Investors use technology as tool to dissect ESG portfolios

Investment and science are meeting at a socially responsible intersection, as institutional investors increasingly turn to new ways of deploying technology and data to up their ESG game.

Environmental, social and governance issues have been moving up on the agenda in recent years. Now they are coming to a head with the onset of regulatory demand; new guidance from the Department of Labor stating that investors can consider ESG factors in their investment without fear of repercussions; student protests; and general pressure from investors across the globe.

While data and technology are commonplace in the world of investment management, a renewed focus on the way they can be used in investing is underway, particularly when it comes to discovering the carbon intensity of holdings. Sources in the institutional investment and responsible investment industries highlighted announcements last month by Dutch pension fund provider PGGM to map the carbon footprint of its real estate portfolio, and French public service pension fund Etablissement de Retraite Additionnelle de la Fonction Publique to launch a virtual ESG platform, as examples of the trend.

Some institutional investors are looking at what others are doing to measure their carbon footprint, and acknowledge that the use of technology to aid ESG investment is a natural next step.

“We have considered carbon footprinting our public equity portfolio,” said Brian Rice, portfolio manager, corporate governance, at the $181.3 billion California State Teachers' Retirement System, West Sacramento. “We have talked to a number of leaders, but it is still a new industry and idea. We have always looked at carbon, but we question the ability to measure a carbon footprint and do it well, so we may or may not decide to do it. There are issues around it, particularly how do you manage a portfolio around a carbon number?”

Executives at the pension fund also think consistent disclosure requirements are necessary.

Globally, increased use of technology and data for ESG investment is in its infancy.

“The reality is we are in the very early stages of a significant IT revolution in this industry,” said Julian Poulter, CEO at the Asset Owners Disclosure Project in London. “The use of those services is incredibly immature.”

Firms that provide data and rankings on ESG aspects of money managers have seen an uptick in interest.

“Many asset owners are not used to looking at this level of granularity, such as ... (measuring carbon footprints) to identify company-level sensitivity to climate policy changes — and those that rely on their investment managers to do this are increasingly aware they need to (be) assessing investment manager capabilities in more detail,” said Kate Brett, London-based senior associate at Mercer Ltd. Mercer is seeing increased use of its ESG ratings in manager selection activity, she added.

Sustainalytics — an ESG and corporate governance, research, ratings and analysis provider — also has seen continued demand for its services, said Michael Jantzi, Toronto-based CEO.

“Finding information about companies is going to be something that big data can be used for,” said Fiona Reynolds, London-based managing director at the Principles for Responsible Investment. “The issue with big data at this stage is understanding how to use it, and getting the right people with the right training to be able to interpret it.”

There are four strands to the uptick in interest, said Stephen Miles, Reigate, England-based head of research for Europe, the Middle East and Africa, at Towers Watson & Co.: the media, Generation Y, regulation, and technology and data. “It is important for asset owners to understand what asset managers are doing, and a key way to do that is through technology and data. That will continue, and the net result will be a greater awareness around ESG footprint, risk or management within a portfolio of assets — but more contentious is often deciding how to act once you have all that information and data,” he said.

Having all the information at their fingertips, but not knowing what to do with it, is a key issue for asset owners, said sources.

Government Pension Fund Global, Oslo, Norway, said in its 2014 responsible investment report that “the volume and availability of data remain a challenge, especially when it comes to environmental and social issues ... We are therefore working on further developing our information systems and collaborating with external service providers and researchers to improve access to information and data.”

Some pension funds are steaming ahead with technology and data to better integrate ESG in the investment process.

Dutch pension fund provider PGGM is collaborating with data analytics company GeoPHY to map the carbon footprint of its entire e20 billion ($22 billion) real estate portfolio, across both listed and private assets. PGGM manages e186.6 billion of assets, including for the e161.7 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.

PGGM, with its clients, aspires to reduce its portfolio's carbon footprint by 50% in the future. “To do so we need to be able to map the current carbon footprint as well,” said Mathieu Elshout, Zeist-based investment director in PGGM's private real estate team. “That is not easy as there is no such thing as a holistic view of what it is, and it is certainly not easy to measure the carbon footprint of a e20 billion combined listed and private” real estate portfolio. The firm also wants to map the carbon footprint of potential future real estate acquisitions.

GeoPHY is working through PGGM's portfolio and existing data. “We believe that, using building specifications — size and year (for example) — and location plus local energy markets, that will provide a carbon footprint on an asset level,” said Mr. Elshout. He hopes the model will be up and running before the end of the year.

Teun Van Den Dries, founder and CEO at GeoPHY in The Hague, Netherlands, added that executives at his firm are speaking with other large institutional investors about the model, and that, in the future, it could be developed for other asset classes, such as infrastructure.

The e23 billion Paris-based ERAFP has teamed up with sustainable investment specialist Cedrus Asset Management, and IT platform and performance research data provider amLeague, to build on the latter's existing platform that invites money managers to show how they manage SRI portfolios.

“Our idea was to mimic that for decarbonization,” said Philippe Desfosses, CEO at ERAFP. Managers can demonstrate their abilities to reduce the carbon footprint of a portfolio on the platform, which holds a notional portfolio of 1,800 stocks and few constraints.

The idea is not to develop a ranking of money managers, but to give the market — particularly institutional investors — the possibility of checking what managers propose. “Then ... each investor will have to consider the results between a reduced carbon intensity, performance and risk.”

The platform takes ERAFP's current ESG efforts a step further; it already measures and discloses its equities carbon footprint, and hired Amundi Asset Management to manage a e1.2 billion portfolio with two carbon emission filters, which ERAFP hopes will reduce the carbon footprint by 40%.

“For a long time, we were on the receiving end, with asset managers coming to us and offering a product or solution — but the institutional investors should be more active on the pitching side. We should ask managers to come with a proposal and then we pick the ones we think are OK. We should set the rules and say, "This is what we want.'” Mr. Desfosses said more than 10 international money managers already are interested in the platform. n