As the global fight against climate change shows signs of slowing down, some large asset owners are taking a more pragmatic approach to investment returns from the transition by focusing on more targeted engagement in order to to drive more lasting impact.
In a discussion at the Fiduciary Investors Symposium at Stanford University, PGB chief investment officer Peter Kolthof gave the example of the Dutch pension fund industry, which has made sustainability an explicit objective by framing its ambition to provide a decent return for all its pensioners, but also to do so in a world they find valuable living in.
Kolthof says the $35 billion fund follows a three-stage approach to climate targets: exclusion, engagement and intentionality.
“First, we look at things that we absolutely don’t want to have any exposure to, and we exclude that – cluster munitions, or the tobacco industry, for example,” he said.
In the next stage, the fund looks to put some influence in its portfolio, either by trying to change the companies themselves through engagement, or by adopting a best-in-class approach to gain exposure to the good things related to water, waste and climate. Finally, it uses impact investing to also pick businesses that show pure intention to contribute to energy transition or sustainability.
Kolthof said PGB does not try to exclude fossil fuel investments, stemming from the belief that it should actually contribute to a better world, rather than leaving the damaged goods for somebody else to solve.
“I’d rather go for a best-in-class approach for those because there’s also the belief that these will be significant contributors to the energy transition, and we’re going to have fossil fuels for quite some time, so somebody needs to produce them and export and exploit them in a sustainable way,” he said.
Positive Change
A slightly different approach is followed by Yuko Takano, who runs the Positive Change portfolio at Pictet Asset Management.
“In a nutshell, we invest in the transition, and that can be anything from climate transition to social transition, but engagement is a core part of our strategy,” she said.
“We believe one of the main areas that we can differentiate is through that active engagement with managements.”
One of the successful engagements the team has had is with global auto giant Toyota. The Pictet fund saw a valuation opportunity in the company because while the markets largely deemed Toyota as not having any concrete battery EV strategy, it had taken a multi-pronged approach and was a front runner in terms of hybrid and plug in hybrids.
Takano said when Pictet approached the company and asked it to disclose more of its ex-China EV opportunities, it was pretty reluctant to engage. But there was a step change when Toyota announced its new CEO last year, and the company started taking in recommendations from investors.
It eventually came out with a concrete and more enhanced battery EV target, boosting its share price.
Sustainable Investments
While the $350 billion California State Teachers’ Retirement System has a net zero objective as a strategic priority, the giant fund also has a $6.5 billion sustainable investments portfolio within that focused on public and private markets.
Nick Abel, who co-manages CalSTRS sustainable investments portfolio, said that when large asset owners talk about targeted engagement, they really only need to focus on 250 companies that make up 75 per cent of the emissions profile of ACWI MSCI.
“When you start shortlisting down that, there’s only about 45 companies that CalSTRS can meaningfully focus on to start moving the needle when it comes from emission reductions in decarbonisation, while focusing on positive shareholder value creation,” he said,
Abel said it was relevant asking companies about climate exposure and how it affects their strategy, at one point of time, but public markets have since evolved.
“That was appropriate at one point in time, but now we’re starting to get into an implementation phase where it’s a lot more meaningful for our stewardship team to have conversations with CFOs about marginal cost abatement for carbon and how they can improve shareholder value,” he said.
On the private markets side, it is investing in companies that are creating unique technologies with the potential to scale, such as those that use AI and robots to sort municipal solid waste and upcycle recycling capabilities, or closed loop battery recycling businesses.
