With regulators raising the bar for pension funds on sustainability and ESG, we explore how to 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.
Regulators in many different jurisdictions are bringing in rules requiring pension funds of all kinds to report on areas beyond their financial positions, including data related to environmental, social and governance (ESG) factors.
This presents pension funds with several investment and reporting challenges – but also with a growing universe of diverse opportunities. Whether you are a defined benefit, defined contribution or hybrid pension fund, there are many ways you can invest to benefit your members and wider society.
Taking action
Clearly there are various investment options available for pension decision makers to consider allocating to in order to support ESG goals; listed equities and bonds whether these are thematic, ‘best-in-class’, or exclusionary approaches.
By diversifying more widely into private markets, the options increase quite substantially and can give 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, asset owners can invest in sustainable buildings and social housing, providing affordable, quality homes to lower income families.
These long-term investments have the potential to generate income and a capital return for pension fund investors.
Importantly, many of these asset classes are no longer just available to large, sophisticated institutional investors – pension funds of all kinds can gain access to illiquid sectors such as infrastructure and real estate debt through innovative fund structures.
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 measure an asset’s – and a portfolio’s – credentials on environmental and sustainability factors.
At BNP Paribas Asset Management, we combine our proprietary analysis from our Global Sustainability Centre with data from third-party providers to give our investment teams a fully informed breakdown of the ESG qualities of each potential portfolio asset. This information is then reported to investors to make sure they are kept informed about their portfolios’ performance.
As an active manager, we continually engage with portfolio companies to ensure they continue to align 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.i
This means we can report accurately on the financial and ESG qualities of our portfolios, ensuring pension funds have the information they need in a timely manner to meet their regulatory requirements.
As regulators continue to scrutinise investors over their sustainability actions as well as statements, investing in private markets is an increasingly important way in which pension funds can demonstrate their credentials while also meeting their financial targets.
At BNP Paribas Asset Management we are able to offer investors access to underlying private markets strategies that have ESG fully embedded in their respective investment processes. With With our innovative and evolving private assets platform we are able to provide access to impact and climate aligned strategies that enable investors to align their portfolios with their own sustainability policies.
References
1 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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