The investors are pushing themselves as well.
At its January retreat, members of the investment committee of the $291.2 billion California Public Employees' Retirement System, Sacramento, said they will vote on a new ESG plan for engaging external managers and public companies by August. In the meantime, investment staff on CalPERS' real estate, private equity, fixed-income and equity investment teams said they are surveying external managers on how they integrate ESG into the investment process.
North Carolina already has partnered with Duke University to assess environmental risk in the pension fund's real estate holdings. Now, Ms. Cowell is encouraging investment staff to have “long-termism” discussions with money managers and consultants and to compile peer research on ESG investment approaches. By 2017, the plan is to benchmark best practices and develop a policy on ESG governance, risk management and asset deployment.
TerriJo Saarela, director of corporate governance for the State of Wisconsin Investment Board, Madison, told a gathering of institutional investors in March that where the board once was more reactive to environmental events, for example, “an internal group of both investment and governance staff realized that some of these (criteria) should be part of our day-to-day analysis.” When staff initially got a slim response from the companies in the board's portfolio, “we decided we should really include these in our engagements.”
It's easier for SWIB — which manages 64% of the Wisconsin Retirement System's $89 billion in assets internally — to integrate ESG into the investment decision-making process, because of the amount managed in-house. But officials now want to develop a way to measure the impact. “As it becomes more of an investment theme, and comes up in the investment committee, eventually we'll get to some more specific measures,” Ms. Saarela said.
The Wisconsin board oversees $97.6 billion in total assets.
One badge of distinction in ESG investing is signing the United Nations Principles for Responsible Investment. Tim Barron is chief investment officer of Segal Rogerscasey, a firm that is the result of a merger of two of the first investment consulting firms to sign onto the pRogerscasey, a firm that is the result of a merger of two of the first investment consulting firms to sign onto the principles.
Before the global financial crisis set it back, ESG was gaining traction in the U.S., said Mr. Barron, who is based in Chicago. In the past 24 months, “it has become much more front burner” again, he said. “There are lots more conversations that ESG factors matter. It's not just neutral; if you don't focus on ESG, you might be actually hurting yourself.”
Mr. Barron also credits the analytics and screening available through indexes offered by MSCI Inc. and FTSE Group, which allow mixing and matching of environmental, social and governance criteria. “They are extremely versatile,” he said.
While most retirement plan executives outsource selection of ESG products to the money manager, “owners should verify. ESG is rising to the point where it's a question you should ask,” said Mr. Barron. “Clients make sure we are talking to our managers. Almost every asset manager now checks the box that says "we care'. In effect, we are the truth squad.”
Acadian Asset Management LLC, a Boston-based global money manager with $69 billion in assets under management, was the first quantitative manager to sign on to the U.N. principles, said Asha Mehta, a portfolio manager at Acadian who directs responsible investing. She said U.S. institutional asset owners are where their European and Australian counterparts were 10 years ago. “I wouldn't be surprised to see more (implementing ESG). Today, we are talking about seeing it in terms of improving returns,” she said. One challenge she sees in the U.S. is how ESG is defined. Along with a holistic approach, she sees segregated mandates becoming more common. “Where the industry is going now is, which of these factors is likely to help with predicting risk? Today, I am seeing a focus on reporting and then risk,” said Ms. Mehta.