Policies vary when it comes to ESG, but some institutions are leading the way.
- Sweden’s 276 billion Swedish kroner ($40.6 billion) AP4, Stockholm, made headlines last year when it announced it was extending to emerging markets its carbon emissions policy. But fund executives have always realized the need to be aware of the environmental, social and governance factors in their investment choices.
“Sustainability to me is ESG — I think many people are missing that you need to start with the governance,” said Mats Andersson, CEO of the fund. “The governance structure will define how to improve sustainability and how you can influence companies. On the ‘E’ and ‘S’ side, we are starting to focus on carbon — it all boils down to the fact that we believe that climate change is real — I think one of the biggest risks that we have in the portfolio is our carbon exposure.”
In late 2012, the fund’s global equities management team invested 1.3 billion Swedish kroner in a low-carbon equity portfolio, screening out 150 companies that “emit most greenhouse gases, including carbon dioxide, compared to peers” from the S&P 500, according to the fund’s website. This was conducted on a sector-neutral basis.
“That (screen) since inception has improved our returns by some hundred basis points,” said Mr. Andersson. The fund will move to a global approach on this screening, which “will probably take another eight months or so.”
As of June 30, AP4’s CO2-efficient investments accounted for almost 10% of the 93.1 billion kronerglobal equity portfolio, according to its latest financial update.
Mr. Andersson also thinks pension funds should be more accountable, disclosing certain policies, and become more engaged with companies.
- Paul Todd, London-based assistant director of investment at the £160 million ($274 million) National Employment Savings Trust, said there is only so much the plan can do until it achieves greater scale. “Our main focus is through our ownership activities — how we vote shares and engage with companies in our portfolio.” While it is invested in pooled funds, voting is conducted by money managers, although NEST executives have inputon voting decisions. “As we get bigger we have an agreement with all of our fund managers that we will carve out the NEST parts of the pools so we can vote directly. That will probably come in the second half of next year, when we reach critical mass,” said Mr. Todd.
The plan has also embarked on a project to assess the impact of climate change on its portfolios.
- U.K. pension plan executives are also aware of the potential impacts of their investments. An annual engagement survey by the National Association of Pension Funds, a trade body for occupational pension plans in the U.K., found that more than half of executives at its member plans had reviewed their responsible investment policy within the past year. However, 15% did not have a responsible investment policy. The NAPF surveyed 48 pension funds with a combined £394 billion of assets.
- The €16 billion ($21.8 billion) ERAFP, a public pension plan based in Paris, has searches running for socially responsible investment allocations. The fund has developed precise criteria for each of its asset classes when it comes to SRI. “We also want to implement a best-in-class approach — which means that we have no sector biases,” said Olivier Bonnet, head of SRI at ERAFP. “We do not exclude; it is not an ethical approach to define where we cannot invest.”
But the fund is strict when it comes to external management, which covers all asset classes except sovereign bonds. “We have our own rules and we want our asset managers to implement ours.” Mr. Bonnet said. To monitor the investments, managers are asked to provide “very detailed reports on how our SRI policy is implemented,” and the fund uses external research providers to assess the portfolio against its policies every three months, he said.
Despite the relatively low levels of awareness in the U.S. compared with Europe, a number of U.S. pension plans have upped their ESG game. The $300.9 billion California Public Employees' Retirement System, Sacramento, said in its 2014 ESG report that it re-launched a team to work across asset classes and support the integration of ESG risk and opportunities into its investment processes.
The fund has developed a number of ESG tools for different asset classes, including for infrastructure and private equity investment. Spokesmen for CalPERS were not available to comment by press time.