Donald Trump’s next appointee as the Federal Reserve chair will be a defining moment for global investors, potentially escalating current market caution into a widespread exit from US assets, warns leading Stanford economist and finance academic Ross Levine. 

Levine, who is senior fellow at the Hoover Institution and co-director of its Financial Regulation Working Group, is concerned about how investors’ view of the next Fed chair – and their potential actions – would impact the US debt and the US dollar.  

All eyes are on Jackson Hole, Wyoming where the Fed chair Jerome Powell will deliver his annual speech this week and the market will be paying close attention to any signs that the world’s most powerful central bank might lower interest rates.   

Trump has hammered the institution and Powell personally for holding rates steady over the last eight months and with Powell’s term wrapping up in May next year, Trump has made it clear that the next Fed chair has to support interest rate cuts.  

“If I think somebody’s going to keep the rates where they are or whatever, I’m not going to put them in,” he said in an Oval Office media briefing in June, putting a significant question mark on future Fed independence. 

Levine says the choice of Powell’s successor will be “very consequential”. Front-running candidates include former Fed governor Kevin Warsh (who is set to speak at the Top1000funds.com Fiduciary Investors Symposium next month), National Economic Council chair Kevin Hassett and incumbent Fed governor Christopher Waller.  

“If President Trump appoints somebody that is seen as his agent at the Fed, markets are unlikely to respond well, and that’s both domestic and international markets, because they will anticipate inflation and potentially financial fragility,” Levine tells Top1000funds.com in an interview.

He says that credibility risk is not just a monetary policy issue, with the fact that the Fed is the regulator of banks and major financial institutions collectively holding about $150 trillion in assets an often overlooked function. 

“To the extent that the President has control over the supervision and regulation of institutions with $150 trillion, that gives one human being enormous discretionary power over the allocation of credit throughout society. One can also think about the allocation of credit as the allocation of opportunities,” he says. 

“The central banks were made independent based on experience, meaning that when central banks are controlled by politicians, economies were more likely to experience much higher and more volatile inflation and more financial crises. So, if the Federal Reserve were now to become more politicised, the risks of macroeconomic instability would rise and people might also lose faith in the very political institutions that exist in a society.” 

Levine’s best-case scenario for the Fed succession is that Trump appoints a candidate who will keep inflation low, buoy investor confidence, and thereby foster long-run economic growth and financial stability. 

“I have some confidence that he’s going to go that route,” Levine predicts.  

“The alternative could be very damaging politically, to the extent that markets respond violently to a Fed chair that they don’t view as credible.” 

On the flip side, this worst-case scenario – a chair who would immediately reduce interest rates at Trump’s discretion – would have enormous flow-on effects for the ballooning US debt and whipsawing US dollar.  

The burgeoning problem of US debt 

What worries Levine most about the US debt is not the sheer level of it – currently standing at around 120 per cent of its economic output – but the unfunded liabilities including social security and healthcare promises which are projected to amount to $78 trillion over the next 75 years. 

The US dollar’s reserve currency status has been a great advantage for the country to borrow at low rates and keep the debt situation under control, but he notes that the US dollar dominance is “a privilege, not a birthright”.  

“The thing that would make it go away is if the world starts to lose faith that the US can pay its debt, or that the US will have excessively low interest rates that trigger high inflation rates,” he says, adding that having a Fed chair who can be seen to keep inflation under control is essential.  

“The recent budget suggests that the political system in the US seems unable at this point to deal with this [debt] challenge. My guess is that things will have to get worse before it becomes politically advantageous to deal with it, because right now, it seems to be politically expedient to ignore it.” 

With that said, Levine acknowledges that the trust in the US economy has been built over an extremely long period of steady growth, which may explain why investors are relentlessly directing their capital into the nation despite risks. 

“When you graph this [real per capita GDP] over time – and reasonable data started to become available after the US Civil War in the 1860s – what you see is remarkably steady growth over five-year periods and over decades,” he says. 

“You had wars, you had women entering the labour force like never before, you had the introduction of federal income taxes for the first time, you had fiscal debts, you had fiscal surpluses. [But still], 2 per cent per year real per capita GDP growth for 150 years. 

“This suggests that economists should be something that they are innately not – and that is humble, because there have been remarkable policy changes, and growth has stayed remarkably constant.” 

But investors can do themselves a favour by not underestimating the political risks.  

“There’s something about the resilience of the entire US political system, such that when policies get out of whack… there’s an adjustment. That doesn’t mean that there will be an adjustment [this time].” 

Office remains a highly challenging allocation for real estate investors like the State of Wisconsin Investment Board. In a recent podcast broadcast on SWIB’s website, Jason Rothenberg, head of real estate at the $162 billion investor set out the challenges.

SWIB’s $12 billion real estate portfolio is overseen by a team of seven in a diversified strategy across type, geography and structures that spans wholly-owned assets to co-mingled funds. But only 5 per cent of the allocation is invested outside the US because taxes, legal structures and currency risk make investing at home preferable.

Although the two largest exposures in the allocation (each around 30 per cent) comprise residential and industrial, the balance lies in office, retail and a growing allocation to alternative real estate that includes thematic trends such as data centres and senior housing. SWIB also has exposure to credit strategies where the underlying collateral is in commercial real estate.

Many investors were protected from the initial impact of office shutters during the pandemic because leases for office buildings are long-term. Large tenants typically sign a lease for 10-15 years, so many companies continued to pay rent even if their employees didn’t come into the office. However, as leases have matured companies are now rethinking how much space they need.

Rothenberg noted an uptick in companies increasing the number of days employees must spend in the office and some employers are asking staff to come in full-time. However, he said in general most companies have adopted a hybrid between in-person and remote. As a result, companies are signing leases for less space and prioritising buildings that have ground-floor facilities like gyms and coffee shops to persuade people to come in.

It has driven a flight to quality in the office sector, creating an environment of winners and losers. Investors must hunt out the winners or risk investing in office buildings that are “the next candidate for demolition or conversion.”

In another market characteristic, Rothenberg said the sector is defined by pockets rather than broad opportunities. New York came back quickly and is doing well, and central business districts have rebounded in cities like Seattle, San Francisco and Denver in terms of street-level activity compared to three years ago.

But small retailers, which comprise an essential part of the ecosystem in a “winning” neighbourhood, are not out of the woods.  Moreover, other areas of these same cities may be less vibrant, creating sub-markets and the need for investors to adopt a building-by-building approach that avoids buildings with low occupancy.

The impact of the pandemic continues to be felt in other sectors too. The sudden demand increase during the pandemic for sectors like warehouse space linked to the surge in consumer demand for online purchases; apartments in sunbelt cities like Austin and Phoenix, and self-storage, has now reversed, leaving over capacity.

“Developers raced to accommodate outsized demand, and now demand has normalised,” he said.

In the current market SWIB is leaning into both its reputation in the marketplace, and with its 40-50 external managers. He is also prioritising accessing the best research so the team have the right lens to evaluate long-term assets. That includes analysis of future constraints in supply that helps target the right quarter and neighbourhood, and requires digging into local knowledge.

Other factors dampening the market

Higher interest rates (another fallout from the pandemic) continue to impede returns because many investors use financing to buy real estate. He said the higher cost of borrowing means market values have moved down, and people pay substantially less for a property now than they did three-to-four years ago.

“The increase in interest rates is challenging,” he said.

Still, he said that real estate investors are supported by a vibrant debt market and competition between lenders will help reduce the cost of borrowing. Construction costs have gone up, and he said supply could also be crimped in the future once the market absorbs what is being delivered. He added that because values have already fallen to capture higher interest rates, it is a good starting point for investors.

The current policy environment is also challenging for real estate investors because corporates are delaying decision-making. Although companies are not looking for shorter leases, he observed a corporate “chill” in committing to new investments or leases in an uncertain future.

Tariffs haven’t spiked demand for stockpiling or warehouse space, and he said the US administration’s ambition to onshore manufacturing could have an impact on real estate demand. However, this will take several years to manifest because new manufacturing facilities require approvals and a suitable workforce.

APG Asset Management, Europe’s largest pension investor, is set to double its global infrastructure allocation in the next five years and is stepping up its push into infrastructure assets in the Asia Pacific with a focus on Australia, India and Southeast Asia and opportunistic investments in Japan and Korea.

The $690 billion investor will inject $652 million into Octopus Australia’s renewable energy platform OASIS, joining several domestic pension investors down under including Rest Super and Hostplus.

Around a third of APG’s $37 billion infrastructure allocation is in the energy sector and it has been looking to expand its footprint in the Australian renewable market for some time, says Hans-Martin Aerts, head of infrastructure and private natural capital for Asia Pacific.

“Together with them [Octopus Australia], we will mainly seek to develop and build new projects and only look at acquiring projects where we can exercise control and typically have 100 per cent ownership, so that we can put together a portfolio of assets that allows us to optimise the revenue profile as much as possible,” he tells Top1000funds.com in an interview from the fund’s Hong Kong office.

To achieve that optimisation, it is important to match the demand and supply of energy, but due to renewables’ intermittent output the task is more complicated. It requires deeper consideration and matching of different sources of energy – for example solar farms, which generate the most energy at midday when the demand tends to be the lowest, can be paired with the complementary generation profile of wind farms, or battery storage that can store and distribute energy for future use.

Aerts says reduction in technology costs makes renewable assets more attractive as alternatives to fossil fuels.

Australia is also an appealing destination for APG due to the stable regulatory framework supporting the energy transition. Although a large part of the Australian economy is still hinged upon fossil fuels, being the second largest exporter of thermal coal and liquefied natural gas, the current Labor government wants the nation to become a “green superpower” in the next decades. It has established more stringent corporate rules for climate disclosures and last year issued the first batch of sovereign green bonds that will be used to finance green projects.

The Australian government also tweaked the mandate of the $307 billion Future Fund in 2024 – a move that sparked enormous controversy – to consider national priorities such as the energy transition in its investment decisions.

“For us, it’s all about all about partnerships. There’s always merit in working together with like-minded investors that have a local presence, and share similar beliefs and objectives as we do,” Aerts says, adding that the fund prefers to create value from projects over the long-term rather than spinning off an asset as soon as feasible.

“We would certainly be seeking closer collaboration with not just the Australian super funds, but other international parties as well that share the same values and interests as us.”

The private natural capital portfolio accounts for $3.5 billion and the fund is also looking to expand that to $5-6 billion, but Aerts says that is dependent on the opportunities available. Asia Pacific investments in that part of the portfolio include 170,000 hectares of forests in Tasmania, Australia (Forico) and a New Zealand timber producer which manages a 30,000-hectare plantation estate (Wenita).

In addition to Australian infrastructure, APG is homing in on India and Southeast Asia (predominantly Indonesia and the Philippines) due to attractive macro factors like the rising middle-class population, urbanisation and fast-growing GDP.

“Coming back to decarbonisation, Asia Pacific offers the biggest opportunity… because more than half of global emissions are created in this part of the world,” Aerts says.

“The other megatrend is digitisation. We see a lot of opportunities across the region, but especially in developing Asia where digital penetration rates are still very low compared to more developed markets.

“In India and the Southeast Asian markets, you really see a strong need for new infrastructure, not only to support the economic growth in the short term, but also to sustain long-term growth. That’s more of the top-down approach. But a top-down perspective alone is not enough. We are combining that with a bottom-up approach where are leveraging on our local market expertise, on the ground capabilities, and trusted partnerships established throughout our long-term presence in the region. Bottom up, it’s really about what are the investable opportunity sets that we’re seeing.”

Aerts says the fund is always conscious of regulatory and political risks when investing in emerging markets but against the global geopolitical background, the risk is higher everywhere.

“People may have thought it’s something only relevant for emerging markets, and they may not have paid as much attention to some of these risks in developed markets.

“For us, we always take these risks into account in our underwriting… If certain risks are too material, for example, when it comes to reputation, then it’s something that we would just avoid.”

British Columbia Investment Management Corporation (BCI), the C$295 billion ($214 billion) asset manager for public sector bodies in Canada’s western most province, oversees a C$20 billion ($14.5 billion) allocation to private debt in a strategy that is defined by a few key characteristics: a large and growing allocation to co-investments, an avoidance of mega deals and an expansion into Europe and APAC.

Around 65 per cent of the private debt allocation is direct or in co-investments via partnerships with external firms, which although not unique, sets BCI apart from many other investors and reaps benefits like diversification, deeper relationships, deal selectivity and lower fees.

“Not everyone can do direct or co-investments but having an overall portfolio of 65 per cent in direct and co-investments is a high number, and we are looking to do more,” says Daniel Garant, executive vice president and global head of public markets, in conversation with Top1000funds.com.

BCI has been doing direct lending in the US ever since the portfolio was launched in 2018. But moribund M&A activity continues to push private credit firms to jump on every opportunity. It’s drawn huge investor flows into US private debt and tightened credit spreads. The fiercely competitive market for lenders has propelled BCI into new geographies – first Europe and more recently, Asia Pacific.

“For the last three years, we have increased our allocation to Europe for the simple reason that credit spreads and returns are currently attractive. Having a portion in Europe, and a growing portion in Asia Pacific, is helping us as these markets will develop over the years. They won’t get to the same size as the US, but private debt in Europe and Asia will get a growing share of this portfolio,” he predicts.

Another important seam to strategy involves avoiding mega deals where “everyone” is bidding. It’s not that these deals aren’t interesting, says Garant, it’s just that they are competitive and tightly priced. Instead, he is focused on transactions that are less crowded to get a better spread, calling on BCI’s strong partners to bring deal flow in the upper middle market and middle market.

Another reason to avoid mega deals in private debt includes competition in the space from broadly syndicated loans (BSLs), which corporate borrowers can tap into as an alternative to private debt. BSLs are usually cheaper, and lenders don’t ask for as much spread as private credit investors. In return, they don’t have the same flexibility.

“A private debt loan is more flexible, but it is more expensive,” he says.

Adjacent opportunities

Another successful seam to strategy includes adjacent opportunities. In one example, the team has broadened its remit and ventured into more asset-backed lending. Garant says it’s less competitive and offers a better risk return, and although deals are more complex, BCI can draw on its deep internal expertise and talent pool for support – around 85 per cent of BCI’s total assets are managed internally.

Traditionally, asset-backed lending where loans are secured against property or equipment, consumer loans or credit card balances, used to be the domain of banks. Unlike direct lending which involves analysis of the corporation, financial projections and strategy, investors in the asset-backed space must also ensure they have the capacity and infrastructure to successfully select the assets that sit behind each deal.

“This is where the secret lies,” he says, adding that managers (and their selection) play a key role in sourcing the assets that back the loans. “Asset-backed lending is usually part of a broad diversified portfolio and that requires technology, including AI tools, to better enable us to see the portfolio behind it because this is where the risk sits.”

Adjacent opportunities also include looking for openings in investment-grade (private) debt where investment-grade corporates go to the private market in search of a more flexible portion of funding.

It’s a strategy that also plays into another inherent strength of the portfolio.

The public markets team oversees both the allocation to private debt and absolute return strategies, alongside more obvious public allocations to passive and active public equities, government and corporate bonds, derivatives, trading and FX and managing portfolio leverage. Garant believes the hybrid portfolio works particularly well given today’s demands on investors to remain flexible, and the fact that the lines that used to define markets are increasingly blurred.

“Investment grade private debt is a hybrid between corporate bonds which are investment grade, and private debt per se, so having the view of both markets is essential in my view to do a good job in terms of capital allocation and risk return.”

Absolute return and synthetic index replication

The C$12 billion ($8.7 billion) absolute return portfolio, the other slight anomaly in BCI’s public markets allocation, seeks opportunities that are uncorrelated to equity – namely unique, idiosyncratic investments that are expected to perform well in all market environments.

The strategy provides a welcome corner of active risk in an equity allocation that has steadily moved into passive.

At 23.6 per cent, BCI’s current allocation to public equities is a smaller proportion of assets under management than it used to be and subjects the portfolio to less volatility than in the past. Of that, the majority is passive in index strategies for rebalancing.

Absolute return investment opportunities have a specific risk-return profile that typically comprises low downside risk and a capped upside, but which is above the market beta return. Absolute return implementation comes via an overlay above public, indexed equities whereby BCI’s clients receive the beta of equities, and a value add over the benchmark from uncorrelated strategies.

“Of course, the quid pro quo is if the downside is capped and limited, the upside is also going to be capped. The key success factor is the right partnership and sourcing, as well as the skill of the team and being agile and nimble to look at opportunities that are a bit different,” he says.

The largest exposure is to a long-short market-neutral credit manager. Other uncorrelated instruments providing strong returns in the overlay strategy include transactions in litigation finance and structured debt instruments with penny warrants. Here, the downside credit protection caps potential losses and the upside comes via the interest rate paid on the debt instrument and potential equity returns from the penny warrants.

In keeping with BCI’s overarching approach, the structure of the overlay is managed internally with capital allocated to partners where BCI will co-invest if the team decide they want more exposure to particular opportunities. “The positions are not short-term, we target transaction maturities to be within five years – we don’t aim for short-term tactical positions that are, say, three months.”

It’s a topical point. As more investors explore tactical asset allocation in the current climate, Garant remains lukewarm.

“I’m not a strong believer in tactical asset allocation. Our strategy is not based off short-term market moves.”

“Tactical asset allocation requires coping with significant mark-to-market volatility with features such as stop losses, and although some firms are good at it, many aren’t because it’s extremely difficult to time market movements. If you want to perform, you need to change positions quickly, and positions need to be large to have a meaningful impact on your return. For example, relative value trades between equity and bonds consume a lot of active risk.”

BCI has no edge investing tactically, he continues. It’s much better to invest the way they are, whereby partners bring opportunities, the internal team hunts for specific returns and risk profiles, and where transactions are less crowded.

A second active equity strategy in addition to absolute return comes via synthetic indexation, where the team move investment between physical and synthetic index replication according to market opportunities.

The physical allocation involves trading a basket of stocks alongside a synthetic index replication exposure via swaps, he explains. Every year, the team has added value by doing synthetic index replication and he concludes that the strategy is important because active equities are difficult in the current market.

“In public equity markets, we have never seen this type of market concentration before. In Canada, we are used to having a few stocks dominating the benchmark, but in the US, this is a new feature in the modern era. It adds complexity for long-only public equity active investors.”

When Google’s chatbot, Bard, made a factual error, the company’s shares plunged 9 per cent in a single day, temporarily wiping off $100 billion in market cap. Last year, OpenAI was fined €15 million ($17.5 million) for processing users’ personal data without adequate legal justification, violating the European Union’s General Data Protection Regulation.

By 2024, Google’s carbon footprint had increased by 48 per cent since 2019 due to energy use associated with GenAI, jeopardising the company’s commitments to reach net zero by 2030. Meanwhile, in Chile and Uruguay, the company is under pressure for its excessive use of freshwater in new data centres.

AI medical diagnostic systems can have racial and gender biases – skin cancer is under-detected in black patients as training materials use images of mostly white skin, for example, and many large companies have experienced data breaches where attackers used AI technology to expose employee and customer data. So the list goes on.

Much is written extolling the investor opportunities inherent in AI at a time when policymakers tilt towards prioritising deregulation and innovation over safety, but a ground-breaking report from £34 billion Railpen on the risks AI holds for investors’ portfolio companies provides a valuable reality check.

Most companies have adopted AI in at least one business function, ranging from informing decision-making to supporting physical operations. Although investors know the financial impacts of these risks can be significant, research and knowledge around financial materiality is scarce and many struggle to price AI risk.

In partnership with Chronos Sustainability, Railpen’s report highlights the short-and medium-term risks and sets important guidance on how investors can assess companies’ preparedness for what lies ahead via an AI governance framework.

Data, climate and cyber

The report authors argue that large data (and energy) requirements of AI expose companies to vulnerability related to both data provenance and security. Uncritical interpretation of inputs is another risk, producing outputs deemed harmful or that reproduce biases present in the training data. Similarly, AI systems possess no inherent ability to discern between true and false information and AI models are increasingly ‘black boxes’ – the larger and more complex a deep learning system is, the more difficult it is to trace the origin of a particular output.

Cyberattacks are an issue across all companies using IT systems but the increasing use of AI significantly amplifies the risks they pose, alongside data privacy and security.

AI has the potential to transform the nature of labour across the whole economy, although estimates of employment gains/losses and wage growth/stagnation remain highly speculative. It’s been estimated that up to eight million UK jobs may be at risk, and 11 per cent of tasks are already exposed to the ‘first wave’ of automation. Lower-paid ‘routine’ cognitive and organisational tasks are at the highest risk, with a disproportionate effect on women and youth.

What can investors do?

The report suggests investors begin by identifying where AI is (or may in the near future be) most significant for the companies in their portfolios. This identification is crucial for prioritising their stewardship efforts effectively. The level of risk (and opportunity) a company faces varies based on its role in the AI value chain, its operational dependency on AI, and how its sector uses AI.

The more a company relies on AI, the greater the related risks. High dependency on AI means that incidents can lead to larger financial, operational, legal or reputational consequences. Therefore, categorising companies by AI significance provides a practical way to allow investors to prioritise where the risk will be most material.

Questions investors should know the answer to include if a portfolio company is an AI developer, deployer, or both. How significantly is AI being used within the company and how does the company’s sector use AI? Is AI oversight structured at the senior leadership or board level and in what ways does AI influence strategic decision-making? Investors should also be mindful of what information the company discloses about its AI operations.

“We encourage investors to participate in dialogue with companies who are at the forefront of AI development and deployment. We also encourage investors to proactively feed into the emerging policy and regulatory discussion on the management of AI risks, and the effective harnessing of AI opportunities. Our sense is that the investor perspective is missing from these policy debates,” wrote the report authors.

Railpen is rapidly developing its AI policy. The investor expects companies developing or deploying AI to demonstrate accountability across the AI value chain, with actions proportionate to their risk exposure, business model, and potential impact. This includes clear board oversight, robust risk management, and transparency.

Where these expectations are not met, and there is evidence of egregious social or environmental harm and inadequate governance, Railpen may vote against the director responsible for oversight.

“We may also support shareholder resolutions addressing AI-related reporting, board accountability, human rights, misinformation, and workforce implications. Plus collective initiatives and policy advocacy,” said the authors.

To help investors assess companies’ approaches to risk management, Railpen and Chronos Sustainability have developed a stewardship framework that moves the responsible AI principles from theory to practice.

Although the long-term capabilities and associated risks of AI remain largely unknown, the framework allows investors to understand companies’ preparedness for these uncertainties as well as the steps that companies may need to take to manage the risks and harness the opportunities.

“Systemic risks are large-scale threats that cannot be diversified away by individual investors or asset owners, as they affect the entire financial system and economy, and therefore all portfolio constituents.

“To address these portfolio-wide risks, investors should consider deploying system-wide stewardship strategies to help understand and mitigate a range of challenges such as climate change, biodiversity loss, wealth inequality – and the rapid development of AI,” it concludes.

Reducing exposure to the risk of falling profits in coal is particularly challenging for South Africa’s 2.38 trillion rand ($122 billion) Government Employees Pension Fund (GEPF).

While other investors like the $82 billion United Nations’ UNJSPF, Norway’s $1.9 trillion sovereign wealth fund and the Netherlands’ $608 billion APG have cut or set key thresholds on their exposure to coal, GEPF’s direct exposure to the fossil fuel accounts for around 6.5 per cent of the portfolio.

Around half of that comes via GEPF’s 50 per cent, predominantly passive, allocation to listed shares on the Johannesburg Stock Exchange (JSE) in a country where the mining industry and the development of the public equity markets have grown hand-in-hand. On top of that, GEPF also has an 84 billion rand ($4 billion) stake in coal-reliant Eskom, the South African power utility, primarily in listed bonds.

But the indirect exposure is even more. Coal and the fortunes of the South African economy – where GEPF invests 85 per cent of its assets and is the equivalent of owning around a third of the economy – are also deeply intertwined.

Coal feeds roughly 85 per cent of South Africa’s electricity capacity, yet that crumbling generation is stymying the wider economy. Rolling blackouts were estimated to cost South Africa 2.9 trillion rand in 2023 and GDP growth of 0.7 per cent that same year, according to World Bank Group data.

In another highly complex characteristic of GEPF’s link with coal, any divestment must navigate the impact on vulnerable coal communities. South Africa’s multi-dimensional poverty, low economic growth and high unemployment, including youth unemployment, making the curb of investment in the industry challenging.

“It’s a transition conversation”, Belaina Negash, ESG manager at the pension fund where she has worked in the responsible investment team for the last 13 years, tells Top1000funds.com.

“When we engage with a company in the extractive sector, we have to have a balanced conversation that takes into account the thousands of people employed in the sector. Of course, we engage on their climate change policy but change impacts profits and therefore we must be able to balance the imperative of environmental sustainability with the need to address socio-economic disparities and once you start impacting profits, it’s going to impact people in a very real way.”

Engaging for a Long-term Transition

GEPF’s ESG strategy is shaped by a systems approach that views every ESG issue from carbon emissions to addressing historical inequalities as interconnected and interdependent. ESG is viewed across all asset classes and strategy includes active ownership and specific allocation decisions. Elsewhere, the team reports portfolio emissions across all high-emitting sectors to the investment committee in an analysis that looks at the per rand invested and carbon intensity.

“We have really tried to strengthen analysis on climate change,” Negash says.

The systems approach means divestment is a last resort. Although the pension fund has divested from companies that don’t align with best practice or meet investment return requirements, it believes staying invested is a better way to effect long term change. Moreover, issues that are externalised in one portion of the portfolio are likely to reappear in another.

“We are in a position to effect change over the long term. If we divest because of climate or other ESG issues, someone else will buy that company stock and systemically, nothing will change. It might reduce the emissions in our portfolio, but you are left with an investable universe that has got more issues than when we were invested in that company. It’s better to have conversations to effect change, and over the long-term to try and create a better system underscored by sustainable financial flows.”

In reality, divestment is also hard. GEPF is by far the largest investor in South Africa and cannot diversify away systemic risk. The pension fund has exposure to every economic sector and every type of risk

“Our investable universe is small,” she says.

GEPF uses its large shareholding to engage on carbon and science-based budgets, and the extent to which a company is investing in renewables. Negash believes it does ultimately move the needle – but points to most progress in areas other than climate.

“A decade ago, we would have conversations with investee board members about ESG metrics in their remuneration policy which was unheard of. Now we see companies being open to these conversations.”

Between 2023/2024, the Public Investment Corporation, GEPF’s government-owned asset manager that invests over 80 per cent of the portfolio, voted on 2,990 resolutions at public companies at 174 meetings and engaged 104 times on 253 ESG topics, mostly related to governance (66.8 per cent), transformation (18.2 per cent), environment (10.7 per cent) and social (4.3 per cent).

The GEPF also invests directly in sustainability via its Isibaya fund. Investments promote socio-economic transformation objectives, renewable energy, healthcare, education, and infrastructure and measurable social impact includes boosting youth employment, adding electricity to the grid and student accommodation.

Asset allocation with a home bias

GEPF currently invests less than 10 per cent overseas and has the headroom to diversify more outside South Africa. But because the pension fund’s liabilities are at home, this is unlikely to change. The portfolio is split between equities, fixed income, real estate and the Isibaya Fund.

Assets under management have grown from 127 billion rand at its formation in 1996 and, according to its latest annual report, it recorded a growth of 2.6 per cent and an annual return on investment of 4.9 per cent. The GEPF’s 10-year annualised return was 7.2 per cent for the period 2015-2024 and its funding level is 110.1 per cent.

“Mitigating climate change and promoting human rights is at the heart of what we do,” she concludes. “We believe we have the capacity to make a difference and have a fiduciary duty to consider how we invest.”