When Andrew C. Palmer joined the $54.8 billion Maryland State Retirement & Pension System, Baltimore, as chief investment officer in 2015, he started looking at all the asset classes through an ESG lens. "We found we didn't tell anybody what was going on (and) every group did something different," he said. Today, all investment team members meet every Friday to consider ESG decisions through a risk/return lens.
Maryland is also working with its investment consultant during asset allocation practices to analyze how various stress tests impact expected returns and portfolio behavior.
The state of ESG investing today reminds Mr. Palmer of how bond investors in the 1980s learned how to model risk of call options on mortgage-backed securities. "Initially there was a lot of difference of opinion, but eventually it became standardized. This is way more complicated, but eventually we are going to get there," he said.
ESG considerations have led to many changes in how Illinois investment officials analyze investments, said Treasurer Michael W. Frerichs. He was a key force behind the first state law this year requiring state government entities — including the Illinois State Board of Investment, Chicago, overseeing $19 billion in defined benefit plan assets — to integrate sustainability factors into their investment decision-making. "Our hope is that we provide an example. We need to manage risk differently," Mr. Frerichs said.
For the OPTrust managing the assets of the C$22 billion ($16.4 billion) Ontario Public Service Employees Union Pension Plan, Toronto, the growing role of ESG led to a reorganization of the investment office to make sure it is integrated into all investment decisions, said Alison Loat, managing director for sustainable investing and innovation. In addition to assessing the entire portfolio for climate change risk, OPTrust in 2019 engaged hundreds of companies on key ESG issues including gender diversity and board effectiveness, and added to its green bond holdings with a $100 million investment in Ontario government green bonds.
ESG "is very much a philosophical underpinning of how we approach our investments," with an eye not just on the sustainability of the fund, "but also the world our beneficiaries retire in," she said.
It is a similar story for Wespath Benefits and Investments, the investments division of the Glenview, Ill.-based $24 billion General Board of Pension and Health Benefits of the United Methodist Church. Wespath built its sustainable economy framework several years ago because "it's embedded in our DNA," said CIO David Zellner. Focused on performance with the benefit of impact, its three components are invest, engage and avoid.
Jonathan Bailey, managing director and head of ESG investing at Neuberger Berman Group LLC, a New York-based global manager with $330 billion under management for institutional investors, 60% of which is ESG-intregrated, said that ESG topics "are resonating with clients because they can see it will help their performance. They are also trying to make they sure they understand what it means to their beneficiaries," Mr. Bailey said.
Standards that connect ESG measures to performance and are industry-specific are also driving ESG integration, said Eivind Lorgen, New York-based CEO and president of Nordea Asset Management in North America, a founding member and chairman of the Sustainability Accounting Standards Board's investor advisory group. "Investors are increasingly integrating ESG into their portfolio management, and SASB is emerging as the leading standard now," he said.
SASB's 77 industry standards will continue to evolve to meet investor needs and respond to investor feedback, which, for example, prompted a "huge project" on human capital management, Mr. Lorgen said.