Pension funds and other asset owners, along with their money managers, need to transform their investment process to promote sustainability in the economy, an approach that would redound to more stable and enhanced long-term value creation,according to a set of guidelines released Wednesday by Ceres.
Through a comprehensive integration of environmental, social and governance factors into the investment decision-making process, institutional investors could better manage looming risks and potential opportunities that include climate change, extreme weather, resource scarcity, population growth as well as human and labor rights, according to the course of action laid out by Ceres, a coalition of investors, environmental groups and other organizations that work with companies to address sustainability issues, including climate change.
“The 21st Century Investor: Ceres Blueprint for Sustainable Investing” — a 56-page report available at Ceres' website — was put together in consultation with or feedback from major public pension funds, investment advisory firms, investment consultants, among others.
The blueprint provides a road map for incorporating sustainability into the investment process. It recommends 10 steps, each framed “in the context of sustainable investment strategy.” It calls for asset owners and investment managers to:
- “establish a commitment to sustainable investment through a statement of investment beliefs;
- “establish board-level oversight of sustainability policies and practices;
- “identify sustainability issues material to the fund;
- “evaluate asset allocation for material sustainability risks;
- “select an investment strategy and integrate sustainability criteria;
- “require sustainable investment expertise in manager and consultant procurement;
- “evaluate manager performance against sustainable investment expectations;
- “establish engagement strategies and proxy voting guidelines consistent with sustainable investment goals;
- “support policies and market initiatives that promote a sustainable global economy; (and)
- “integrate sustainable investment criteria across all asset classes and strategies.”
The set of steps “satisfies fiduciary responsibilities to act on behalf of our beneficiaries in an ever-changing, increasingly interdependent global economy,” Thomas P. DiNapoli, New York state comptroller and sole trustee of the $160.4 billion New York State Common Retirement Fund, Albany, wrote in a forward of to the report.
“It has been our experience that integrating relevant environmental, social and governance considerations into the investment decision-making process enhances our ability to achieve our objectives. Investors face new risks in the 21st century that challenge our customary understanding of economic and investment risk. One such risk is climate change … (w)ithout significant worldwide reductions in greenhouse gas emissions, climate change will produce severe economic disruption in the coming decades.”
The blueprint provides asset owners and money managers “with a framework for reviewing their investment policies and practices to better manage risk, protect principal and enhance investment return,” wrote Mr. DiNapoli, a member of Ceres' board of directors.
“This means accounting for risks, some of which are unprecedented, many of which are not identified in financial statements.”
The report states, “Integrating material ESG factors into their investment decision-making is fully consistent with the fiduciary duty of institutional investors.”
In addition, the report states that modern portfolio theory “is not inconsistent with sustainable investing strategies and the incorporation of ESG factors into investment decision-making.”
Mindy S. Lubber, president of Boston-based Ceres and director of its Investor Network on Climate Risk, said in a separate statement in the report: “Today, rapidly accelerating climate change, dwindling water supplies, supply chain breakdowns, population growth and other sustainability challenges pose enormous, unprecedented risks to the global economy. But they also have created enormous economic opportunities in renewable energy, efficiency technologies, resilient infrastructure and other solutions to these challenges.”
“One of Ceres' four strategic priorities is to transform the functioning of our economic systems with the goal of a sustainable economy,” Ms. Lubber continued. “This requires the engagement of all capital market players from corporations to stock exchanges, credit-rating agencies to policymakers. But, critically, it also requires that investors … integrate sustainability deeply into their investment policies and practices.”
The report — written by Peter Ellsworth, senior manager, and Kirsten Snow Spalding, director, both in the Ceres investor program — states, “Some investors are beginning to grapple with these risks and incorporate them into the investment process, but many investors are either ignoring them altogether, in part because they're hard to quantify, or acknowledging them only as extra-financial factors that don't yet warrant serious analysis.”
The blueprint calls for:
- “analyzing ESG risks in every asset class and mitigating these risks across the entire portfolio;
- “understanding the economic impact of increasingly common severe weather events that are causing hundreds of billions in economic losses and tens of billions in insured losses every year;
- “knowing the practices that safeguard worker health and safety, protect human rights and support local communities across the supply chain;
- “financing the clean-energy technologies … and understanding the risks in water infrastructure bonds in a world that can no longer take ample supplies of fresh water for granted;
- “preparing for the impact of new regulatory frameworks that will inevitably catalyze a shift away from fossil fuels to renewable energy sources”; (and)
- “understanding the risk to infrastructure, real estate and supply chains that sit on land just a few feet above sea level and are vulnerable to stronger storm surges from rising seas and more powerful storms.”
Members of a working group that were consulted on the report include officials of the California State Teachers' Retirement System, New York State Common Retirement Fund, Florida State Board of Administration, New York City Retirement Systems, UAW Retiree Medical Benefits Trust, Maryland state treasurer's office, as well as UBS Global Asset Management, MFS Investment Management, Jarislowsky Fraser Ltd., State Street Global Advisors, Prudential Investment Management, Mercer LLC, Trillium Asset Managemeent LLC, and Pax World Management LLC.
Among others contributing advice for the report were officials from California Public Employees' Retirement System, AustralianSuper, TIAA-CREF, KKR & Co., MSCI Inc., TIAA-CREF, Domini Social Investments LLC, Walden Asset Management and the Harvard University Initiative for Responsible Investment , MEAG New York Corp., Breckinridge Capital Advisors Inc., Impax Asset Management Ltd., StoneBridge Partners LLC, the Groom Law Group Chartered and the Reinhart Boerner Van Deuren SC law firm.
The $3.2 billion Kresge Foundation, Troy, Mich., provided financing for developing the report. Kresge has provided a combined $1.7 million in funding to Ceres and the Ceres Investor Network on Climate Risk since 2008, said W. Kim Heron, web and publications writer at the foundation.