Asset owners embrace ESG

Leading asset owners have integrated environmental, social and governance (ESG) elements into their investment policies and processes in order to harness the opportunities of global systemic drivers, a panel of investors told the PRI in Person conference in Berlin.

Since 2008, the giant Dutch pension fund ABP’s policy has evolved to integrate objectives for sustainability and corporate social responsibility completely. Josepha Maijer, vice-chair of the $453 billion ABP, said that until 2008, it had a traditional policy and assessed investments on risk, return and cost. But since then, ESG criteria has been added, and then a lens of sustainability and responsibility were added to enhance the policy.

“We promised our beneficiaries we would achieve the returns required to pay current and future pensions in a responsible and sustainable manner,” Meijer said. “We have a fiduciary duty to contribute to a more sustainable society, and believe sustainable companies will perform better in the long run.”

The implementation of this revised policy is through the concrete investment objectives of: reducing carbon dioxide by 25 per cent by 2020; increasing the allocation to investments that contribute to a better and cleaner future from €29 billion to €58 billion ($69 billion) by 2020, including investments in renewable energy to the tune of €5 billion by 2020, and €1 billion in communication infrastructure and education. The fund is also focusing on specific ABP themes, including banning child labour, cocoa, human rights, and safe working conditions.

Meanwhile, Chris Ailman, the chief investment officer of the $214 billion California State Teachers’ Retirement System (CalSTRS), told the audience that ESG is an integral part of every asset class and every stage of the investment process at the fund.

CalSTRS has individual teams for each of the three sub-sectors of ESG – environmental, social and governance – with the belief that specialists are needed to deal with the complexity of the individual issues in each sub-sector.

“We have at least one or two staff people who are E, S and G within every asset class,” Ailman said. “If you look at the things that will affect us, things like demographics, urbanisation and climate change, they are different when you look at different asset classes,” he said. “We are constantly monitoring how we have done on the integration.”

The fund’s asset allocation as at June 30 was global equities 56.4 per cent, fixed income 14.7 per cent, real estate 12.6 per cent, private equity 8.1 per cent, risk mitigating strategies 5.1 per cent, cash 2 per cent, inflation sensitive 1.3 per cent, innovation and strategic overlay 0.3 per cent.

Philippe Desfossés, chief executive of the $14 billion French fund ERAFP, who was also on the panel, said it’s important for investors to pay attention to “anything that might derail your mission of paying pensions”.

“We see that as the three main challenges of social, governance and environment, so we designed a charter around those three issues, and decided to implement this in a no-nonsense approach,” Desfossés said.

This was through a best-in-class policy, where the bottom quartile of investments rated on ESG scores were excluded.

“It is very hard to out-guess the market, the only thing you can do is apply criteria to lead you to exclude the bottom quartile,” he said.

ERAFP also paid particular attention to measuring manager performance on ESG scores.

“Now we have regular meetings with managers on the way they’ve been delivering on ESG,” he explained.

Desfossés urged the members of the audience to collaborate with one another.

“Together, we can make a big difference,” he said.