Art by Chris Buzelli

Jagdeep Bachher took ESG as a category or box to check and expanded it into an organizational mindset for the University of California. The environmental, social, and governance consequences and risks an investment presents are fundamentally factored into all investment assessments.

“Organizationally, you can have a function that is ESG sustainability, but what we did was to basically make it part and parcel of the entire entity,” Bachher told CIO.

In November, the University of California is set to formalize this mindset and include ESG criteria as a fundamental consideration in its investor policy statement. Along with fiduciary responsibility, maximizing returns, and minimizing risks, “We’re adding a fourth objective, which says incorporate ESG risk factors with equal weighting as to other things we evaluate in our investment decision-making,” Bachher said. “That would make us one of the very few—less than a handful—of institutional investors in the world that has gone that far.”

But understanding the risks ESG presents is already central.

Bachher points to utility companies to illustrate how ESG plays into fundamental investment analysis. Utilities are popular among asset owners for their yield-generating capacity. The prospect of income can keep many investors from turning a blind eye to their energy source. “Some investors just say ‘I’m just going to invest in these things because it checks the boxes. I don’t care how dirty it is… because it’s a good asset,’” he said.

But determining the sustainability of the power source—whether because of technological disruption, or shifting social attitudes—is a integral part of the investment process for Bachher. While coal is still dominant in many emerging economies, “in places like America, we may not necessarily want to invest in a coal plant,” Bachher said. “So, when you look at either a bond that’s issued or the stock of one of these companies, or even a private investment as an infrastructure asset, it’s a real issue.”

Researching and funding technology solutions to address climate is another innovative strategy the University of California uses to address ESG. It’s the only institutional investor that is a signatory to Bill Gates’ Breakthrough Energy Coalition, whose mission is to accelerate clean energy solutions; and it frequently invests in technology of all stages and venture capital funds for renewable energy.

The inspiration for not thinking about ESG separately and stitching it into the organizational fabric came from former vice president and high-profile environmental advocate Al Gore. 

“I was taking the traditional approach three years ago,” Bachher said. “I had posted a job that was called director of sustainability.”

But in informal conversations, Gore convinced him the approach would backfire. “He basically said, ‘Look, if you make this a policing function and you have a separate entity, people will always be worried. You just have to satisfy the ESG department,’” Bachher said. “But if you made this what everybody is doing and includes in their framework, then it has a chance of being much more sustainable in the longer term.”

The result? “I ripped up the director of sustainability job description, and I said we’re just all basically going to live this.”