Supported by Impax Asset Management
The earth-shaking events of 2020 — the coronavirus pandemic, the mass protests and the hotly contested presidential election, to name just three — have made one thing crystal clear to asset owners and asset managers: the world is more connected than ever before, in ways both good and bad.
That’s driving change among institutional investors, with many increasing their engagement with portfolio companies and others making even stronger commitments to fighting climate change and social injustice. The incoming Biden administration seems certain to accelerate these trends.
This year’s upheavals “have definitely highlighted some trends that were already on the radar, and accelerated them — for us and for others,” says Lisa Beauvilain, head of sustainability and ESG at Impax Asset Management.
Biodiversity and Human Capital
One area receiving a lot of attention is related directly to the coronavirus itself: biodiversity and related environmental issues.
Impax is spending a lot of time these days on “the issues of ecosystems and biodiversity, and how that can be a source of pandemics,” Beauvilain says. “There is data showing that, essentially, when we encroach into nature and ecosystems, it drastically increases the chances of zoonotic viral jumps from animal to human.
She expects a “new multilateral framework,” similar to one that was implemented after the SARS pandemic in 2003, will come into effect soon. “In the aftermath of Covid-19, we need to do all we can to prevent these diseases and pandemics from happening again,” Beauvilain says, for reasons of public health as much as the markets. “As investors, we need to focus on that so much more than we have.”
Another area with renewed focus is human capital, which is getting much more attention as an ESG factor in the wake of the coronavirus.
“Human capital has really come to the forefront. Not many investors had previously thought about what makes someone an ‘essential worker,” Beauvilain says. “The pandemic has really brought new attention to this aspect of inequality. Who can safely work from home, and who are the ‘essential’ workers, who often are relatively lower paid staff but have to go to work and put themselves at risk?”
The coronavirus has been especially hard on those front-line workers, notes Jennifer Coulson, v.p. for ESG at British Columbia Investment Management (BCI). The pension now puts a “human capital lens” on its portfolio, which includes asking companies what they are doing to protect and support workers. It’s not just about protecting employees, though that’s obviously crucial. “We want to make sure the long-term business is resilient,” she says, speaking at a CleanTechIQ climate forum in September. She adds that BCI is also partnering with other institutional investors around the world to do collaborative engagement with companies on their Covid 19 responses.
It can be ”quite difficult to capture” information on human capital issues, Beauvilain says, but it’s important to get as it helps flag potential issues at a company. Portfolio managers “are increasingly trying to think about what kinds of metrics we could perhaps develop ourselves, and issues and flags to focus on even more than before.” Engagement is a key method to collect this data, she adds.
Indeed, while many institutional investors have long been pressuring their portfolio companies regarding climate issues, engagement has been expanded to include pandemic-related issues.
The pandemic “made us think about what our shorter-term priorities are,” says Coulson. “We realized that we needed to be talking with companies about their response to the pandemic.”
Engagement on climate change continues too, of course, in some cases instead of divesting from fossil fossil fuel companies, notes Dave Zellner, CIO at Wespath Institutional Investments.
“We will not just sell high-carbon emitters and replace them with low-carbon companies,” he says. Instead, engagement can sometimes be about continuing to hold on to high-emissions companies, “and convincing those companies that they need to transition their operations to net-zero by 2050.”
For example, Wespath led an investor engagement campaign at Cummins, Zellner says, leading to the manufacturer committing last year to becoming net-zero by 2050.
Overall, engagement is having a positive effect. Adam Matthews, director of ethics and engagement at the Church of England Pensions Board, notes that the pension engaged with Royal Dutch Shell, which has committed to a net-zero emission goal. “We are now seeing a raft of companies make net zero commitments, including in the electric utilities sector,” he adds. “And we’ve seen movement in European oil and gas majors.”
Engagement means more than climate change issues. Sparked by the social unrest in the wake of the police killings of George Floyd, Breonna Taylor and others, a growing number of investors are engaging companies and managers over racial and social justice issues. That often goes hand in hand with a sharpened focus on human capital.
“It’s fair to say with the events we’ve observed in 2020, including Covid-19 and issues around racial inequities, we’ve definitely increased our engagements around human capital management and racial inequities,” Zellner says.
The push for racial equity is supported by data showing that diverse teams — in terms of both asset managers, and the companies they invest in — tend to outperform, says Wendy Walker, managing director at Cambridge Associates. Yet right now, only about 1% of all institutional assets are invested with “diverse” asset managers, she adds. That arguably creates a business opportunity for managers that can offer racially diverse strategies or workforces.
A growing number of investors are embracing this approach. “We believe that diversity and inclusion leads to long-term optimized risk-adjusted returns,” says Rodrigo Garcia, CIO for the Illinois State Treasury, speaking at a CleanTechIQ forum on diversity and inclusion in August. The state has been taking a closer look at diversity-related data, trying to identify gaps so they can be filled, he says. That includes a close look at everyone his office works with, including asset managers, broker/dealers, investment banks, mutual fund boards and corporate boards.
“We try to advance ownership when it comes to diverse ownership in asset management firms,” he says. Those efforts include requiring asset managers to “submit diversity data to us on a yearly basis” he says, which allows his office to establish a baseline and track changes and improvements over time
“I believe institutional investors have a pivotal role,” Garica says. “We should be constantly evaluating the diversity of our management teams and staff. We should be leveraging investment stewardship to promote racial and ethnic equity.”
Coming Together… and More
Institutional investors are also teaming up, joining or creating alliances and initiatives to share knowledge and increase pressure on companies and their peers, particularly when it comes to climate change.
Earlier this year, both Wespath and the Church of England Pensions Board joined the Net Zero Asset Owner Alliance, the UN-sponsored group of pensions and insurance companies that commit to making their investment portfolios net-zero by 2050. There are now about 30 members, up from about 20 at the start of the year.
Wespath also is part of Climate Action100+, an investor initiative to engage with major companies and get them to reduce or eliminate their greenhouse gas emissions. The Church of England, meanwhile, is also a steering committee member of the IIGCC’s Paris Aligned Investment Initiative, which now has some 70 members and is meant to help institutional investors align their portfolios with the Paris Agreement goals.
In July, BCI and several other lage institutional investors, including AustralianSuper, APG and PGGM Investment Management, announced the launch of the Sustainable Development Investments Asset Owner Platform, which allows investors to assess portfolio companies on their contribution to the UN’s Sustainable Development Goals.
The platform “is an important next step in a process to mobilize more institutional capital around the big challenges of our time, as described in the SDGs,” Eloy Lindeijer, who at the time was PGGM’s CIO, said at the launch.
SDG themes that PGGM is focusing on include healthcare, access to food, access to clean water and climate, says senior investment manager Jeroen Verleun, speaking at a recent CleanTechIQ forum. Tactics include investing in companies that provide solutions toward the goals, as well as engaging with corporates and sovereigns to change their practices in line with the SDGs
At BCI, “We have not yet built SDGs into our investment practices yet, but that’s what we’re hoping to do by participating in the platform,” Coulson says.
Wespath is another asset owner that is aligning with the SDGs. “Our team is really committed to aligning our investments with outcomes related to the 17 UN SDGs,” Zellner says.
Pensions are also turning up the heat on their asset managers to meet their goals around climate, social justice, human capital and more. To take just one of a growing number of examples, “We insist our asset managers integrate consideration of ESG factors in the investment selection process,” Zellner says. “Every RFP we issue includes questions regarding ESG integration. And each year, we administer a questionnaire to all our asset managers to ask about their ESG integration efforts.”
There’s also concrete changes to investment portfolios, like the Church of England’s recent push into private equity for the first time. “We are looking for private market opportunities to be able to align with climate goals in private markets where we think there is huge opportunity in innovation and in job creation,” Matthews says.
Indeed, climate change and sustainability-focused investment could see a significant boost in early 2021 as the Biden administration takes power. President-elect Joe Biden has spoken strongly about the need to fight climate change; such comments, paired with his stated intent to re-join the Paris Agreement as soon as he takes office, are giving hope to climate hawks and could lead to a surge in cleantech and related investments.
It could also translate to increased ESG investments. To take just one example, in October, the Trump administration Labor Department finalized rules that make it harder for 401(k) and other corporate retirement plans to offer ESG-focused funds. Critics called the move short-sighted at best, and point out that such funds are seeing surging demand and also tend to produce stronger long-term returns versus their peers, according to Morningstar.
It’s clear that while there’s intensifying interest in social justice and other vital issues, many institutional investors continue to devote significant energy to the most existential threat facing humanity today: climate change. That’s only going to continue, even as investors agitate for change around social justice and other issues as well.
“We have been clear about the risk that climate change poses to our ability to deliver the returns needed to fund our pensions into the future,” says Matthews
“We just can’t deprioritize the importance of addressing the adverse consequences resulting from the changes of our climate,” Zellner adds. “Over the next six months, working with our many partners, we just have to find a way to effectively achieve the goals of the Paris Agreement.”