With regulators raising the bar for pension funds on sustainability and ESG-related investing, Timothy Li explores how funds can make a positive real-world impact while helping investors to make the right decisions for a comfortable retirement.
For pension funds, making a positive impact often stretches beyond ensuring beneficiaries can enjoy a comfortable retirement. How does that sit with regulators in many different jurisdictions bringing in rules requiring pension funds to report on areas beyond their financial positions, including data related to environmental, social and governance (ESG) factors?
These requirements present pension funds with investment and reporting challenges – but also with a growing universe of diverse opportunities. Whether it is a defined benefit, defined contribution or hybrid pension fund, we believe there are many ways to invest to benefit members and the wider society.
Taking action and adding private assets
There are various investment options available to pension decisionmakers to consider allocating in support of ESG goals: listed equities and bonds whether these are thematic, ‘best-in-class’ or exclusion-based approaches.
By diversifying more widely and including private markets, the options increase substantially. The result can be a more rounded multi-asset approach. Often, the nature of private markets asset classes means that managers and investors can make a tangible real-world positive impact as they are closer to the assets in which they are invested.
For example, many new green technologies are being developed by small private companies funded by venture capital. Asset owners can invest directly in infrastructure funds backing renewable energy projects. In real estate, they can invest in sustainable buildings and social housing, providing affordable, quality homes to lower income families.
Such investments have the potential to generate income and a capital return for pension fund investors over time.
Importantly, many of these asset classes are no longer just available to large, sophisticated institutional investors – pension funds of all kinds can access illiquid sectors such as infrastructure and real estate debt through innovative fund structures.[1]
Certifying and reporting impact
Allocating capital to assets with good ESG credentials is one thing, but how do you demonstrate that these investments are having the impact intended?
One way is to align portfolios with international standards such as the United Nations’ Sustainable Development Goals (SDGs). Portfolio companies and assets can be ‘mapped’ onto one or more goals: for example, a renewable energy company would align with SDG 7 (Affordable and Clean Energy), but could also support SDG 13 (Climate Action).
For real estate, sustainability certifications such as BREEAM and LEED are internationally recognised and can be used to attest to the environmental and sustainability credentials of assets and portfolios.
At BNP Paribas Asset Management, we combine proprietary analysis by our Sustainability Centre and data from third-party providers to give investment teams a comprehensive breakdown of the ESG qualities of each potential portfolio asset. This information is then shared with investors to ensure they are kept informed about their portfolio’s performance.
As an active manager, we continually engage with portfolio companies to ensure they remain aligned with our ESG goals, helping them to improve wherever possible. Our track record has been recognised externally: ShareAction ranked BNP Paribas Asset Management as one of the strongest asset managers across a range of governance, stewardship, climate, biodiversity and social factors in its latest survey of the industry.[2]
Our approach allows us to report accurately and timely on the financial and ESG qualities of portfolios, ensuring pension funds have the information they need to meet regulatory requirements.
As regulators continue to scrutinise investors over their sustainability actions as well as statements, we believe investing in private markets can be an important way in which pension funds can demonstrate their credentials while also meeting their financial targets.
We can offer investors access to private markets strategies that have ESG fully embedded in their investment processes. With our innovative and evolving private assets platform, we can provide access to impact and climate-aligned strategies that enable investors to align portfolios with their own sustainability policies.
[1] Also read An introduction to private asset investing (bnpparibas-am.com)
[2] Source: ‘Point of No Returns 2023’, ShareAction survey and report, March 2023. BNP Paribas Asset Management ranked second overall out of 77 asset managers assessed on a range of ESG criteria. See the full ranking here: https://shareaction.org/reports/point-of-no-returns-2023-part-i-ranking-and-general-findings/ranking-and-performance
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