Institutional Investors Innovate ESG Usage

ESG investing principals are being implemented by institutional investors in a rich variety of ways, with an increasing emphasis on the “social” and “governance” portion of ESG. 

The topic of environmental, social and governance (ESG)-aware investing is often associated with left-leaning political sensibilities—in no small part because many of the ESG-labeled products one comes across are aimed at reducing an investor’s carbon footprint or environmental impact.

But a new report, “Tipping Points 2016,” published by the Investor Responsibility Research Center Institute (IRRCI), finds that ESG investing principals are being implemented by institutional investors in a rich variety of ways, with an increasing emphasis on the “social” and “governance” portion of ESG. In fact, the study indicates that investors are “intentionally attempting to influence systems-level risk factors previously ignored as beyond the impact-ability of institutional investors,” going far beyond simply reducing carbon output.

Some investors, for example, are thinking deeply about how the social interconnectivity of the world has dramatically impacted market correlations and the competitive landscape in which all for-profit enterprises operate. “Previously, investors could find ways to insulate their portfolios from certain global events,” the report notes. “Today, even seemingly local events can immediately and adversely affect all portfolios.”

Other investors, it could be said, are actually hedging the possibility of negative environmental impacts from climate change within their portfolios, positioning themselves to be ready to take advantage of new solutions that will undoubtedly be needed in a climate-stressed future. The report points to PGGM, a Dutch pension fund manager, which has allocated a multi-billion dollar portion of its assets to what it describes as a “solutions” portfolio focused on responding to four issues: climate change, food scarcity, health care cost inflation and water scarcity.

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The report shares many other innovative examples, giving a nod to BlackRock for the creation of an internal “impact division” created to help the company factor long-term sustainability into all business management processes. It also calls out the California State Teachers Retirement System, which has allocated $2.5 billion to an MSCI low-carbon index fund, and also has worked with the NGO Ceres to query 45 fossil fuel companies about their strategic plans under various energy/climate scenarios.

The IRRCI report goes on to make a series of recommendations for institutional investors looking to take advantage of ESG principles to better position themselves for the mid- and long-term future. Institutions are urged to “maximize the alignment of the asset classes in which they invest with the societal purposes those asset classes were designed to address.” Further, institutions may be able to find opportunities to pursue compelling investments that “support and strengthen activities within their defined geographic region.”

It may seem obvious given the current political environment, but the report suggests investors must “engage in meaningful public policy debates they view as relevant to their particular management of risks and rewards at systems levels … They must accommodate the consideration of a diverse set of systems-levels issues.”

Looking ahead, the IRRCI report predicts the increased flow of information about ESG topics and their relationship with financial systems can only further boost the importance of these topics.

The full report is available for download here