As asset owners’ fervor surrounding environmental, social, and governance (ESG) and impact investing intensifies, sustainable investing has emerged as an integral part of investment frameworks. While the motivation behind the integration of ESG within the investment decision process varies, investors are nevertheless formalizing their commitment through policy and/or increasing their allocation of assets to sustainable investing. And asset managers are paying attention.
Earlier this month, the world’s largest pension plan, Japan’s $1.37 trillion Government Pension Investment Fund (GPIF), partnered with the World Bank Group with the ultimate goal of committing more capital to ESG strategies across investment verticals. The initial steps of the collaboration include a research program focused on the sustainable fixed-income market. Nearly 44% of GPIF’s assets were in fixed-income assets as of the end of June.
“This is a unique opportunity for GPIF and the World Bank Group to make a valuable contribution towards the Sustainable Development Goals, providing practical solutions to catalyze the development of sustainable fixed-income markets,” Hiro Mizuno, CIO of GPIF, stated in a release. “This partnership strongly reflects GPIF’s strategic commitment in advancing the integration of environmental, social, and governance considerations in all asset classes of its portfolio.”
Similarly, the CAD286.5 billion Caisse de dépôt et placement du Québec (CDPQ) echoed its focus on sustainable investing when it announced a CAD8 billion commitment to low-carbon investments by 2020. “Our strategy is based on a fundamental commitment,” Michael Sabia, the fund’s president, stated on its website. “From now on, climate change will factor in each and every investment decision we make across the breadth of our portfolio.” The fund intends to treat climate change in the same way it treats other risk factors fundamental to its decision-making process.
This consideration of climate risks was in part driven by the impact of the Paris Agreement, changing consumer choices, and technology market technology, a CDPQ spokesperson told CIO. “Our new investment strategy sets out targets and tools for taking concrete and constructive action, as an investor, in the global challenge that the transition toward a low-carbon economy represents.”
CDPQ is not the only investor upping its ante within the ESG space. In October, the McKnight Foundation increased its allocation to Generation Management’s Global Equity Fund, to $75 million from $25 million, and moved the strategy from its experimental impact portfolio to the main $2.2 billion endowment. Over the past three years, the strategy returned 17.3% annualized versus the MSCI World benchmark’s 6.6% as of June 30.
“[Generation sees] sustainability as an organizing imperative of the new global economy—a point of view that harmonizes with McKnight’s grant-making goals,” according to the fund’s website. Further, every two years the foundation evaluates the carbon intensity of its public portfolio and the ESG capacity of its fund managers.
In similar vein, Georgetown University’s $1.5 billion endowment approved a Social Responsible Investing Policy in June that includes the incorporation of ESG factors into its evaluation of direct investments and external investment managers.
Likewise, the $110 billion University of California Regents announced the formalization of ESG considerations within its investment policy statement over the summer.
“ESG investing among endowments is taking off,” asserted Georges Dyer, a principal at the Intentional Endowment Network, a nonprofit supporting learning and action on sustainable investing. “Increasingly, endowments are seeing that sophisticated consideration of ESG issues is fundamental to prudent long-term investing. The fact that this aligns with their institutional purpose to improve society through education and research makes it all the more compelling.”
The mounting interest and demand for sustainable investing has not gone unnoticed by investment managers. “ESG has become more present in our client conversations, when compared to five or six years ago,” Hugh Lawson, managing director and global head of ESG and impact investing at Goldman Sachs, told CIO. “If you want to be a full-service wealth manager and investment advisor to institutions, you have to have a rigorous ESG capability to be credible. Just in the same way people look to us around asset allocation or portfolio construction or risk management.”
The fund manager’s ESG/impact-oriented assets increased to more than $10 billion from about $500 million over the past two years. About one-third of the increase stems from institutional capital. In 2015, Goldman acquired Imprint Capital, a dedicated ESG and impact investing advisory firm. The firm has collaborated with its clients on a number of ESG strategies, including a $2 billion low-carbon equity strategy for the $197.1 billion New York State Common Retirement Fund.
The level of interest and the excitement we have around the solutions we’re developing are consistent across asset classes,” added Lawson. “In equities, data continues to be the vexing issue. We are looking into ways to use AI [artificial intelligence] to gather relevant data rather than relying on company disclosures.”
Other market practitioners also recognize the increased demand for sustainable investments and are expanding their ESG offerings and resources accordingly. For example, over the past month:
- Nuveen, the investment manager, introduced an ESG-oriented US bond exchange-trade fund to its product offerings.
- BlackRock hired a former adviser to President Obama’s administration on climate change to spearhead its sustainable investing efforts, according to recent reports.
- MSCI, a provider of research-based indexes and analytics, launched MSCI Factor ESG Target Indexes, designed to help investors integrate ESG considerations within factor investing.
While there has been a proliferation of ESG strategies within the marketplace, the levels of integration might vary dramatically, according to Scott Perry, a partner at consulting firm NEPC. “As a result, there is an opportunity for advisors and asset owners to discern who the true ESG asset managers are, how these funds are incorporating ESG into their strategy and what the potential benefit is to investors,” he said.
Jamie Kramer, ESG lead at J.P. Morgan Asset Management, agreed. “There is not a one-size-fit-all approach to ESG, she said. “For example, we’ve seen different approaches to sustainability even when it comes to managing carbon exposure,” she said.
While European investors initially led the interest for ESG assets, there has been an uptick in demand by Asian and US clients over the past few years. “Clients are thinking about ESG integration from a risk management perspective,” Kramer said. “These nonfinancial metrics, when material, do impact earnings. Clients want to see how ESG is integrated in our investment-decision process.”
Kramer expects the institutional appetite for sustainable investing to rapidly rise over the next few years. “ESG investing now has a formal, undeniable seat at the investment table,” she said.