Environmental, social and governance (ESG) factors now play a more pivotal role within the manager selection process and the risk management framework for the $178.6 billion New York State Common Retirement Fund (CRF). In its inaugural Environmental, Social and Governance Report, the fund outlines its previous ESG strategies and current objectives regarding sustainability, its methodology in determining material ESG risks, and plans to commit capital to sustainable investments in the future.
“As a long-term investor, Comptroller [Thomas] DiNapoli and the New York State Common Retirement Fund seek out sustainable economic growth and strives to align its interests with the stable, enduring success of the companies in which it invests,” said Matthew Sweeney, a spokesman for New York State Comptroller Thomas DiNapoli. DiNapoli serves as a trustee of CRF.
“This report is developed to memorialize the long-term commitment to ESG strategy to multiple stakeholders. Particularly, our intent is to send the signal to the financial market that CRF integrates ESG factors into capital allocation decisions,” Sweeney said.
As part of its ESG risk management framework, the fund created an ESG Risk Assessment to guide its due diligence when evaluating external managers’ ESG polices and performance. “The purpose of the Risk Assessment is to guide investment decisions by ensuring uniformity of information and a common language for the Fund’s investment team to discuss ESG issues,” Sweeney said.
Manager evaluations will be based on the following criteria:
- Transparency – including public disclosure of ESG performance, establishment of ESG policy, compliance as a signatory to any public campaigns
- Information – how the manager sources ESG information, including the use external and in-house metrics
- Process – how the manager integrates ESG evaluations within investment decision process
- Engagement – how the manager uses its shareholder engagement rights and decides when to engage
In addition to its new manager evaluation process, the Fund also formalized how it will assess material ESG risk within the investment selection process. Outside of shareholder engagement, the fund will gauge its direct investments against material ESG factors using tools such as MSCI rating metrics, and assess indirect investments by evaluating external managers’ ESG policies.
“The Fund’s evaluation of the ESG performance of its securities holdings and external managers will ensure that such material issues are appropriately addressed,” said Sweeney, “either by avoiding at-risk investments or by working with companies and managers to mitigate the risks they face.”
Sustainable investment themes the Fund will target include: resources and the environment, human rights and social inclusion, and economic development.
While the fund has committed more than $5 billion to sustainable investments, it also intends to commit an additional $1.5 billion to its Sustainable Investment Program (SIP), over the next few years. SIP investments need to clearly address a sustainable investment theme, focus on generating attractive risk-returns and score well on the ESG Risk Assessment. The plan considers the program as a way to better prepare for trends that may impact the plan’s portfolio, including evolving regulatory polices and a transition to a low-carbon economy.
“The Fund has long recognized that ESG factors could have a significant impact on the value of its investments,” Sweeney said. “The Fund aspires to be an industry leader in addressing ESG concerns and practicing sustainable investing. We can enhance the value of the Fund’s investments and help build robust industry standards that will give ESG issues the consideration they are due.”
by Amrita Sareen-Tak