The push for integrating environmental, social and governance (ESG) analysis into investment decision-making got a quiet boost last month amid other louder news events.
Regarded as the second-largest pension fund in the U.S., the California State Teachers’ Retirement System (CalSTRS) has announced that it selected three sustainability-focused global equity investment managers to collectively manage $750 million across non-U.S. focused strategies.
“The three firms, Hermes Investment Management, Impax Asset Management, and Schroders are highly attuned to how sustainability-related trends, like the low carbon transition and resource efficiency, create investment risks and opportunities,” says Kirsty Jenkinson, director of Sustainable Investment and Stewardship Strategies at CalSTRS, in a prepared statement. “We are excited about these new partnerships and their expertise in delivering resilient financial returns amid a rapidly changing global economy.”
At CalSTRS, Jenkinson oversees an ESG portfolio of more than $4.1 billion.
The three firms “are the first to emerge from a CalSTRS manager pool initiated in October 2016, which diversifies the $6 billion Sustainable Investment and Stewardship Strategies portfolio,” according to CalSTRS. “They join existing managers Generation Investment Management and AGF Investments, as well as several activist managers, focused on driving corporate governance and operational improvements.”
In fact, the three new firms “offer geographic diversification and apply analytical rigor in incorporating environmental, social and governance factors into fundamental analysis — all while maintaining a long-term investment horizon,” according to CalSTRS.
Finding these three firms “is the culmination of a thorough and rigorous selection process that allowed us to identify proven industry leaders with expertise in integrating ESG analysis into investment decision-making,” says Brian Rice, portfolio manager for the pension fund, in a statement. “We believe they will bring positive environmental and social as well as financial impacts to our portfolio.”
Beyond CalSTRS, portfolio managers and analysts at many securities firms are reporting a shift toward meeting a growing list of ESG stipulations. Initially, ESG initiatives were met with much skepticism but have since become serious considerations for many investors and firms.
CalSTRS’s efforts are likely to influence others and to ultimately have multiple impacts upon the portfolio and quantitative analysis, equity research, and screening processes at investment firms as quantifying ESG is not easy. This may mean IT, data and workflow changes for some firms, and there are also ramifications for client reporting and client care.
It will be interesting to see what additional impacts CalSTRS’s ESG actions (and those of other prominent asset owners) will have among investment communities and beyond. (The CalSTRS portfolio is valued at $226 billion as of May 31, 2019, and has been described as “the largest educator-only pension fund in the world.”)
I suspect that the ESG surge will continue and will become a new reality for many industry participants. Investment firms will be hearing from current and future clients and competitors, and that will compel most of them to think twice before ruling out ESG efforts.