Transparency is key to building trust according to executives at Norges Bank and the United Nations Staff Pension Fund. They discussed the benefits, and limitations of transparency at the Fiduciary Investors Symposium at the University of Oxford.

The Government Pension Fund Global, the giant Norwegian sovereign wealth fund, achieved a perfect score of 100 in this year’s Global Pension Transparency Benchmark (GPTB). the score improvement was deliberate and considered, and involved executives from the fund lobbying the Ministry of Finance to be more diligent on disclosures that impacted the fund’s governance rating, including board effectiveness reviews.

Frederick Willumsen, global head of strategy and research for Norges Bank Investment Management, who advises the executive board and finance ministry on investment strategy, said the actions demonstrate how important transparency is to the fund.

“In one sense we have one client, the Ministry of Finance; but in another sense, we have five and a half million clients, the people of Norway,” Willumsen said at the Fiduciary Investors Symposium at the University of Oxford.

Norges Bank conducts a reputation survey every second year which shows a clear link between what people know about the fund and whether they trust the management of the fund.

“So for us it’s really important that people know what we are doing, they know the organization, the investment strategy and so on, because we really think that is a way of building trust in what we are doing,” Willumsen said.

“And asset management is a trust business, right? You really need trust. That’s the key thing. I can basically talk about anything we do, because it’s probably in the public domain already. So, transparency is really key for us, because that is the link to building knowledge and trust in what we do, that is the most important part of why we care about transparency.”

Unlike some sovereign wealth funds that don’t disclosure their AUM, Norges Bank publishes its AUM online, and updates the value 13 times a second.

Norges has somewhat of a complicated governance structure that includes delegation from the Parliament and the Ministry of Finance.

In the past year Norway’s SWF improved its governance score on the GPTB by deliberately negotiating with the Ministry of Finance to change some disclosures including criteria for appointing board members, compensation principles and board effectiveness reviews.

“Our board and the Ministry of Finance really care about transparency as much as we do, and hence they were very keen to change that,” Willumsen said.

The Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and CEM Benchmarking, is now in its fourth year, It measures the transparency of disclosure across the four factors of cost, governance, performance and responsible investment of the five largest pension funds in 15 countries.

In 2023, 77 per cent of funds improved their transparency, and this year the figure was 69 per cent. So, the benchmark is having an impact on increasing transparency across the industry, one of its intentions from the outset.

David Jennings, director, client coverage Nordics and UK for CEM Benchmarking, said Norway had shown leadership by prioritising transparency and actively improving their score.

“Transparency definitely requires leadership, and I don’t think funds should just wait for regulation to happen. That’s been very clear with, with Norges. That’s been clear with the Canadians,” he said. “Sometimes it is a bit of a risk. And I think it does invite scrutiny, but that’s not a bad thing.”

Jennings pointed to the fact that this year nine of the top-scoring funds scored better than the top-scoring fund last year.

“There’s been a concerted effort across pretty much all funds to improve their transparency. But it’s really been the top-ranked funds who have been improving the most.”

A transparency journey

The United Nations Staff Pension Fund is not officially ranked as part of the Global Pension Transparency Benchmark, but it has voluntarily measured its own transparency using the publicly available survey that underpins the GPTB.

Pedro Guazo, General Secretary Antonio Guterres’ representative for the investments of the assets of the United Nations Joint Staff pension fund, takes transparency incredibly seriously.

When Guazo started as head of investments five years ago there were two websites for the fund: one for investments, and one for pension administration.

“When Rosemarie [McLean] and I joined five years ago we were in the middle of a severe crisis of confidence. The trust from our stakeholders was not there, and mainly because of lack of transparency,” he said.

“We made a pact back then to start sending a message as one fund. Because it doesn’t matter the reporting lines, you have one fund. So we started with having just one website and trying to put as much information that we consider relevant throughout the first couple of years. So it worked out. We started improving the trust with all our stakeholders until the moment that I saw it arrive into my email… that analysis from Top1000funds.com on transparency.”

Guazo said “being a numbers person” he wanted to do a shadow rating to see whether the fund’s work on transparency had paid off.

“And we almost died, because we got 45 points out of 100,” he said.

“We realised there was a lot of work to do. So we put together a taskforce with people from both sides, investments, back office, everybody, just to work and make a gap analysis.”

The fund moved from a rating of 45 to 75 in the first year, and in particular has improved the disclosure of board and committee member qualifications, and costs.

“The story is very nice. The trust is really good,” he said.

The limits of transparency

Both panellists said that while transparency is beneficial, especially because it builds trust, there are limits.

The UNJSPF said that in its case, it is not relevant for the fund to disclose all its investment holdings.

“We’re not disclosing all the transactions… and we have made a conscious decision that we will probably never reach 100 per cent based on the current methodology,” Guazo said.

Norges Bank does provide full portfolio look-through. All its holdings are updated twice a year and go back more than 25 years.

“If you go to our web page you can literally go back to 1998 and you can see every year all of the holdings down to the company level, the address level when it comes to unlisted real estate, every single bond, everything,” Willumsen said.

The fund operates within the mandate it has been given by the Ministry of Finance and that includes investments that may be criticised, such as holdings in Israel.

“This is a big topic in Norway, the conflict in Gaza. We are operating within the mandate that we have been given by the Ministry of Finance. Any decision to not invest in Israel will need to be a political decision made by the correct authorities, not by us.”

Artificial intelligence continues to make inroads into the investment operations of major asset owners, but most are proceeding with a high degree of caution and setting clear boundaries around what the technology is and is not permitted to do, while resisting the temptation to allow AI to dictate organisational change.

Global head of digitalisation and innovation at the €577 billion ($606 billion) APG Asset Management Peter Strikwerda told the Top1000funds.com Fiduciary Investors Symposium at the University of Oxford that the opportunity for AI is “large throughout the whole investment chain”.

“The reason for that is quite simple,” he said. “AI, as is, is good at processing data; is good at processing unstructured data, especially; is good at efficiency gains. We don’t make chairs or tables, we work with data, being investors.

“That is a good starting point to look at all the opportunities. The challenges are, even so, big. Outside of technical ones, there are cultural and organisational ones…and what is in between, I think what is paramount is don’t take a technology push perspective here.”

Strikwerda said the big hyperscalers are investing tens of billions of dollars a quarter and pushing the use of the technology on users whether they want or need it or not.

“[It] is going to be pushed forward, but never use it as a tech-push in your organisation,” he said.

“We can build the smartest hammer that you have, but if you need to put a screw in, I mean, where are you at?

“That’s the AI stepping in and taking over. But the other side of that equation is look at your business challenges and then see how to smartly apply it. And some, I think, great examples are in, for example, responsible investing, where we have a lot of data challenges, on data quality and data availability; on standards; on ethics; anything. So I think AI has a great role there and we have some great examples already there on the sustainable development investments.”

Investment risk and data manager for the DKR230 billion (32.4 billion) Industriens Pension Fund, Julia Sommer-Legaard, told the symposium the fund has started using AI to support asset allocation decisions, but does not leave the technology to make decisions unsupervised or unchecked.

“We have always had a model for [asset allocation], but now, using AI, we could actually develop a much more complex model,” Sommer-Legaard said.

“We have basically fed PDFs and articles to chat GPT and to Copilot and made it write the code. What can be dangerous about this is if you don’t know coding yourself, you wouldn’t know if it actually did it right. The strategists in my firm and myself, we have a lot of coding experience, so that’s how we make sure that the coding is actually right.

“Then, understanding the mathematics, of course, too. Also developing an internal model. We wouldn’t have the resources for that, being two people, so it has helped a lot in that sense.”

Sommer-Legaard said it is critical for asset owners to combine the outputs from AI with human knowledge and experience.

“We are not just trusting a model and trusting the mathematics, we are combining it with human knowledge from the portfolio managers,” she said.

“You can never use an AI model just by itself. You need like, the 20 last per cent from human interaction and human knowledge.”

Sommer-Legaard said asset owners must also be able to fulfill their fiduciary responsibilities as investors and be able to explain or demonstrate how AI has produced the results or the investment inputs that it has.

“Investment managers, our CIO, everyone needs to understand this is not just a black box,” she said.

“We understand what’s happening, so that’s one of the issues. But since it’s leaning towards our normal model, then it hasn’t been that big an issue. But it could be an issue when we want to use it for other things.”

Robeco deputy CIO and head of quant investing and research team Weili Zhoulso touched on fiduciary responsibilities and the challenges that are created by using AI to make decisions or generate investment proceed inputs from vast oceans of data. Zou said that every two years the volume of new data created is equal to the sum of all data created in human history to that point.

“The amount and dimensionality of the data that is available is amazing,” Zhou said.

“It’s not only the stock price movement, volatility, it’s what the CEO is saying, what news and policymakers are doing, what’s the sentiment from a client and leaving a review on eBay, on Amazon; all these information actually are relevant, sometimes, for the decision making of investment.

“This is a blessing and curse at the same time, because do you have the power to process it? Can you see what is noise and what’s relevant and what’s irrelevant? And that also requests you to have a very strong infrastructure.”

Zhou says the output of an AI model is one thing, but investors need to look well beneath the surface.

“Is your AI industrialised, is your AI auditable, is your AI result-repeatable?” she said.

“If you’re sued…are you able to prove where [decisions] come from and what recommendations were made?

“That’s putting on a lot of requests on the whole infrastructure and the governance around it.”

At the end of the day investing remains largely a human-based activity, even though it is increasingly being augmented by AI. APG’s Strikwerda said that must always remain the case.

“If we trust technology [blindly] and stop thinking, we’re in deep trouble,” he said.

Global defence spending has jumped 18 per cent this year and is on track to reach as high as $3 trillion per annum by 2030, as the globe grapples with the largest number of active conflicts since World War II and a record number of forcibly displaced people.

Governments are preparing for a decades-long battle for power that will impact trade, economic policy, and military and defence strategy, according to Simon Henry, managing director and portfolio manager at Wellington Management.

The fragmentation of global power, alongside climate change and the rise of AI, has been identified by Wellington as major generational changes that will impact markets for decades to come.

“Geopolitical friction and great power competition will lead to a much higher prioritisation of national security, and one clear knock-on effect is going to be the structural rise in global defence spending,” Henry told the Fiduciary Investors Symposium at Oxford, UK.

“Governments around the world are recognising these tensions, and the burden is increasingly on individual countries to defend their borders.”

While defence ticks a lot of boxes for investors, given the sector’s strong medium-to-long term growth outlook and favourable political tailwinds, Henry acknowledged the challenges of investing in defence from an ethical and sustainability perspective.

“In an ideal world, this wouldn’t be a theme that is compelling. No one wishes for war. In our discussions with investors however, there is an increasing recognition that it is essential to modernise defence capabilities to protect national interests and, hopefully, reduce the likelihood of conflicts in the future.”

In addition to war and geopolitics, climate change also poses a major threat to long-term national security. According to Wellington, the number of people displaced by climate change, particularly in the equatorial band, could outweigh the number of people forcibly displaced by conflict.

The consequences of this trend include mass migration, driven by, or leading to, greater levels of water stress and more extreme heat events.

Henry said action on climate change needed to extend beyond the energy transition to include adaptation.

“We talk a lot about slowing down climate change, but there isn’t much discussion about how to live in the new reality,” he said.  “Human beings will need to adapt. Economies need to prepare for much more volatile and extreme conditions.”

A greater focus on adaptation also provides some protection against the risk of governments and corporates failing to hit their emission reduction targets.

To achieve targets contained in the 2015 Paris Agreement, global greenhouse gas (GHG) emissions need to almost halve by 2030 and hit net-zero by 2050.

“Decarbonisation is going to take time. Renewables come with an intermittency that is very challenging from a grid perspective and the supply chain, particularly the solar supply chain, is heavily dominated by China, which is challenging from a geopolitical perspective,” Henry said.

“The longer the transition gets delayed, the more money must be spent on adaptation and resilience. The numbers are staggering.”

With climate-related risks, global conflict and technological advancement here to stay, investors needed to step back, think long-term and build targeted exposures into their portfolios, he added.

“The next 25 years will be full of disruption as we all navigate a changing world order, the impact of climate change, and the explosion of AI,” Henry said. In relation to this trend of continual change, Wellington’s Thematics Platform has identified around 20 investable themes. One theme includes investing in defence stocks. “There are about 50 pure play defence stocks, and they are underrepresented in broad market exposures, and they can come with quite interesting return opportunities and characteristics, particularly during periods of heightened geopolitical risk,” Henry said. Climate resilience is also a key theme, given the strength of the team’s conviction and how structurally underrepresented the theme is in investment portfolios.

“These changes sound like existential problems and somewhat dystopian at times, but they can provide compelling return opportunities, particularly in areas where traditional benchmarks and exposures are very light.”

Public policy can impact investor returns. Take the returns from building EV plants in the US for example, heavily influenced by America’s Inflation Reduction Act. Investors might have to lower the discount rate on the future value of the business: if credits disappear, returns will be lower.

“Public policy does matter,” said Brian Funk, global head of private capital at MetLife Investment Management, speaking at the Fiduciary Investors Symposium at Oxford in a session delving into the risks and opportunities of investing in private markets to support the energy transition.

Monique Mathys-Graaff, senior director, head of sustainability solutions at WTW, stressed the importance private capital plays in decarbonising the economy given the scale of what is required.

Private markets channel capital into specific economic outcomes. For example, flows into renewable energy have benefited from sitting in investors’ alternative allocations.

Joel Probin, head of investment management at France’s Caisse des Depots, the investment arm of the French state which counts La Post, France’s post office, and extensive real estate and utility holdings, as well as a public sector investment bank in its extensive portfolio.

Probin explained that Caisse invests in private markets in accordance with its purpose. Investments include long-term loans to social housing and local authorities. In private markets, it puts capital to work in private equity and credit and has pledged to allocate billions to climate change over the next five years, encompassing loans, private equity solutions and green bonds.

Funk estimated that given the level of government debt, governments and supra-nationals will only provide roughly one-third of the trillions of dollars required to meet the energy transition. “Private market solutions are required,” he told delegates.

Huge need for capital

Funk noted the importance of capital being deployed to hard-to-abate sectors like steel or shipping. However, financing a corporate journey from brown to green requires huge amounts of capital. For these sectors that require capex over a long-term return, credit makes a lot of sense.

Private credit investment is accompanied by a relationship between the asset owner and the management team. Discussions centre on the business model and how companies plan to achieve their aims, and if the technology is available. “Engagement in private credit markets is an advantage,” said Funk. Meanwhile, borrowers in the public credit market are familiar with answering questions about compliance.

He added that with more transparency and disclosure, investors can encourage corporations to think differently about their business models. “They want to lower the weighted cost of capital and overtime there will be positive ramifications on this.”

“We think private credit plays a really big role [in the transition]. Corporate private placement is a big book,” he added.

The debate widened to discuss the extent to which private companies are meeting their net zero pledges. And the extent to which investors that have committed to net zero are struggling to find the investments. For example, tech companies have erased their net zero commitments because they require huge amounts of energy to fuel the data centres that support the rollout of AI.

Delegates heard how fossil fuels will not disappear from the energy landscape even if innovative solutions appear. Every source of energy that has been superseded continues to exist. For example, oil and gas came along, but coal hasn’t disappeared – coal-fired power stations are still being built in China and India.

Delegates heard that renewables are difficult to feed into the grid and fossil fuels will likely remain part of the energy mix. It means carbon mitigation and removal will become more important going forward and science and innovation will grow in size. The world is “not going in a single direction” and investors shouldn’t expect displacement of existing sources of energy.

Mathys-Graaff reflected on the challenge of managing fiduciary assets according to different mandates. Some WTW clients will have a 40 per cent allocation to private markets, others just 10 per cent, making investing more in alternatives challenging. Still, private debt offers a compelling first step on the ladder.

Panellists also reflected on the challenges of measuring performance with current benchmarks. The tracking error and duration mismatch of private credit versus the available benchmarks is complex, and the ability of investors to measure their investment on a risk-adjusted basis requires reform.

Investors face a catastrophic risk from the loss of the world’s natural resources spanning soil to flora, fauna and minerals that underpin the global economy and provide the world’s food, medicines and built environment.

Nature loss will impact economies and the financial system, yet nothing is being done at a global level to mitigate the losses because in many ways the issues remain invisible, said Ingrid Kukuljan, head of impact and sustainable investment at Federated Hermes Limited speaking during the Fiduciary Investors Symposium at Oxford University.

“Plants alone are responsible for around 40 per cent of the medicine in the western world,” she said.

Kukuljan pointed to recent research from Hungary’s central bank, MNB, conducted to help it and other central banks evaluate the impact of biodiversity loss. It revealed a profound impact on the economy, an increase natural disasters and hit to GDP from biodiversity loss.

Despite the fact the issues are frequently unseen, Kukuljan argued they are increasingly apparent. Like inflation in commodity prices in goods like cocoa, coffee and olive oil which she directly attributed to  issues in the supply chain as a consequence of natural disasters.

She said fiduciary capital is not flowing into strategies to stem its loss.

“Biodiversity is much bigger than climate, but there is a lack of understanding,” she said.

The world needs to change how we live and eat, and she pointed to sector specific opportunities for investors in food production and manufacturing.

Moreover, the market is beginning to price in biodiversity gains. For example, before the “Trump trade” Federated Hermes’ nature-focused equity investment fund of biodiversity champions with no tech exposure has provided strong risk adjusted returns, only trailing MSCI World “by 100 bps.”

Kukuljan said the fund has done well because the businesses in the portfolio are exposed to huge secular growth factors.

“You can make money by investing in solutions,” she said. She also sounded the alarm on not putting capital to work to protect biodiversity.

“If you don’t start investing now there won’t be any returns in ten years because the degradation will be so high. Take it seriously from a fiduciary duty point of view.”

Oxford endowment focuses on natural capital

Integrating nature at the £6 billion Oxford Endowment Fund is in its early stages. Eighty per cent of the portfolio is invested in an externally managed equity allocation and a small allocation to rural land in the mixed property portfolio is long-term tenanted to farmers. However, in a recent push to meaningfully integrate nature in a larger allocation, the investor acquired a 7,000- acre estate in Scotland in 2020 where it is developing a long-term multi-faceted strategy encompassing financial, environmental and societal returns spanning peatland restoration, woodland creation and sustainable tourism.

“Our focus is on maximising the natural capital,” said Antonia Coad, head of sustainability, Oxford University Endowment Management.

The endowment has already seen returns from its natural capital investment. For example carbon credits from the peatland restoration project have been generated to boost value creation for the estate.

The endowment is also involved in a more niche nature investment in its venture portfolio, including an opportunity to help mitigate the impact of micro plastics. But Coad said it is difficult finding talented venture capital funds that are backing interesting innovation with a biodiversity impact.

In public equity, the endowment has backed sustainable investor Osmosis Investment Management, investing both in the company and its fund.

Like the Oxford endowment, most investors begin integrating nature in real assets first.

Yet Kukuljan said publicly listed multinational corporations are the “biggest culprits” when it comes to destroying biodiversity and nature. She urged fixed income rating agencies to start taking biodiversity loss into consideration at a sovereign and corporate level.

She also stressed the strong connection between the ‘S’ of ESG and nature investment.

“If you want to invest in social issues you have to invest in biodiversity.”

TNFD reporting

The Oxford Endowment Fund has not begun integrating TNFD into its reporting. Instead the team is watching others to learn lessons and best practice from early adopters. Coad noted that it is helpful that it is not “an entirely new framework” but shares similarities and alignment with the TCFD. She added that it will be a helpful tool for engagement.

Federated Hermes has been working with the Natural History Museum to gather better data on biodiversity loss, looking at the key stress factors contributing to loss around waste, water, emissions and land use.

“The data is there but it is sparse,” she said.

Kukuljan called the TNFD a user friendly framework, and predicted that it will ultimately merge with the TCFD.  Similarly, she suggested that the biodiversity and climate COPs will merge. “I hope they unite the COPs; there is no need for two, or to silo biodiversity and climate.”

“Climate is one of the drivers of biodiversity loss and we shouldn’t separate the two. Forty per cent of all climate mitigation has to come from nature based solutions. If you don’t invest in nature, how are you going to reach climate targets?”

Recently in Cali, Colombia for the COP16 Biodiversity Summit she noted a heightened present of private market participants and finance ministers, representing a greater fiscal lever. Other encouraging signs of progress include the Global Biodiversity Framework, launched in 2022 and viewed as the Paris Agreement for Nature.

Although stewardship is an important element of investing in nature panellists reflected that capital allocation is a much greater lever than stewardship in creating change and Kukuljan also urged governments to reform lobbying laws. Positively, federal and state laws in the US help protect biodiversity and Japan has become a global leader in stemming biodiversity loss.

Regeneration will become a key investment theme in the future according to Gabriel Micheli, senior investment manager, thematic equities, Pictet Asset Management.

Speaking at the Fiduciary Investors Symposium at Oxford University, Micheli said the planet has lost around three quarters of its species/life over the past 50 years. Something he called a “staggering loss.”

“Nature provides the services we take for granted, but the the world is becoming less resilient,” he said.

Pictet Asset Management’s experience in sustainable investment goes back two decades. The asset manager’s funds focused on water, the energy transition and land use have seen strong performance over the years and it has also developed a framework that measures corporate impact. However, many investors are less experienced in the space.

They are still focused on “first steps” like removing the damage of climate change via net zero targets, for example. He told delegates that they will have to go further than this to begin biodiversity regeneration and restoration, repairing what has been lost and making sure that the planet’s rebuilt resilience is kept.

He said that restoring biodiversity is dependent on local communities safeguarding and taking care of nature for the long term.

“In the end what matters is that people around [nature] take care of it and that people are empowered to protect it over time.”

The circular economy offers investors a huge opportunity, according to Micheli. Circularity currently accounts for just 7 per cent of the global economy but he forecasts that recycling will become “huge” over time. Other opportunities lie in regenerative agriculture where food groups like Nestle and Danone are already putting capital to work to transform how food is cultivated. Regenerative agriculture is more resilient, reduces tilling and uses less pesticides and more nature based solutions to ensure yields.

Oats or dairy?

One of the most important aspects of Pictet’s work integrating nature comes from measuring the impact of corporate actions and applying those changes to investment strategy.

Micheli pointed to analysis of the difference in biodiversity impact between oat (low) and cow (high) milk to highlight how impact analysis has grown to span the whole value chain. In this case, encompassing packaging to water and land use, and emissions.

The study between the different sources of milk allows investors to understand one company compared to another, he continued. It reveals that one product has a lower impact on biodiversity loss than another which will ultimately be favoured by consumers and policy makers. He said impact analysis allows investors to position for headwinds and benefit from tailwinds that will fan financial returns.

But gathering the data is complex. Analysis must take into account the different impact from land use in different geographies and navigate the lack of standardization in corporate reporting, and the fact companies use different metrics. He said a top-down approach to analysis is also accompanied by incorporating bottom-up corporate reporting.  He also stressed the importance of working with academics to delve into the research and add expertise.

Using these processes, the asset manager has classified the biodiversity dependency of all the companies in the MSCI World.

Micheli said that the food industry has the biggest impact on biodiversity. The data also reveals how companies evolve over time, revealing that some companies’ do reverse their negative impact on biodiversity. The data also allows investors to make projections for the future and pinpoint where the impact of biodiversity loss will be felt most keenly. He said that biodiversity loss happens all over the world because global corporations have an impact across the world.

Pictet does not measure biodiversity impact with ESG ratings. Although they are useful, he described ESG ratings as more of a risk management tool. “ESG is about how  [companies] operate and do it better,” he said.

Away from data gathering, delegates also discussed the challenge that many investors face because they don’t have a mandate to invest biodiversity. For many it means they are only exploring how to integrate biodiversity, and face capacity constraints. They hold real assets like farms and timberland but the focus is more on ESG than biodiversity.

Micheli countered that investing for impact adds value to any investment strategy; it helps identify companies that the market hasn’t seen and creates performance and alpha for investors. “This is the reason people do it,” he said.