Leading institutional investors said the industry could benefit from having a franker conversation about sustainable investments, both in terms of what climate goals are achievable on the path to net zero and what is behind the pushback on ESG funds.  

The comments, made during the Top1000funds.com Fiduciary Investors Symposium at Harvard University, came as only 15 out of the 194 countries pledged to the Paris agreement submitted their latest plans for slashing greenhouse gas emissions within the deadline. The proposal, known as nationally determined contributions (NDCs), are renewed every five years.  

“We’re big supporters of the Paris Agreement, but if you look at a lot of the work that came out immediately following that, they all called for massive, precipitous, immediate declines in fossil fuel use and emissions,” said Michael Cappucci, managing director, compliance and sustainable investing at Harvard endowment.  

“Think on the order of what we experienced in 2020 during COVID. But every single year from now until 2050 those were never realistic assumptions.  

“I think we would all be better served having a more realistic conversation around what a pathway to net zero might look like.” 

This is not to suggest that everyone stops trying to decarbonise, but Cappucci said it is only one part of the bigger change investors can propel. Harvard endowment has committed to a net zero portfolio goal by 2050 and no longer holds positions in publicly traded fossil fuel companies.  

It is using the framework developed by Breakthrough Energy – Bill Gates’ clean-tech investment firm – to find opportunities in new climate solutions around the five pillars of manufacturing, electricity, agriculture, transportation and building.  

“As investors, all we can really do to impact change is invest,” Cappucci said. 

“The impact we have, is the positive things we invest in, hopefully for the future to promote growth and including in decarbonisation.” 

Generation Investment Management co-founder and partner Colin le Duc said another issue that warrants some candid discussions is the performance of ESG funds.  

“A lot of people have tried to think about this pushback on sustainable investing, or the green retreat, or the green hushing – whatever you want to call it – as being a political thing. I actually personally think it’s because a lot of sustainable funds haven’t performed,” he said.  

In it for the long haul

In public markets, the Nasdaq Clean Edge Green Energy index has “wildly” underperformed global stocks, especially since Russia’s invasion of Ukraine which saw the “fossil fuel complex come back into fashion”. While in private markets, there are promising green technology companies like Northvolt which end up failing spectacularly despite backing from corporates and sophisticated institutional investors, le Duc said.  

“It’s really important to recognise that this energy transition, land transition space is just like any other investing – it’s hard, and one needs to be specialist to really execute properly and seize the opportunities in this space with a lot of volatility. 

“Our best vintages in Generation’s performance history have always been when the tourists have gone home and people who leant into climate or sustainability have suddenly got distracted by something else and gone away. 

“[And the entrepreneurs will ask] are you a private equity firm that I really trust to stick with me if the going gets tough on sustainability for a period of time, or not?” 

For most asset owners, sustainable investing, like everything else they do, is about anticipating the long-term trend. For the Netherlands’ PGGM, this means the fund is not only investing in new technologies but also improving the sustainability of older assets.  

“If you look at the current energy consumption for the next few decades, the demand for energy is going to outpace whatever we are able to build in terms of sustainable energy,” explained chief fiduciary manager Arjen Pasma.  

“What can we do to make what we are doing right now more energy efficient?” 

For example, PGGM has been purchasing older office buildings and improving their energy efficiency, so that they can satisfy European regulations standards and remain eligible as rentals after 2027.  

The fund also holds windmills in the North Sea which are made of steel produced using fossil fuels – that manufacturing aspect could also be improved, Pasma said.  

All these investments are in the core part of what the fund calls a core satellite sustainable investing approach. The core part, which accounts for about 95 per cent of the assets and is where the pensions are paid out, has a 3D investing framework emphasising risk, return and sustainability.  

“In that part of the portfolio, we’re not looking for sustainability just for the sake of sustainability. We look for great investment opportunities,” he said. 

But in the satellite parts, the fund conducts impact investments around three themes: energy transition, healthcare (the main industry for its fund members), and food transition.  

While return still matters, this part of the portfolio is about maximising impacts, Pasma said. For example, PGGM usually has a minimum ticket size of €100 million for any investment but it is making an exception when investing in healthcare. It is primarily a venture capital investor in that sector and is trying to address the “lack of functioning capital market union” for innovative companies looking for funding in Europe.  

PGGM also has a broader exclusion list, but Pasma said the goal is not to “exclude companies and then claim that the resulting portfolio is more sustainable”. It doesn’t invest in certain countries or companies because its plan participants do not want it to.  

“We did calculate the numbers over the last 13 years, and the net [performance] result [after adding exclusions] is plus three basis points. 

“So our data shows there is no indication that we actually made a lot of money out of those [exclusions] as of yet. On the flip side, there’s also no indication that we lost any performance.” 

The healthcare sector emerges as an attractive destination for asset owner capital as new technologies reshape established and startup companies and regulatory headwinds abate, according to a panel of investors.

“[Healthcare] is very ripe for investing and has been for a long time,” Paul McCracken, managing director of growth equities at the $470 billion Canada Pension Plan Investment Board (CPPIB), told the Top1000Funds.com Fiduciary Investors Symposium at Harvard University.

“It’s huge, it’s growing fast, it has historically, both in public and private equity, been a category where specialists have reaped excess returns. In this environment, where change is accelerating, that view holds as much as ever.”

CPPIB has some venture capital exposure for “earlier stage, moonshot-type investments”, but it typically takes a more diversified exposure, with its overall program covering everything from bets on small, unproven companies to classic growth equity.

“I think for a lot of generalist investors it’s a very tricky area,” McCracken said. “The number of things you have to keep track of, the number of risks in terms of projecting outcomes, is getting harder. And it seems like a great period to continue to allocate to healthcare, and it’s a great place to deploy capital for a large asset allocator.”

Bolstering that view is the fact that healthcare is finally going to start integrating with technology in a more holistic way, following years of predictions that have – until now – not come to pass, according to Philip Broenniman, managing partner and portfolio manager at Varana Capital.

“We’re really at a nexus where there’s artificial intelligence, but also robotics; two years from now there’s going to be opportunities we never imagined. There will be things I can imagine,” Broenniman said.

“AI helping reduce the need for phase one studies by creating new combinations, new therapies and… being able to test automatically, electronically, being able to test therapies and then maybe accelerate the approval process. I don’t know that robotics, at least in the near term, will be used for something like general surgery, but for micro activities within and without the operating room? Absolutely. We are really going to see a mashup of healthcare and technology now.”

Healthcare typically lags behind tech by a decade due to the fact that it’s a highly regulated business, while technology companies can go directly to consumers without the need for lengthy trials. The industry is now at an “inflection point”, according to Daniel Matviyenko, managing director and portfolio manager for healthcare strategies at Jennison Associates, but it’s “going to take a little bit more time”.

“On opportunities, we love to be contrarian,” Matviyenko said.

“There was some commentary earlier about budgets being cut, but we’re very excited about the life science tool space… thematically we think that sector is going to do very well going forward, because you had multiple years of underperformance. A lot of those headwinds, we think will abate. The NIH funding won’t get cut 40 per cent and China, once we’re done with this nonsense trade war, will come back. And lastly, we think pharma and biotech are returning to spend.”

But investors should perhaps temper their enthusiasm for the next shiny thing. Some of the biggest value creation has come from established companies with established therapies.

“Leading into the pandemic, there was a lot of enthusiasm about AI and cell therapy and gene therapy, mRNA,” McCracken said.

“And I think we’ve seen sort of moving through various stages of the trough of disillusionment, you know, in each of these categories. Where has the most value being created? It’s been in obesity, and two publicly traded companies. It’s kind of like the Nvidia moment for healthcare.”

“This information was in plain view, and very astute public markets investors took very large positions where they saw real indications from human clinical trials. These are the things that are going to move the needle on big cardiovascular outcomes. So it’s a good object lesson for me anyway, that we ought not to be looking through one lens to see where the value creation is going to be.”

Stronger liquidity management through a total portfolio approach (TPA) can do more than manage real-time risk exposures – it can also help generate alpha, according to panellists at the Fiduciary Investors Symposium at Harvard University. 

The $533 billion CalPERS is one of the largest asset owners currently planning its own TPA rollout, which will bring several benefits including a better view of the pockets of liquidity residing across its balance sheet. 

“The total fund portfolio management team has been huge proponents of pushing for this total fund system that we’re implementing,” co-head of treasury management and head of liquidity, Jonathon O’Donnell, said, “and we can easily make the case that these activities – even on the margin – will pay the whole bill of implementing a gigantic system implementation.” 

CalPERS currently employs multiple order management systems, which makes it challenging from a centralised funding perspective to minimise cash drag through strategies such as securities lending, O’Donnell said. 

“The journey that we’re embarking upon right now is going to be a long and a hard one, I think, from a technical perspective, but one that is absolutely critical to getting us off the ground.” 

United Nations Joint Staff Pension Fund chief executive, Pedro Guazo, said liquidity management “helps on the defence, but should be used on the offence”.  

“In the absence of information… we end up having much more liquidity than what we need because when you don’t know exactly how much you will need, and how much you have, you tend to overstock. And of course, there’s an opportunity cost for that. So if we get better clarity on the liquidity management and better cash flows expectations, we can deploy that capital into something much more profitable.” 

The United Nations Joint Staff Pension Fund is currently facing several liquidity challenges including lower contributions from UN member nations, fewer contributing staff as countries pull back, and falling distributions from private assets in a more difficult market environment. 

“We’re taking liquidity as a systemic issue based on TPA, not only as a constraint in your portfolio construction under SAA, but a strategic discussion, and really understanding what is the real liquidity, and at which prices that you can drill on whenever your system starts to crank. 

However, Guazo said the disparate quality and fragmentation of private asset information – which underpinned valuations – created an even bigger challenge for cash forecasting. 

The necessity and limitations of models  

SimCorp head of product, analytics, Ian Lumb, said the systems that underpinned a TPA had to provide multiple lenses of risk, but modelling was constrained by limited private market data. 

“To build models where you can think about digging into the correlation across markets, between public and private, about the interplay of the cost of capital and liquidity, is really key,” he said.

“It’s not easy because there is no such thing as perfect data, especially in the illiquid space.” 

He said that “no models are perfect, but some are useful,” and that portfolio stress tests should be aligned with scenarios that cause issues for an asset owner’s board or would attract the attention of regulators. 

CalPERS’ O’Donnell said preparing to implement a TPA is about preparedness, with liquidity management the most important component. It underpins the ability to stay on strategy and to make capital calls, as well as make pension benefit payments, which are predictable and stable for CalPERS. 

“It’s all the other ‘what ifs’ that we’re talking about in terms of scenario testing and what happens to your margin, what happens to your securities lending book, how do you hedge different market environments, etc that is kind of the growing piece of how you prepare to enter into that TPA world.” 

Artificial intelligence and digital transformation are the hottest themes in infrastructure investing, not only among private investors but also increasingly state governments.

Just this month, Saudi Arabia unveiled one of the biggest state AI infrastructure investments, with plans to buy billions of dollars’ worth of advanced chips from US manufacturers including Nvidia and AMD.

But despite the overwhelming bullishness, some asset owners are wondering when – or if – AI can deliver a miraculous productivity gain and benefit the underlying infrastructure such as data centres.

“I am actually a little bit more – let’s call it sceptical – of AI in the longer-term than I maybe started with,” said Nick Khaw, head of research and co-head of private market at the $38 billion Khazanah Nasional, at the Top1000funds.com Fiduciary Investors Symposium at Harvard University.

“As a macro economist, I think one thing that’s pretty clear, and it’s been documented by economists from down the river at MIT, is that it [AI benefits] really hasn’t shown up in any productivity numbers.

“So either we’re measuring productivity wrongly, which is possible, or it’s not as general purpose as we think.”

With that said, AI and digital transformation is one of the four megatrends Khazanah is monitoring (alongside climate, demographics and de-globalisation). The Malaysian sovereign wealth fund’s philosophy to private markets investment is to look for “something which looks like a headwind today, but it’s a tailwind in the future, because you can buy low and then hopefully get a return later”, Khaw said.

Compared to pure AI technologies such as large language models, Khaw believes robotics is more likely to have a meaningful impact on the real economy particularly in relation to blue collar jobs. But that comes with its own set of potential problems.

“I do worry about data centre usage, but I also wonder for some of these things… if the productivity numbers don’t match up, or if they do and people lose jobs, will the politics push back on something like AI and say, look, too many people are losing jobs. We can’t afford a universal basic income. Maybe let’s stop doing this stuff.”

An interesting dilemma for pension funds in the scenario of new technologies leading to jobs losses is that the workers impacted could be their fund beneficiaries.

When asked how the fund balances its investment and fiduciary needs, Andrew Siwo, head of sustainable investments and climate solutions at New York State Common Retirement Fund, said the fund has set important parameters around workers’ rights protection in portfolio companies.

“I would say more broadly, we do have, at least in private equity, a responsible workforce management policy that addresses our expectations for sound labour management principles,” he said. The policy directs that, for example, the fund’s private equity managers should encourage industry standard wages and benefits and minimise adverse impact on workers when there are mergers and acquisitions.

While opportunities around AI are attractive, Siwo added there are risks and inaccuracies prevalent in AI that are concerning.

“New York State Comptroller, Thomas DiNapoli, the fund’s sole trustee, released an AI audit report recommending the use of governance structures to prevent AI abuse and inaccuracies. Each investment manager that has received capital from us must complete a scorecard to assess material investment risks/opportunities including environmental, social, and governance factors.”

Resilient to volatile trades

Executive director at IFM Investors Adrian Croft is more optimistic about AI and said it is “the most consequential megatrend” for infrastructure investment now. Its most prominent manifestation is data centres, but that booming demand also extends to energy infrastructure due to the substantial need for power.

“There’s certainly a case for a huge amount of potential investment in energy infrastructure, generation and grid enhancement,” he said.

“Renewable energy is going to play a huge part of that… but we think there’s still going to be a role for gas because these data centres do need 24/7 firm capacity.”

But an even longer-term play is fibre networks, which Croft admitted haven’t been the easiest area for equity investments – at least in the US and parts of Europe. This is induced by issues including rising build costs and overbuilding in some markets.

“It has been a tough spot, but the development of large data centres in secondary or emerging data centre markets are all going to need to be connected, so there could be a really good case for more fibre,” Croft said.

While global companies are rushing to establish domestic supply chains amid the uncertain trade environment, Croft believes infrastructure is an asset class resilient to the ongoing impact of localisation.

“If your infrastructure is essential to the community it serves, it’s still going to need to be there. People are still going to keep using energy, water and gas. They’re still going to need to get to work, get to school or get home in the evening. They’re still going to want to communicate and use the internet,” he said.

“But not everything is going to be unscathed… there’s a lot of focus on what’s going to happen with global ports in particular, with volume through US ports going to drop precipitously in coming months. We’ll see.”

With risks come opportunities, though, as Croft believes there could be more demand for local infrastructure like logistics and cold storage.

Granted, “it might not be the most efficient way of doing things if you have to replicate what already works pretty well in various parts of the world,” but it could add more opportunities across the spectrum from core infrastructure, infrastructure adjacencies, to value-add strategies, he said.

Specifically in relation to AI infrastructure, Khazanah’s Khaw said a driver of localisation is data sovereignty concerns, which may prompt companies to keep centres capable of processing data for advanced AI applications domestically.

Reforming European capital markets could unlock a multi-trillion-dollar investment opportunity as investors seek alternatives to the US in the wake of Liberation Day, said Apollo Asset Management co-president John Zito. 

“If you look at the marketplace, you have a $24 trillion economy in the eurozone, versus a $30 trillion in the US, of which there’s $15 trillion securitised in the US and $500 billion of securitised market in Europe,” he said at the Fiduciary Investors Symposium at Harvard. 

“There’s a multi-trillion dollar opportunity to unlock the bank’s capital but that requires 35 countries to get aligned on policy, which is hard.” 

The Trump administration’s extensive Liberation Day tariffs in April shocked markets and undermined confidence in the role of the US as the natural home of capital and innovation.  

Zito said the balance of trade argument behind the tariffs neglected to consider the massive foreign direct investment coming back into US capital markets, which propelled growth and underpinned higher multiples in public markets.  

“One dollar spent on a good versus one dollar spent in equity that can be leveraged and then multiplied is worth infinitely more than the dollar on goods,” he said.  

However, the fast growth of large asset owners such as sovereign wealth funds meant they had limited options to deploy their funds outside of the US. Zito said he was positive that Europe would ultimately respond to the opportunity. 

Late last year, the European Commission appointed former European Central Bank President Mario Draghi to produce a report aimed at boosting European competitiveness. It highlighted the role of securitisation to increase the competitiveness of European financial markets, which remains heavily reliant on bank financing.  

“I think you’re going to see the German spigot turn for the first time in a decade in terms of fiscal spend. I think private credit and private capital will be a big proponent and part of that,” Zito said. 

“And just Germany turning on, particularly in conjunction with France, is going to change the whole narrative and just way the way people think about growth in the region. I’d love for them to consolidate their exchanges. I’d love for them to make it easier to do business.” 

While geopolitical forces continue to reshape the world, a technology arms race is also underway. Zito said the impact of artificial intelligence was impossible to assess, which made it a significant risk.  

“AI was not in any single investment memo for a software buyout in 2018 to 2021 and it was the single largest sector that bought out at 11 times revenue, and we still have not marked it. Meanwhile, I promise you that there will be massive amounts of disruption in software. It is the first thing that will happen. It’s the easiest thing to disrupt.” 

An economic slowdown would cause a re-rating of the sector as software retention rates declined. 

“In the LBO space, 40 per cent of private credit is software and in the equity space it’s a big percentage of total private equity outstanding, particularly stuff that has not been sold.” 

Zito said the pace of change was fast and companies needed strong leadership to pivot their strategies and a willingness to change. For example, just a couple of years ago, Microsoft was focused on workflow software but is now investing billions of dollars in AI.  

He also said it was time for large long-term asset owners to get more dynamic around their fixed income pools, given the end of zero or negative interest rates. 

“I think you’re going to see the sovereigns and the places that actually use their duration of capital to fund what is the two biggest gross spends – which is effectively infra and defence – they’ll end up having much larger pools and end up being the leader.” 

Equity markets have been the growth engine for the portfolios of many asset owners globally, fuelled by decades of low interest rates, rising economic growth and a relatively benign geopolitical backdrop.

But that seems like it’s beginning to change. Faced with increasingly fickle public markets, fewer and fewer companies are pursuing IPOs, while concentration risk has big investors questioning the size of their exposure to liquid assets.

“I think we’re seeing an evolution towards private markets because public markets are not functioning as well as they used to,” Anne-Marie Fink, chief investment officer for private markets and funds alpha at the $132 billion State of Wisconsin Investment Board (SWIB), told the Top1000funds.com Fiduciary Investors Symposium at Harvard University.

It’s getting “harder for companies to live in the public markets”, Fink said. But private market investing can remove some of the intermediary layers between companies and investors and allow both parties to properly orient their strategy towards the long term. SWIB’s portfolio is 65 per cent public assets, 20 per cent private equity and debt, eight per cent in real estate and 19 per cent in inflation-sensitive investments.

“We’re not all in privates, and we do think that publics have a place in our portfolio – in fact, a bigger place,” Fink said.

“We find that we get better returns from privates, just generally, relative to publics. We think they have advantages in terms of the way the governance works, the ability to plan things over a four- or five-year timeframe as opposed to a quarter-to-quarter timeframe, and then there’s the collaboration between your owners and your management teams of your companies. So for that reason we expect that private equity will outperform public equity.”

Gold rush

But the weight of money moving into private markets – a gold rush for established and new managers – belies the fact that many of the fund and fee structures on offer have not been particularly advantageous to their investors, while plenty of private market managers have grown up in the same benign macro environment that’s propelled public equities higher.

“There’s a lot of people that haven’t lost,” said James Clarke, global head of institutional capital at Blue Owl. “I’m 50; there’s a lot of people that are 40-odd, and they were 25 during the Global Financial Crisis, even younger, and they’ve had a tailwind of low cash, they’ve had a tailwind of people increasing private markets exposure.

“I think that the whole system has changed; I think that it’s moved from a tactical to a strategic allocation. I would say if Blue Owl, or formerly Owl Rock, had started in 2025 and not 2015 there would be zero reason for us to exist. None. I honestly mean that, and I mean that because a new entrant in this space right now would be awfully difficult. The world needs another private credit manager like it needs a hole in the head.”

To stay relevant, GPs can’t poke their heads out every three years when they want money for a fund.  LPs want partnership for the long-term value add it brings to their portfolios, and the firms that don’t get that are “going to languish”.

“Why is that beneficial? There’s scale,” Clarke said.

“There’s a fee premium through co-investment, it’s a volume discount that only a handful of managers can provide. Number two, they can access you in a way that’s more customised to their portfolio. It’s not a fund where they’re riding alongside XYZ $5 million investor. It’s SMAs, it’s funds-of-one, co-investment programs. And I encourage everybody to make sure that co-investment program is as tight as possible and replicates what the portfolio looks like, because I’ve seen co-investment programs at other firms and they can be 400 to 500 basis points off.

“There’s also fees. It’s not ‘we’re charging on committed capital’, it’s invested capital, in many cases it’s flat fees. The returns have compressed. I think it was a capital appreciation strategy in private markets and it’s now migrated to a capital preservation and income generation strategy, and that’s been the biggest change.”

Meanwhile, Kevin Kneafsey, senior investment strategist for multi-asset solutions at Allspring Global Investments, anticipates a “massive shrinking in this space” as more and more LPs realise that large chunks of the private credit, equity and real estate they’ve been buying offer them only “leveraged beta”.

“There’s a group in Chicago, Delaware Street Capital, that replicates private market assets with public market assets. The first thing they do is match the sector; the second thing they do is match the leverage. And if you do that you get a lot of what you’re getting. So if you want to pay two and 20, pay it for the alpha portion above the leveraged beta portion. I think that’s a washing out that’s coming. I think the fee pressure is coming.”

Kneafsey also thinks the market has gotten too large and that big investors “don’t need more of this” – but that many of the managers that already exist are solid, with strategies that make sense.

“When I was at BGI, back in the hedge fund heyday of the early 2000s, our CEO said there are now 5000 hedge funds. And he said there aren’t 5000 really smart people. Well, there are 17,000 private equity firms in the US. I guarantee you there are not 17,000 really smart people, and they’re all not in private equity. So this space is due for a real big shrinking and a rewriting.

“Do I think it’s going away? No, it makes a tonne of sense. There’s lots of reasons to finance companies in different ways, whether it’s venture, whether it’s private equity buyout or growth, whether it’s private credit funding these things. But the way it’s being done, the way it gets paid, the transparency – all of those things need to change.”