Responsible investing forces investors to take a wider perspective and directly confront ambiguity and brings a wide range of benefits to organisations including clearer purpose, better talent attraction and the ability to navigate complex multi-stakeholder issues, experts say.

In a panel discussion showcasing how investors with leading sustainability practices are demonstrating leadership more broadly, Alison Loat, senior managing director, sustainable investing and innovation, at Canadian fund OPTrust, said responsible investment forces investors “to look at a much broader set of factors.”

This is not just good for clarifying investment theses, but also as a “cognitive exercise,” Loat said, speaking at the Sustainability in Practice conference, held at Oxford University and organised by Top1000funds.com.

“It’s a much more comprehensive set of risk and return considerations than many of us were trained to look at in school,” Loat said. “It forces people to confront ambiguity in a much more direct way. Those are really important qualities build no matter what you do in life.”

Culture plays a critical role and is built through priorities, process and resources, Loat said, referencing research from the late Clayton Christensen, a Harvard Business School professor.

Responsible investment should not just be the priority of the responsible investment team, but of the whole organisation, Loat said. Priorities need to be set. Processes need to be simple, clear and straightforward. And organisations need to very intentionally provide resources towards the culture change they want to see.

Saker Nusseibeh, chief executive Federated Hermes – International, said some issues like gender equality are not so much to do with sustainability as they are about common sense, pointing to the stupidity of being a “buyer of talent [and] halving your supply,” or being “a seller of a good [and] halving your market.” The same applies to diversity in ethnicity and sexual orientation, he said.

Sustainability allows workplaces to understand the whole picture, by allowing different cognitive views, allowing people from different backgrounds to “bring their whole selves to work,” and ultimately tackle problems from different perspectives, Nusseibeh said.

Federated Hermes Limited is the only company in the financial sector where every employee signs a personal pledge, as far as he is aware.

Nusseibeh described this pledge at including things like “I will act ethically,” along with “I will put the interest of the client before the interest of the company,” and “I will advocate for the environment and I will work with stakeholders–including other companies, by the way–to advance the cause.”

Also on the panel was Phil Edwards, head of manager selection at Universities Superannuation Scheme in the UK. Panel chair Amanda White, director of international at Conexus Financial, publisher of Top1000funds.com, asked Edwards about dealing with the issue of greenwashing in his role when measuring, monitoring and maintaining relationships with external managers.

USS has around £75 billion of assets with the majority run in-house, but does also rely on the complementary skillsets of external relationships for some parts of its portfolio, Edwards said.

To identify external managers with whom the fund feels confident, USS has a set of “gateway indicators” laying out the minimum standards it expects managers to meet, such as clear sustainability and ESG policies, “a decent level of resources of back up those policies,” and “a serious and certain level of ambition to their net zero commitment.”

USS is also looking for philosophical and cultural alignment with how it thinks about sustainability among senior leaders, and it wants to see whether sustainability work is well-integrated or rather siloed into a seperate team with inadequate influence.

“Spending time with asset managers and a range of people within those organisations, I think we can get a better understanding of how they operate and what degree of alignment exists,” Edwards said.

Predictability and transparency are fundamental to having impact as a global responsible investor, according to Wilhelm Mohn, the global head of governance at Norges Bank Investment Management, which manages Norway’s $1.43 trillion Government Pension Fund Global.

Owning around 1.4 per cent of the world’s equities and managing 95 per cent of them in-house, Norges took top spot in this year’s Global Pension Transparency Benchmark.

“Being predictable and transparent is, in itself, something that can make us more effective, make us have a bigger impact,” said Mohn, speaking at the Sustainability in Practice conference, organised by top1000funds.com and held this year at the University of Oxford.

Norges has a straightforward governance framework, Mohn said, with 70 per cent listed equities, 25 per cent listed bonds of which 70 per cent are government bonds, along with some unlisted real estate and unlisted renewable infrastructure investments.

In its corporate governance efforts to engage with companies, Norges has stewardship experts or subject matter experts on sustainability that take views on companies’ exposure to governance and sustainability risks and develop strategies to engage for change.

Its benchmark is determined by a department in the Norwegian Ministry of Finance, and its main strategic decisions are anchored in parliament, giving a lot of transparency to its operations. Norges publishes five days in advance how it is going to vote in board resolutions, with detailed explanations of its reasons if it decides to oppose a resolution.

This policy is based on three tenets carried since the beginning, Mohn said. “We should be principled in our approach that we build on clear principles and standards; We should be quite predictable so that it’s possible for our stakeholders and the company that you invest in to understand where they’re coming from and what we might do next; And then that that has to be underpinned by transparency.”

When the fund implements changes to its guidelines in a specific market, such as previously changing how it votes in Japan on independence or diversity, the fund tries “to be ahead of it to start conversations at market level,” Mohn said.

Norges has divested from 74 companies in 2022 and more than 440 since 2012, clearly viewing divestment as an effective tool while other asset owners are increasingly reluctant to use divestment as a tool, noted session chair Amanda White, director of international at Conexus Financial, publisher of Top1000funds.com. What is the thinking behind this?

Mohn said the engagement versus divestment discussion “is a little bit too binary at times,” and there are times when the fund decides “the risks are too high, and they’re not managed particularly well, and it’s not for us.”

The fund also has ethical exclusions about products or conduct it doesn’t want to invest in. Net zero is a central topic, along with anti-corruption, tax and transparency, human rights, human capital management, responsible AI, and water. 

Developing better analytics is a key pillar of being a responsible investor, Mohn said, by sharing coherently the results of its stewardship over time. 

“That’s essentially all a big accountability exercise and for us that’s really important,” Mohn said. “Because really what we’re trying to do by being a responsible investor is to safeguard these assets for the future. And it’s more important than anything that our ability to invest and to invest smartly and not to react with knee jerk reactions to anything, it’s the stability of all that that really decides whether we are a good investor for future generations.”

When now CEO of New Zealand Super Matt Whineray joined the fund in 2008 the investment committee consisted of “anyone who wanted to attend”. At that point the fund employed 40 people, had NZ$14.7 billion and entirely outsourced its investment management. When Whineray leaves the organisation on December 8 he’s leaving a very different place.

Matt Whineray joined New Zealand Super in May 2008, after Bear Stearns collapsed but before the chaos of the Lehman Brothers implosion, tasked with managing the private markets portfolio including private equity, timber, infrastructure a little bit of real estate and an “other private assets” allocation. It was a baptism of fire for Whineray, who quickly learned the calibre of his teammates as the fund experienced a material drawdown in equities, and assets fell by more than NZ$3 billion to NZ$11.2 billion.

“Equities markets tanked and we went down with them,” Whineray tells Top1000funds.com in an interview from his Auckland, New Zealand, office.

It was a steep learning curve for Whineray, who joined the fund from an investment banking background focused on transactions, not managing a portfolio. And while his immediate portfolio wasn’t experiencing the same catastrophic outcomes as some, because of lagged valuations, the public markets team were dealing with market-neutral hedge funds that weren’t hedging, and the collapse in public equities.

“It was a very useful time for me to understand portfolio construction and portfolio completion,” Whineray says.

“It was a big lesson for us because we were entirely outsourced and we didn’t really have control over liquidity, we didn’t have a great view of what we needed or what we had.”

At the time even cash was externally managed which Whineray says was a lesson in the potential misalignment when using external agents.

“There were times when overnight cash was paying phenomenal returns because cash was so scarce, but we didn’t get any of that because our manager was not incentivised to do that.”

From that, then-chief executive Adrian Orr pushed the development of an internal function that became the portfolio completion team, with oversight and control of managing that risk. Portfolio completion has become one of the signature characteristics of the fund, and a great contributor since that time.

Whineray credits Orr as a significant influence on his career. They worked together for more than a decade, with Whineray clocking up six years as general manager of investments and then four years as chief investment officer.

“One of the things I really enjoyed was we would talk to peers and ask them about how they tackled a problem or how they did something,” Whineray says. “We are so transparent so we can be free with information. Adrian was very open to bringing in those lessons and thinking about how we could operate here.”

That openness was demonstrated in everything from the fund’s sustainable investing leadership to rewriting policies that were no longer fit for purpose.

“Adrian would say ‘we wrote them in the first place so we can re-write them’. He was very pragmatic and I learnt a lot from that,” Whineray says adding that Neil Williams, then general manager of asset allocation, was another influence.

“He has a massive brain, and because of his capability it pushed me to work. I read a lot of asset allocation research papers so I could hold a conversation with Neil, it was a great driver of me understanding the industry and learning,” he says.

Leadership journey

Orr and Whineray’s more than 10-years of partnership at the top of NZ Super came to an end when Orr left in 2017 to become governor of the Reserve Bank of New Zealand and Whineray then took over the chief executive role at the guardians.

Moving from the CIO to CEO role was another growth opportunity for his leadership, Whineray reflects.

“It made me grow professionally [and] having to deal with stakeholders and the board more intensely was an area of development for me. I’ve enjoyed and grown into the CEO role,” he says.

In order to navigate the potentially tricky domain of a CEO who was previously the CIO (a career progression also seen at the Future Fund by Raphael Arndt and before him David Neal) Whineray stepped off the investment committee when Stephen Gilmore joined as the investments chief.

“I still get all the IC papers so I know what’s going on and understand what is happening in the portfolio,” he explains. “But it was important for me to focus on the rest of the organisation and that is a challenge to do that. On the leadership team if you’re not responsible for it you’re not as attuned to the detail. Getting your head around what happens in tech, operations, data, HR, and corporate affairs is a big bit of learning.”

If he had to mark himself down on any areas of management Whineray says he wishes he’d spent more time, focus and money on technology.

“We are followers on the tech and data front,” he says. “I wish that I had grasped that needle a bit harder and pushed that. One of the things perhaps going from the CIO to CEO role is how to size those functions and push for the investment in them that is really needed. We need to lift ourselves from the data and tech point of view, we are later to it than other funds and I wished I’d pushed that a bit harder.”

Whineray’s legacy is demonstrated in the clarity of thinking and the transparency of reporting with NZ Super a clear leader in the responsible investment space, and a bold “growthy” portfolio accentuated by the strategic tilting strategy.

Now New Zealand Super – which turned 20 years old in November this year – is more than 200 people and manages NZ$64.4 billion ($39.2 billion), with a 20-year return of 9.5 per cent per annum. It was also recently announced as the top-performing sovereign wealth fund over 10 years by the International Forum for Sovereign Wealth Funds, with the top ranking for sustainability, governance and resilience; and all the while moving the investments to a sustainable finance approach.

“I’m proud of what the organisation has done,” Whineray says. “Adrian said you have to be careful to distinguish what happened because of you and [what happened] in spite of you. All of this is achievement, the whole guardians has done,” he says modestly. “We have real clarity about our beliefs and line strategy up with that.”

At the core of the portfolio is creating simplicity in portfolio construction and focusing the team on how to move from the reference portfolio to the actual portfolio.

“Out of that we have been quite clear in delineating who is responsible for a decision and accountable for the outcomes, we are clear in our approach to risk,” Whineray says. “We have taken plenty of risk along the way and are good at articulating that risk is not volatility, that is a certainty because of our portfolio, risk is liquidity or losing the support of stakeholders.”

Building stakeholder support

For Whineray managing the funds’ risks is not just about modelling liquidity and investment outcomes but building stakeholder support through communication and education.

“When I first started as CEO in 2018 our annual report included a case study of what would happen if we had the GFC event again. We showed that in that case we would take a big hit and the numbers would be large, but that we understood that, and we think over the long term we will be paid for the portfolio we have,” he says. “One of the more gratifying things for me was when we went into 2020 and had a big drawdown from COVID, I was on the radio explaining we had gone from NZ$48 to NZ$35 billion because markets had gone off, and they understood it. It was vindication of that work around people understanding what we were doing and why. It was personally a good moment for me.”

Many chief executives find that once they’ve ascended to the top job, every now and then it gets a little bit lonely. There’s not a lot of room at the summit, but Whineray says he has been very focused on building the team and culture of the organisation including one of the fund’s values as “team not hero”.

“All of this has been produced by all of us,” he says. “This is important for us. We all succeed by all succeeding together.”

As Whineray leaves the fund where he’s grown up as a pension fund manager, he’ll take time out over the summer with his kids who are now all finished school and his wife who recently completed a PhD. He’ll be missed around the board table, but also at the “Culture Club” staff events, where the Goldfinger James Bond onesy and a karaoke microphone were never far away.

Global asset management firm Robeco has differentiated its ESG assessment methodology to give a more accurate picture of the impact investors have on sustainable development goals (SDGs), according to Rachel Whittaker, the firm’s head of sustainable investment research.

Speaking in a panel session with Del Hart, head of external managers at New Zealand Super – which has used Robeco’s methodology to significantly improve its ESG profile – Whittaker said the Robeco SDG framework contains two critical differences to other ESG ratings methodologies. 

The first is it focuses only on sustainability impact, and does not take into account any financial materiality. “We are purely looking at the impacts that companies have on people and planet,” Whittaker said.

The second difference is a focus on the company’s products and services as its primary impact mechanism. “We look at little bit at operations too, but have a very strong focus, we believe that what a company produces and sells has the biggest impact on sustainability,” Whittaker said.

The panel discussion on the evolution and uses of SDGs was part of the Sustainability in Practice conference, organised by Top1000funds.com and held at Oxford University.

Robeco’s framework takes an “avoidance of harm approach,” rejecting the notion that a negative impact in one area can offset positive impacts in another area. 

“So, in the company’s operations, even if they are really well managed – maybe even reducing negative impacts or having some positive impacts in their operations – that wouldn’t offset a negative impact that we see coming from their products and services,” Whittaker said.

All assessed companies are given an SDG score between minus three and three, and this is made available open source for everyone, including the public and academics.

“That really grew out of seeing many, many more uses to our SDG framework than even we had initially anticipated,” Whittaker said.

Some organisations want to pick out specific SDGs on which to focus as well as the overall score, she said, giving the example of a client with associations with a labor union that wanted to focus more on social issues. 

But making the information widely available has some obstacles, as Robeco cannot share any data that it doesn’t own. Its website only displays overall scores and individual SDG scores, but doesn’t make the underlying data points available as these are sourced from other providers. 

Robeco is now digging deeper on a number of topics, improving its data and forming partnerships with academics. One partnership with a PhD student at the University of Zurich, for example, is looking at the link between SDG scores and controversial incidents.

New Zealand Super Fund , a NZ$64.4 billion sovereign wealth fund, has been integrating ESG into its investment process from its inception 20 years ago, although its approach has evolved considerably over the years. 

Robeco is one of the managers that  worked with NZ Super to incorporate Paris alignment into its multi-factor portfolios.  Hart, head of external managers at NZ Super, said the framework had removed the -3 and -2 companies from its factor mandates, and aligned more closely with SDGs. 

“So we are really improving the ESG profile by quite a significant extent [but] I think it’s very early days for us,” Hart said.

Investors’ approach to ESG has evolved considerably, particularly in the area of engagement with portfolio companies, and encouraging change through active and targeted engagement is “the epitome of what active managers can do,” according to Yuko Takano, senior investment manager, equities, at Pictet Asset Management in the UK.

Speaking at the Sustainability in Practice conference, organised by top1000funds.com and held at Oxford University, Takano said ESG was initially more exclusion-focussed, and evolved towards investing in the leaders in various sectors, but “through backward-looking third-party ratings and not really looking out into the future, which created a lot of valuation bubbles.”

Today’s approach, which she dubbed “ESG 3.0,” goes back to fundamental investing and looks at companies in a holistic manner, she said, “and this is where engagement really comes into play.”

In a panel discussion about accelerating companies’ sustainability alignment through engagement, Takano gave several examples of encouraging change in portfolio companies “in a judicious and thoughtful way.”

One was PG&E, a northern California utility company which formerly had significant fire risk and insurance risk and almost went bankrupt. Investor engagement helped the company to accelerate the process of putting electrical wires underground, which supported a regain a lot of credibility in the market. 

“It’s been one of our best performing stocks,” Takano said.

Another example was Baker Hughes, an oil services company, which is “not a typical company that an ESG fund would own,” but Pictet was attracted to its unique compression technology which had applications in gas, carbon capture and hydrogen.

Engagement encouraged the company to accelerate investment in this area, focusing on the positive outcomes to the environment and potentially greater margins.

A third study was Japanese carmaker Toyota, where engagement from a range of investors encouraged the company to greater disclosure around its technological roadmap in terms of EV commitments, resulting in its share price to leap.

Michael Marshall, head of engagement at Railpen in the UK, said it was important to focus on the “ecosystem for stewardship,” as “a well-intentioned investor–one with net zero ambitions–may not thrive in a broken system.” Collective action is important, he said.

For Railpen this includes being part of the Paris Aligned Investment Initiative from inception and grappling with difficult questions like “trying to define what it could mean for a diversified investor to be aligned with the Paris Agreement.”

Railpen also co-authored the Net Zero Stewardship Toolkit; has formed a trans-Atlantic coalition with some American pension funds to push against dual-class share structures and increase voting rights; and participated in a range of other initiatives.

Innes McKeand, head of strategic equities at USS Investment Management in the UK, said engagement with public companies was “very, very hard,” and can take years for minor wins. Sometimes the quicker solution is to engage policymakers and governments to legislate against, for example, plastic bottles. 

“Get the government or policymakers to change the rules of the game: that’s where we should be changing our influence and our focus, and that’s one of the things we’re trying to get our heads around as a fund,” McKeand said. 

“That involves a lot of difficult things for trustees to grapple with: What’s our reputation risk appetite? How do we engage with governments effectively? How do we move the needle?”

Chair Amanda White, director of international at Conexus Financial–the publisher of Top1000funds.com–asked Rossitsa Stoyanova, chief investment officer at IMCO in Canada, how she was approaching engagement with the fund’s private assets.

Stovanova said with around 40 per cent of its portfolio in private assets, IMCO has identified that investing in the energy transition “is one of the biggest opportunities of our lifetime,” and has developed in-house expertise to help portfolio companies transition and decarbonise.

“It starts from the top of the house in developing the expertise, and then I’m going to get to the engagement,” Stovanova said. 

Engagement then involves picking general partners based not just on their returns but their ESG goals and beliefs to ensure long-term alignment, and working with them to create decarbonising plans that will “make the company more valuable in the future,” she said.

Han Yik, senior advisor to the chief investment officer – stewardship, at New York State Teachers’ Retirement System in the US, said NYS was a slow mover on ESG but had the advantage of learning from others’ mistakes.

Engagement with high emitters in the portfolio has to be more than a tick-the-box exercise, Yik said, and involves building trust and accountability with decision-makers, rather than just dealing with investor relations.

CIOs need to fight back against the politicisation of ESG in the United States by adopting sound governance principles and not allowing their funds to be “pinned down to one side of the [political] spectrum,” according to John Skjervem, the chief investment officer at Utah Retirement Systems. 

Expressing disappointment with how sustainability has evolved in public funds, Skjervem said the issue had been “captured by the elected officials and the political class and has strayed terribly from its original intent,” which was to “put an empirical framework around externalities.”

“I went to college in the early 80s and you know, you study microeconomics and you get to the part where the factory is dumping pollution in the river and the professor shrugs his or her shoulders and says: ‘Oh, well, it’s an externality,’” Skjervem said. “And so I felt like one of the greatest things that’s happened in my lifetime as we have evolved as a society is to say: ‘Hey, we’re not going to tolerate externalities anymore.’”

But after around 2016, ESG “became very narrative based” and lost its empirical foundations, he said.

He was speaking at the Sustainability in Practice conference held by Top1000funds.com at the University of Oxford, in a panel session chaired by Robert Eccles, visiting professor of management practice, Saïd Business School, University of Oxford.

Skjervem, a lifelong surfer, skier, and lover of nature, said the popular view of liberals towards ESG “largely comes down to vilifying big oil or vilifying fossil fuels…and there is no appreciation for the fact that it has to be a transition.”

Well-intending people are thus ignorant of the complexity of the transition that needs to take place, and think that by divesting, the problem is solved. Environmental officials elected on a two-year election cycle are misaligned with CIOs like him with “a 40-year horizon”. This leads to misguided campaigns that hamper efforts to deal with critical issues like climate change, he said.

For example, expanding the power grid in the United States is one of the biggest impediments to decarbonisation, he said, as the legal environment is onerous and punitive. 

Environmentalists had cheered after defeating the 17-year Northern Pass high-voltage transmission line project to bring hydro-electric power from Quebec to the north-east, “even after the developer agreed to bury something like 60% of the transmission lines,” he said. “And so the north-east now will burn more coal.”

There are numerous examples of this kind, he said.

Utah Retirement Systems takes a “both, and” approach, he said, never getting “pinned down to one side of the spectrum or the other.”

“We are capitalizing on the exodus of private equity in oil and gas and we are coming in right behind that and doing direct deals with oil and gas operators,” Skjervem said. “We are doing full spectrum of renewables and we are, to my knowledge, at least the United States, the only plan that has made direct active investments in what I call emerging energy: fusion, fission, hydrogen.”

The fund does not have any investments in coal, he said.

Arguing climate change and sustainability are seperate issues, Skjervem also said “net zero is a waste of time” as most of the world’s population is not in the developed world and aspire for the same lifestyle as rich countries.

“So 1.6 billion people [in developed countries] have created this problem over the last hundred years,” Skjervem said. “I just find it just infuriatingly sanctimonious that we’re going to spend our time and energy on net zero targets when it doesn’t matter, because the only thing that matters is developing clean energy technologies so that those 5.2 billion people don’t do what we did.”

ENDS