received the CFA Institute’s Award for Professional Excellence in 2011, and the CFA’s James R. Vertin Award for producing a body of research of enduring value. Ambachtsheer doesn’t have a CFA designation, neither does his daughter Jane (partner and global head of responsible investment at Mercer Investments) but his daughter Julie, head of programs at the Responsible Investment Association in Canada, does.

With more than $170 billion in equity exposure, the California Public Employees’ Retirement System is the biggest institutional sharemarket investor in the US. But chief investment officer Ted Eliopoulos says CalPERS is missing out on opportunities because private companies are waiting longer for their initial public offerings.

“What we see as an opening in the marketplace is how long private companies are staying private now,” Eliopoulos said in an interview at CalPERS’ semi-annual retreat meeting on January 16 in Petaluma, California.

Eliopoulos wouldn’t say how big a private company investment portfolio CalPERS is envisioning, but his interview remarks came after a panel of investors spoke at the meeting about whether the largest pension system in the US could take advantage of its home-state edge in a region that is headquarters to Silicon Valley and its start-up culture.

“We think there is an opportunity for CalPERS to invest in private companies, perhaps at later stages of the venture cycle,” Eliopoulos said in the interview. “Companies that have gone through their first, second, third, fourth venture round but aren’t ready yet…to go public, that’s an opportunity.”

Eliopoulos did not say when CalPERS would make a decision on the private markets portfolio. He did tell the $357 billion pension system’s board at the meeting that CalPERS had taken a “high level” of equity risk to meet annualised return expectations of 7 per cent over the next three decades. The fund’s new asset allocation plan, which goes into effect on July 1, increases the target for equity from 46 per cent of the portfolio to 50 per cent.

CalPERS doesn’t invest in major private companies that are yet to go public, such as Uber, like some other public pension plans have done. It does have a private equity portfolio worth about $26 billion, but most of it is devoted to buyout funds. Venture funds make up just $1 billion of the system’s private equity portfolio.

They have also performed poorly. On a five-year annualised basis, ending June 30, 2017, they have returned 4.7 per cent, compared with the private equity portfolio’s overall 11.5 per cent for the same time period, CalPERS statistics show.

Venture capital should be part of CalPERS’ private equity portfolio, said Steve Poizner, a start-up investor who spoke at the retreat meeting, but he said it should have a higher-quality set of investments.

“The point is that CalPERS historically has invested in venture funds that aren’t in the top tier,” said Poizner, who has also served as California’s insurance commissioner. “The top tier in Silcon Valley hasn’t wanted to partner with CalPERS for a variety of reasons. So the returns to CalPERS in the venture capital class haven’t been all that great. CalPERS needs to get more flexible so it can work with the top-tier VCs because the top-tier VCs produce the vast majority of the profits in the VC sector.”

Eliopoulos agreed, saying some top-performing VC funds had shunned CalPERS because of transparency rules the pension plan required.

“It’s absolutely critical in the field of active management in general – private equity, private markets, venture – to attach yourself to the very best talent in the marketplace,” he said.

Eliopoulos said an ongoing review at the fund is looking at alternative business models for private equity and venture capital, including outsourcing the portfolio. He said no timetable has been set but CalPERS has been in the process of soliciting proposals from investment managers for the outsourcing program as part of its review.

Following a year of synchronised global growth, strong equity markets and unusually subdued volatility, can investors hope for more of the same in 2018?

While our central expectation is for reasonably strong growth to continue in the new year – and this will probably be moderately supportive of equities – stretched valuations and a gradual turn in central bank policy are likely to present challenges to investors over the years ahead. Against this backdrop, Mercer outlines four themes we believe will be important for investors to consider when building portfolios in 2018.

From QE to QT

After almost a decade of monetary stimulus, the world’s major central banks are gradually starting to pull back, led by the US Federal Reserve. In response to low levels of unemployment and robust growth, the Fed recently announced a plan to normalise its balance sheet gradually over the coming years (referred to as quantitative tightening or QT). In November, the Bank of England implemented its first rate hike since 2007 and the European Central Bank has announced a reduction in the rate of asset purchases from January 2018.

We would, therefore, appear to be on the cusp of a shift in monetary policy – the end of an era in which central bank policy has been a significant tailwind for markets. The pace and scale of the shift from QE to QT will be critically important for markets in 2018 and beyond.

The open question is if and when policy might become an outright headwind for markets. A shift away from QE need not end badly, but there is no historical precedent for unwinding an easing program of this magnitude. Accordingly, we expect a more volatile market environment than the unusual degree of stability that prevailed during 2017.

In light of this shift, we believe investors should review the extent of interest rate duration inherent in fixed income exposures and consider floating-rate assets or strategies with limited structural duration, such as private debt, absolute return fixed income or asset-backed securities.

Equity markets will also be affected by the speed and scale of tightening, but the impact may differ substantially across stocks and sectors. Defensive sectors and high-yield stocks that have been treated by some investors as bond proxies could be particularly exposed to a rising yield environment.

Equity and bond markets have delivered exceptional returns in the post-crisis period, while also benefiting from a diversification effect due to their negative correlation.

The shift towards a tightening bias threatens both of these trends. Investors should be prepared for an environment of lower returns from equities and bonds, plus the possibility that the diversification effect could disappear, with equity and bond returns becoming positively correlated, as has been the case for long stretches in history.

This is an important consideration for investors making use of leverage (for example, in risk parity strategies) and suggests that portfolios dominated by passive equity and bond exposure offer an unattractive prospective risk/reward profile.

Preparing for late-cycle dynamics

The later stages of a credit cycle typically present a challenging environment, offering lower returns and greater risks than the early- or mid-cycle periods. Although we expect the current economic strength (evident across much of the global economy) to continue this year, we believe investors should start considering the ways they might prepare portfolios for the risks and opportunities the late stage of this credit cycle might present.

As cyclical conditions evolve across the global economy, we believe the following issues warrant discussion:

Investors should be wary of reaching for yield, especially in credit markets offering historically low levels of compensation for default risk. In particular, we view investment-grade credit and high yield as unattractive, with current yields and spread levels offering relatively little upside. Similarly, investors should ensure that they are able to receive sufficient compensation for illiquidity and complexity when accessing less liquid markets.

Reduced levels of liquidity may increase the magnitude of any sell-off in markets, as illustrated by the flash crash in 2014 and the market falls of early 2016.

In addition, an increasing volume of assets is now managed in a way that could increase gap risk in markets. In particular, risk parity, volatility control and trend-following strategies, along with exchange-traded funds that provide short volatility exposure, could all amplify a market sell-off. Periods of market stress reinforce the importance of stress-testing and appropriate position-sizing, but they may also create opportunities for investors willing and able to behave in a contrarian manner.

Conversely, if central banks are able to reduce monetary stimulus without upsetting markets, emerging markets (both equity and debt) are likely to benefit from a combination of early-cycle dynamics, relatively cheap currencies and strong global growth. Under our central scenario, we expect emerging-market equities to outperform developed-market equities, perhaps for some time.

Political fragmentation

Since the early 1980s, there has been widespread convergence, across large parts of the developed world, towards neoliberal policies broadly centred on free trade, free markets and reduced state intervention (deregulation). In recent years, we have witnessed a backlash against the mainstream (‘establishment’) politicians and parties that have upheld this consensus, resulting in the rise of populism across large parts of the Western world.

This fragmentation of the liberal free market consensus creates an environment in which political uncertainty is heightened, with a higher probability of significant shifts in policy. We believe investors should stress test portfolios against large equity, bond and currency movements. Investors who might struggle to tolerate large market movements may wish to consider ways to manage their downside risk exposure, including outright de-risking, defensive tilts or explicit hedges.

A fragmenting political consensus, fueled by a rise in populist resentment of elites, might also become more openly hostile towards corporate profits and monopoly power. Over time, this could lead to a reversal in the multi-decade trend favouring capital over labor (as a percentage of GDP), leading to downward pressure on profit margins.

Similarly, more empowered regulators might seek to take action on aggressive taxation policies and the dominance of large tech firms. Such actions need not be unambiguously bad for equity or credit investors – it is quite possible that intelligent regulatory interventions might help reduce the risk of more extreme political outcomes – but they clearly do create tail risks for certain stocks and sectors of the market.

Stewardship in the 21st century

In recent years, we have seen an increasing recognition of the importance of institutional investors’ role as stewards of capital, along with a wider discussion around the role of finance in promoting the social good.

In particular, there has been a clear trend in the treatment of fiduciary duty towards recognising the importance of ESG issues. We see this as positive, having explicitly stated for many years our belief that an engaged and sustainable investment approach, especially one that recognises the importance of ESG issues, is likely to help create and preserve long-term investment capital.

For long-term asset owners, the critical components of a sustainable investment approach can be considered at three levels:

Asset owners should have a clear set of beliefs on: the impact of ESG factors on risk/return outcomes; the importance of stewardship and engagement activity; and any investor-specific factors that might affect their approach. Investors should also determine which collaborative industry initiatives can help them address related issues in a resource-effective manner.

At the strategy level, asset owners should ensure that their strategic asset allocation is consistent with their beliefs and policy. Beyond this basic requirement for consistency, investors should also be clear on the extent to which systemic risks (in particular, climate change) can be expected to affect the risk/return characteristics of their portfolio.

At the portfolio level, asset owners should ensure that their underlying managers integrate appropriate consideration of ESG issues into their investment processes and take their stewardship responsibilities seriously. This applies equally to active and passive managers.

Moving beyond sustainability and ESG considerations, there is a wider debate taking place concerning what has been described as a “crisis of capitalism”.

As touched on under our fragmentation theme, this discussion typically revolves around issues of rising inequality, the rent extraction of elites, corporate and investor short-termism, and insufficient consideration of social and environmental externalities.

While it is far from clear where this debate will lead, what does seem clear is that politicians and policymakers (reacting to a loss of public trust in finance and capitalism) will seek to find ways to align corporate behaviour more closely with social wellbeing. This will apply as much to the investment industry as to any other part of the economy and will require all parts of the investment chain to demonstrate their value to society in order to maintain a social licence to operate.

The ideas outlined above represent our observations on the challenges, opportunities and drivers of change present in the current investment environment. We provide these ideas with the aim of provoking debate and discussion around the appropriate response to a changing and changeable market landscape. We look forward to continuing this discussion over the course of 2018.

Phil Edwards is global director of strategic research at Mercer.

 

The board of CalPERS has directed staff to look into aligning its $357 billion portfolio with the UN’s sustainable development goals.

The largest pension fund in the US is already one of the global leaders in engaging with companies on ESG risks, but by adopting the UN SDGs it would embrace more specific social objectives, such as ending poverty, hunger and gender inequality.

CalPERS’ chief investment officer Ted Eliopoulos characterised the 17 SDGs as a “gift to investors” at the board’s retreat meeting on January 16 in Petaluma, California. He said investment staff would report back to the board at its July meeting regarding how the goals could connect with CalPERS’ existing sustainability investment plan. Other institutional investors will be invited to that meeting to discuss their experiences implementing the SDGs.

The 17 goals address everything from the environment to various social principles. But Eliopoulos acknowledged in an interview that whether aligning a portfolio with them when they are combined will lead to better returns hasn’t been tested.

“It is definitely a nascent area and the taxonomy that the UN has provided through the sustainable development goals provides a framework for investors that have long tried to consider what subject matters fall under the environmental and social” categories, Eliopoulos said after the meeting.

He called the UN’s SDGs, which 190 nations ratified in September 2015, “authoritative” but said “for investors, it’s a new development and it’s going to take time to digest and understand” how it might relate to portfolios.

He said collaboration with other global pensions would help shape the ultimate application of the SDGs. Australian fund Cbus Super and large Dutch pension plan ABP have both made the SDGs part of their investment plans. Other European funds, such as Dutch PGGM, are also incorporating them into their investment philosophy and implementation.

The move towards implementing SDGs at CalPERS came after the board and investment staff heard from UN assistant secretary-general Elliott Harris, who urged CalPERS to adopt the goals. He said that would help the UN.

“We need to understand how best to measure the impact of the SDGs on financial returns, and how best to preserve the goals and targets in ways that attract the interest of private investors,” Harris said.

He explained that while CalPERS’ sustainable investment strategic plan considers factors such as climate change and natural resource scarcity, that may not be enough.

“The concept of risk may well have to be expanded even further to incorporate the lack of progress toward some of the other aspirations of the sustainable development agenda – such as reducing inequities or [achieving] gender empowerment and equity – which themselves have an impact on macroeconomic factors,” he said.

Harris said CalPERS’ leadership would help generate standards of financial reporting that allow for a systemic evaluation of these new risks.

CalPERS investment director for sustainability, Anne Simpson, said in an interview that she believes implementing the UN goals will help the system drive returns. The pension plan has only a 68 per cent funding ratio and is in the process of lowering its expected annual rate of return from 7.5 per cent to 7 per cent because of diminished future return expectations. Simpson called the situation “demanding”.

“The sustainability development goals are intended to build prosperity,” she said. “As an investor, you could say this is how you build opportunity for us and risk gets addressed. So, that’s really why we’re interested.”