Institutional Investors Attack Climate Change by Responsible Investing

Representatives of pension plans and asset managers describe effort to Invest in ESG strategies at annual Principles of Responsible Investing conference.

Officials of large global pension plans and asset managers detailed efforts to reduce the carbon footprint in their investment portfolios last week in San Francisco at the annual Principles of Responsible Investing conference amidst concerns that time is running out to effectively tackle climate change and prevent the earth’s temperature from heating up.

The measures described at various panels included investing in energy conservation as part of a strategy within the $31.3 billion real estate portfolio of the California Public Employees’ Retirement System (CalPERS) to a portfolio realignment by Sweden pension fund AP2. The fund is building its $38.4 billion portfolio to invest in companies that have low carbon emissions and won’t contribute to the global temperature rising more than 2 degrees Celsius.

The Celsius calculation is part of the agreement from the Paris Accord of 2015, in which countries around the world agreed they must limit the global climate from rising by more than 2 degrees Celsius.

US President Donald Trump has since announced he is pulling the United States out of the agreement, a fact that was rarely mentioned during the first two days of the three-day conference.

Institutional investors heard from an array of panelists, some who urged alternative approaches to responsible investing.

At CalPERS, Beth Richtman, managing investment director of the sustainable investment program, told a PRI panel that in the real estate asset class, “oftentimes when we are not looking for these energy-saving opportunities, we’re leaving money on the table.”

“If you’re an investor in real estate in core markets you might know that trying to build an office building right now, or a mall or a multi-family that’s really a fascinating property, maybe you’re lucky if you get 7% return right now,” she said.

But Richtman said enhancing a real estate portfolio by using energy-conservation strategies can up returns way beyond that 7%, in some cases up to 30%.

She told CIO after she spoke that “the concept is that investors should be looking in their own portfolio for opportunity.”

Richtman said a two-year pilot project at CalPERS’s real estate partnerships resulted in $34 million in energy savings that were plowed back into profits. She said CalPERS will soon announce plans to increase the partnerships across all separate accounts in the real estate program over the next year.

At Swedish pension plan AP2, CEO Eva Halvarsson told a panel that her pension plan has worked with academics and external money managers to build a low-carbon portfolio.

 “We are looking at the portfolio from a new perspective,” she said. The plan has about $38 billion in assets.

Another pension plan targeting the Paris Agreement is the Pensioenfonds Metaal en Techniek, a $81 billion scheme. Asset manager MN, which invests for the fund, begin to measure the plan’s carbon footprint after the Paris Agreement, looking for low-carbon investments.

“We are integrating a strategy framework and looking at opportunities,” Gerald Cartigny, chief investment officer and member of the managing board at MN, told a PRI panel.

One of the largest environmental, social and governance (ESG) efforts being described at one PRI panel went beyond individual pension funds. It was a framework being developed by regulators in China designed to help institutional investors globally.

The China Securities Regulatory Commission (CSRC), in collaboration with China’s Ministry of Environmental Protection, has introduced new requirements that, by 2020, will mandate all listed companies and bond issuers to disclose ESG risks associated with their operations, said  Yimei Li, chief executive of asset manager ChinaAMC.

“China is new to this concept but at the same time, we have seen a lot of top-down work from the government,” Li said. “This raised awareness is helping asset managers engage with Chinese companies in a new and open way.”

Asset owners were urged to assess the water risk of companies they hold in their portfolio at another panel.

“It is a macroeconomic risk that affects entire regions,” said Piet Klop, senior adviser, responsible investing, at PGGM, an asset manager that invests around $250 billion on behalf of several pension plans in the Netherlands.

But Klop said assessing the risk is not easy because metrics are not uniform and company cooperation can be difficult.

Senior pension officials at PRI, which is supported by the United Nations, have been pushing pension plans and other institutional investors to step up ESG investing efforts to help meet the goals of the Paris Agreement, limiting the efforts of climate change.

PRI officials, however, at its annual conference are preaching to a choir of investors that for the most part already buys into the need for increased emphasis on ESG investing. 

Many of the 1,200 attendees represent institutional investors from Europe. Largely absent are Asian and US institutional investors except for representatives of $352 billion CalPERS and the $228 billion California State Teachers’ Retirement System (CalSTRS). The two systems are the largest defined benefit plans in the US.

Tags: , , ,