Denmark’s largest pension fund, the DKK 732.6 billion ($98 billion) ATP, has just posted its worst loss ever, shedding nearly DKK 58 billion ($8.2 billion) mostly in its investment portfolio. Rising interest rates and falling equity markets hit the allocation, impacting investments in government and mortgage bonds and listed equities particularly.

The return-seeking fund, run on a risk-parity basis since 2005, introduced four risk factors in 2016 based on equity, interest rates, inflation and other risk factors – namely illiquid risk factors and an allocation to long/short hedge funds or alternative risk premiums. The strategy has always sold itself on an ability to function well in almost any market environment due to its perfect balance between different asset classes.

Despite the latest results and other investors losing faith  with risk parity, ATP’s CIO Mikkel Svenstrup tells Top1000Funds he is sticking with the approach.

“ATP’s long-term strategy for the investment portfolio is to follow a balanced risk strategy in our four factors,” he says. “That hasn’t changed just because this year the rates factor has underperformed equity. A more traditional 60/40 portfolio would only have done slightly better.”

Svenstrup continues that in today’s stagflationary world, where central banks are fighting inflation by rising rates, none of the three main factors will perform. The largest positive contributions in the recent results came from the holdings of inflation-related instruments.

It means the most important decision lies around whether to increase or reduce the risk level, and during the first six months of 2022,  Svenstrup says ATP reduced the level of risk in the investment portfolio. Levels published at the end of 2021 marked market equity factor at 47 per cent, interest rate factor at 32 per cent, inflation factor at 14 per cent and other factors at 7 per cent.

Risk parity experts say that when interest rates are rising, risk parity can open the door to hidden interest rate risk seeping into other factors and upsetting the balance. For example, high interest rates can convert into lower equities. Rising inflation is another source of disruption because of its impact on interest rate risk. In short, the different factors may end up throwing off the same cashflows and stack up the same exposures. It can leave risk parity investors struggling to diversify and reduce risk – or running more risk than they thought they had.

Positives

Svenstrup  stresses that despite the losses, the basic security of ATP’s guaranteed pension is unchanged because of its large hedging programme.  “ATP protects its pension guarantees by hedging the interest rate risk allowing us to ensure that all our members – more than 5 million in Denmark – receive the pensions promised regardless of interest rates rising or falling. ATP will maintain its disciplined approach to risk management as a long-term investor.”

The funded ratio is secure, he continues. “ATP started 2022 with a funding ratio of 120 per cent after paying 4 per cent general bonus to all our members and now the funding ratio has dropped to 117.4 per cent which is in line with the historical levels.”

“No doubt we have had a large loss in the investment portfolio. However, given that the returns the last three years were 44.2 per cent, 23.3 per cent and 35 per cent – a half year return of -36.4 per cent is a poor outcome but not at all inconsistent with our high risk strategies,” he concludes.

Cryptocurrencies do not live up to the investment hype and offer nothing but enormous volatility to institutional portfolios, according to PGIM’s mega-trend research team.

Cryptocurrencies “have no place in an institutional portfolio,” but investors should be on the lookout for the emergence of collateral technologies that will be critical to the distributed ledger ecosystem, according to award-winning macro economist Shehriyar Antia.

While it is too early to tell exactly what role distributed ledger technology will play in the future, it will rely on a range of supporting technologies if it does truly change the world, in the same way the internet revolution was enabled by things like Wi-Fi and mobile phones, Antia said.

Antia is the head of thematic research at PGIM, the investment management business of American life insurance company Prudential Financial. Speaking with Julia Newbould, managing editor at Conexus Financial, on the Insights for Outcomes podcast, Antia said PGIM’s megatrend research team was drawn to the phenomenal growth of crypto assets, with close to 20,000 different crypto tokens and crypto currencies, and enormous valuations bringing the crypto market to around $3 trillion at its peak last year.

Institutional clients were asking how suitable cryptocurrencies were for fiduciary investors, and whether they would bring anything new to their portfolios, Antia said. Was it an inflation hedge? Did it offer returns uncorrelated to other asset classes, or strong risk-adjusted returns?

Being detached from governments, financial markets and central banks, these assets may indeed offer some unique investment traits, Antia said, so his group set out to “cut through the hype,” concluding ultimately that they had little to offer.

“We looked at all of Bitcoin’s, 13-year history and we found very little evidence that cryptocurrencies had any enduring investment superpowers,” Antia said. “It simply does not live up to the investment hype.”

A good example is Bitcoin plummeting more than 60 per cent this year despite inflation soaring around the world, Antia said, destroying its credentials as an inflation hedge. And when markets around the world crashed in parallel during the onset of Covid-19 in early 2020, Bitcoin and Ether fell even more sharply than equities, commodities and fixed income.

In its 13 year history, Bitcoin has had more than 25 episodes of 20 to 25 per cent drawdowns, and a handful of 50 per cent drawdowns, while stock markets during this time have had only two or three drawdowns of 25 per cent, Antia noted.

“One big conclusion from our research was that cryptocurrencies have no place in an institutional portfolio, and this is just as true at $60,000 back last year as it is today with Bitcoin at close to $20,000,” Antia said. “Bitcoin’s only extraordinary superpower…is to add to portfolio volatility in really big seismic waves.”

But while highly critical of cryptocurrencies, PGIM’s research did find strong potential in the underlying distributed ledger technology and the real world applications that come out of it, although “it’s probably a bit too early to tell right now exactly what those would be.”

Likening distributed ledger technology today to the early days of the internet in the late 1990s with enormous excitement around Netscape, Hotmail accounts and askjeeves.com, Antia said the internet “proved to be a transformative force that genuinely changed the world [but] it was not these first manifestations that did it.”

Collateral technology like Wi-Fi, mobile phones, standardised internet protocols and others played crucial roles, and it took the world at least a decade to figure out “what exactly to do with the internet.”

Such collateral technology for investors to seek out could be infrastructure supporting the ecosystem and solving major challenges such as interoperability–that is, one blockchain speaking to another–or fraud prevention mechanisms that may have a first-mover advantage as central bank digital currencies emerge.

But currently it remains unclear what the technology landscape will look like, and how it will be monetised, Antia said.

As it stands, cryptocurrencies are “not very good currencies,” Antia said, as they fall short of meeting the three basic functional requirements for a currency. They are not a reliable store of value, they are rarely used as a medium of exchange, and they are not a unit of account as very few real world goods and services are priced in cryptocurrencies.

Some investors will no doubt argue Bitcoin will regain its value to reach new heights as it did after last year’s crash of more than 50 per cent, Antia said, rejecting this as “hogwash”. This time the drawdown has wiped out critical infrastructure including multiple exchanges and crypto lenders, severely damaging investor sentiment and revealing “some of the hidden fragilities and vulnerabilities in the broad ecosystem [and] there are likely more,” Antia said.

Bitcoin is also “really slow,” Antia said, processing about “seven transactions per second compared to the five or six thousand per second of the Visa network.” From an ESG perspective it is highly problematic as well. One Bitcoin transaction has a similar carbon footprint as almost two million Visa transactions, he said, with the Bitcoin blockchain alone using as much electricity annually as the entire nation of Thailand.

Being trustless and decentralised, cryptocurrencies have uses for nefarious actors in evading sanctions and taxes. This lack of transparency poses issues for authorities around money-laundering, and presents red-flags for ESG-minded investors as well.

Two strategic asset allocation priorities are driving decision-making at the United Kingdom’s LGPS Central, the £55 billion asset manager for eight local authority pension schemes in central England. Allocating to both illiquid markets and inflation-proof, cash generating assets are the priorities as the fund navigates both runaway UK inflation – forecast at 18 per cent next year – and a shift in the saving trajectory of many of its one million beneficiaries from accumulation to income generation.

Like most other LGPS pools, Central has pooled around half (£33 billion) of its total assets so far, explains CEO Mike Weston in an interview with Top1000Funds.com. However, that belies a huge variation amongst the eight client funds’ individual pooling progress since Central was up and running in 2018, with some transferring 90 per cent of their assets – but others just 20 per cent.

It’s no reflection of a dearth of investment opportunity insists Weston, who lists asset allocations on offer spanning most flavours of public equity and fixed income alongside private equity and private debt. The next product launches comprise external mandates for direct and indirect real estate and total return.

Of all Weston’s tasks since taking the helm in 2019, deciding whether to run a new allocation internally or externally demands particular thought. Central is one of five of the eight LGPS’s pools that is authorised and regulated by the Financial Conduct Authority to manage its own assets. As an asset manager, the more Central can manage in-house the better, but internal management is far from given and for now, only comprises a gilts portfolio, private equity co-investment, passive equity and a climate focused fund that tilts to or away from companies relative to the transition.

Weston says he has developed an agnostic view to internal management, guided by client preferences. This, in turn, is governed by whichever approach brings the best net of fees performance. “To manage an allocation internally we have to be convinced we can deliver a market-matching performance, and you can’t do that in every asset class,” he says.

The quest for performance net of fees leads him to defend the UK pools that haven’t set up their own asset management organizations, opting instead to wholly outsource to investment managers. When pooling kicked off in 2016, it was assumed pools would manage most of the money in house. But persuading pension schemes focused on performance to hand over assets to new companies without a performance track record, simply because of perceived lower costs, was always going to be a struggle. “It was a false premise,” reflects Weston.

No Regrets

LGPS Central took the decision to set up a separate investment management business, going for the broadest solution to give it every opportunity to act in the best interests of clients. “There was a belief at the time we would be competing with commercial investment managers; we needed to be FCA regulated to compete on a level playing field with systems and processes on a par with the best.”

Although he wasn’t around for that decision-making process, Weston is convinced it was the right one. “With £30 billion pooled so far, we are a big investment manager. Being FCA regulated is where we should be.” Looking ahead, will Central continue to farm out more assets? “My focus is on the best interests of LGPS Central’s client funds, what products they need and what will bring the best performance,” he says.

Internal management

For all his careful pragmatism on the pros and cons of internal over external investment, Weston can’t hide his pride in LGPS Central’s new internal team, blossomed to 80-strong in the last four years. Around half work in investments, making Central a significant asset manager outside the UK’s financial centres of London and Edinburgh before levelling up became a government manifesto pledge. “We’ve been levelling up since 2018,” he says.

Team members are increasingly recruited from local universities, witnessed in the candidates making it onto the latest recruitment programme. “We’ve just had our third graduate entry cohort. We saw 150 applications for 4-5 places – it was really pleasing,” he says.

Mandating externally means LGPS Central is pouring increased resources and time into due diligence. Manager selection is focused on three key elements – people, process and performance – in a strategy designed to try and predict performance as much as possible. “It’s easy to know what the fees are going to be but it’s difficult to predict performance,” reflects Weston.

As soon as client funds decide on a strategy or asset class the team begin looking for managers, with contenders put through an internal sustainability benchmarking and scoring process before going out to tender. “Manager selection kicks off as soon as we enter the launch phase. We select managers based on performance data and multiple meetings in-person to get underneath the surface of what’s going on. It’s not a quick process; we will take as long as we need to get comfy.”

Once mandated, contact remains regular and relationships are regularly reviewed (it’s just coming up to Central’s first three-year review of its earlier mandates) to ensure managers are delivering what they promised. However Weston stresses that the relationships are long-term: changing a manager is expensive and complex.

 

Rising interest rates are placing unprecedented liquidity constraints on some of the United Kingdom’s largest corporate pension funds, prevalent users of LDI strategies. According to a recent research note from consultancy Mercer, a growing number of schemes are having to sell liquid assets like equities and investment grade corporate bonds to raise cash to maintain the level of leverage needed to ensure they can hedge their liabilities.

“To maintain leverage at acceptable levels, pooled LDI funds are issuing regular collateral calls,” says Daniel Melley, head of UK investments at Mercer. Leverage, or borrowing in order to gain more exposure to rates and inflation movements, is used within LDI mandates for risk management purposes versus the liabilities. It is also used to enable schemes to buy growth assets that otherwise would not be possible. But as interest rates track up, it is leading to losses on the gilt or swap assets held within these portfolios, in turn leading to rising leverage ratios.

Action

Meeting margin calls requires quick action, warns Melley. “In the short-term, pension funds will need to respond to collateral calls from their LDI managers in order to protect hedging levels. The key point here is that eligible assets (typically cash / gilts) will have to be made available quickly, in a matter of days.  This could be challenging, particularly where there are currency implications from selling growth assets.”

Given inflationary pressure in the economy is unlikely to abate in the short-term, it is likely that central banks will continue to increase interest rates. “If the pace exceeds the markets expectations, it will result in further strains to LDI portfolios,” predicts Melley. “A significant proportion (of pension funds) will need to act quickly to ensure they have dry powder available to meet further collateral calls, if interest rates rise further.”

Moreover, James Brundrett, senior investment consultant and partner at Mercer, warns that since interest rate rises this year have now surpassed the typical cushion set in place in LDI portfolios – a 1.5 per cent rise in long-term gilt yields – many pension funds collateral buffers are depleted. “Pension funds collateral is depleted, and we are seeing clients looking to replenish.”

The problem might not only turn pension funds into forced sellers. Some may not be able to hedge as much as they have done, and may have to accept lower hedge levels should they run out of liquid assets that could be used to top up collateral in their LDI strategies. Cue increased risk levels and potentially wider implications from a covenant, funding, investment strategy and Journey Plan perspective.

Positive

Positively, Brundrett points out that pension fund liabilities are also falling. Rising interest rates will also lead to falling liability values, potentially reducing the size of deficits and increasing the impact of contributions. “As interest rates go up hedges are losing money, but liabilities are also going down,” he says.

However, critics counter that the value of liabilities should always be seen in relationship to the value of assets, noting the value of assets may fall more than the value of the liabilities if funds have had to sell assets to meet margin calls.

“It is the difference between the value of assets and liabilities that is important, and the value of assets will fall through forced sales,” says Professor David Blake, Director, Pensions Institute, Bayes Business School, City, University of London, who argues pension funds should not be borrowing in times of economic uncertainty. “Having to sell assets in a falling market is pure speculation. It is particularly challenging if they all have to do this at the same time and liquidity disappears.”

Brundrett and Melley insist that overall LDI portfolios have passed the test of managing funding level volatility in the past decade and remain a key building block for pension fund risk management.

But important risks lie ahead. “Governance models will be called into question to see if funds have been able to react as quickly as hoped. Boards will need to know where to go if they need more collateral; if it’s not corporate bonds, where do they go?” If pension funds are forced to turn to illiquid assets, it opens a raft of new value and pricing challenges “Illiquid assets are not mark-to-market. In allocations like private equity, the pricing is out of date,” concludes Brundrett.

 

Elizabeth Fernando joined NEST as head of long-term investment strategy in November 2020. A year later she became deputy chief investment officer but is still very much focused on long term strategy.

“When I joined I went to lunch with Mark and he gave me a sticky paper with three things on it,” she says.

On that paper Mark Fawcett, the fund’s CIO, had outlined the areas he wanted Fernando to focus on: Think about how assets are allocated; how the internal asset allocation process works; and help with the development of the leadership team.

Now as Fernando talks to Top1000funds.com in a rare in-person interview at NEST’s Canary Wharf office, she says the fund is preparing to change how it allocates.

The change comes as it reviews its objectives – what it is actually trying to achieve – and how to allocate assets in line with that.

“Is a reference portfolio really the best way to do that?” Fernando says. “We’ve been working through that since I joined. It has involved looking clearly at what each asset is doing for us and whether it moves us closer to the objectives or not.”

Currently NEST is set up with three clear phases in the default fund: the foundation phase, the growth phase, and the retirement phase all of which have different investment implications.

“The foundation phase is when you first join at 22 years old and while we get them used to the idea of savings we keep volatility down. The growth phase is where members spend the vast majority of time, and then 10 years from retirement we gradually de-risk the portfolio to the at-retirement mix.”

Now, instead of having three “hard” phases the fund is looking to have a more dynamic portfolio, recognising that the needs of a 25-year old are not the same as a 50 year old.

“This will mean we will need to be more granular in how we meet those needs and take advantage of the fact we have now bigger asset size and so have more tools in the toolkit,” Fernando says.

One example is that younger members have longer time horizon and a different liquidity risk tolerance and that could mean a higher allocation to private equity, private credit and infrastructure.

“Towards the end of the year we will be talking more about a dynamic approach. The board have agreed to changing the objectives and we are working through the implementation plan now,” she says.

A more robust approach

NEST just celebrated its 10th birthday, making its first investment back in 2011. It’s first ever contribution was the odd amount of £19.65. the defined contribution fund represents the future of pension systems in the UK. One in three of the working population in the UK has a NEST account.

Employees can actively opt out but otherwise there is a mandate minimum contribution set by the government of 8 per cent made up of 3 per cent employer and 5 per cent individual contributions.

Assets now sit at around £25 billion and the fund is growing at around £400 million a month just due to contributions, not including investment returns.

It’s a good time to be reviewing the idea of the fund’s objective.

At the moment CPI plus 3 per cent after charges is the overarching objective.

“This gets you to a certain pot size at retirement. We think pensions are a bit more than that,” she says.

Other more mature defined contribution markets, such as Australia, are still grappling with the balance between accumulation and the best offering in the post-retirement phase that focuses on income.

“We have had defined benefit in this country for so long, simplistically when you say ‘pension’ to someone they think about a monthly cheque. People think they will hit retirement and automatically something happens, we know that is not the case and the sums are really difficult.”

This feeds into the idea of being more granular in what the fund is trying to achieve and while keeping the idea of investment phases, having softer edges around that.

“And if we have different objectives then what are the priorities of the different types of assets at different stages of the journey? For example the closer to retirement then there is more interest in the visibility of income and longevity so we have to make sure we’re finding the right assets to meet those requirements.”

Before joining NEST, Fernando spent nearly 25 years at the Universities Superannuation Scheme, and brought with her robust investment thinking around “making a case for investments”

“I bought with me some of the thinking about having a case for everything: why do it, why not do it, and the metrics to monitor whether we are on track or not. It helps with why you have the views you have and has driven recognition that some markets were priced for “as good as it gets” so we are bring positions back to neutral. It provides a framework for everyone to know why we are doing what we are doing, then we can have a discussion about why we are doing it and can filter out the noise. It makes things a bit more efficient.”

Changing investment allocations

NEST has started to bring its asset allocation back to a neutral position, having pushed out to an overweight position in risk assets in the autumn of 2020 when it took a view that the vaccine rollout would be a game changer for how markets would behave.

“It’s a really tough environment. We have a target of CPI+3 per cent after charges and when CPI is 1 or 2 per cent that was imminently achievable, but when CPI is north of 10 per cent it is very difficult,” Fernando says. “We think the world now is more difficult so we are bringing everything back towards neutral positioning.”

The only asset class that has delivered any real contribution to returns has been commodities in the past 12 months, she says.

Globally, the star performer for many investors has been private equity, but NEST only began its foray into private equity two months ago and has a modest 0.5 per cent allocation. The aim is a target of 5 per cent of the portfolio invested in the asset class by the end of 2024. Looking ahead, that same 5 per cent allocation to private equity in 20 years – when NEST’s AUM could be around £250 billion – would amount to around £13 billion.

NEST is not to be under-estimated with its vocal quest to change the nature of private equity fees paid by asset owners being widely successful. It has had a massive impact on the future of private equity investing, essentially reinventing what investors pay for the asset class.

NEST now has two partnerships, with Schroders Capital and Harborvest, to source co-investment deals and is not paying any performance fees or carry.

“We proved it can be done,” says Fernando.

The growth of AUM is a key attraction for managers, she says, as is the reputational benefit of being a good manager of defined contribution assets in the UK given the growth potential.

“We had an initial target of 20 per cent to illiquid asset classes but we will have another look at that and how much we can afford to invest, our younger members can have a lot more than that.”

On the horizon

With the addition of private equity, and also recently infrastructure, Fernando says there are no other asset classes to add to the mix for now.

“We did have a bit of a look at natural capital. We’ve had climate tilting on a lot of the portfolios for some time, and that seems like a reasonable extension,” she says.

From a more immediate investment perspective NEST recently did a piece of research on different inflationary regimes and what that would mean for correlations and returns.

“And at what level inflation would become problematic,” she says.

It also looked at central bank digital currencies.

“I don’t think there is anything there right now, but we looked at it in the context of some of the challenges to the financial system in the longer term,” Fernando says. “We are trying to do that longer term thinking so where appropriate it gets incorporated into the asset class outlook.”

The team is also looking at the responsibility of investing members’ money in equities given the indexed nature of investments in that asset class.

“All of our equites are indexed so we are thinking about if in an index is a sufficiently high enough bar to allocate members’ money or should we be building the bar higher? Just because a company is in the index does that mean they deserve our members money?”

The focus on this “right” to manage members’ money is something engrained into the culture at NEST.

The investment team of around 40 has a more holistic, and outcomes-focused approach than a team that has internal investments, she says.

“We have people who have thought hard about pensions in the round and what good pension design looks like and how you organise yourself to deliver that,” she says. “We are all in it for the same outcome. We don’t have performance bonuses so no one is trying to maximise their personal income. We are properly in it together.”

NEST default strategy asset allocation as at June 2022

The term “ESG” has come under attack recently in various opinion pieces, reaching the spotlight. Elon Musk told his Twitter followers that “ESG is a scam”. A Bloomberg op-ed began with the headline: “America’s Political Right Has a New Enemy No. 1: ESG Investors.”

The anti-ESG narratives go on, politicizing, and frankly sensationalizing, the term “ESG,” framing it as a left-wing agenda misaligned with investors’ best interests.

For Wespath, sustainable investment practices, those that consider the risks and opportunities related to ESG factors, have absolutely no relevance to any political affiliation.

As a faith-based, not-for-profit investor responsible for the financial security of more than 100,000 benefit plan participants and 140 institutional investors, we strongly believe long-term investment success requires a sustainable global economy: one that holistically considers the systemic risks that pose serious threats to world economic development, robust financial markets, and ultimately our investment portfolios.

We focus on integrating sustainable investment through our Sustainable Economy Framework. We recognize that the world is complex and there is no “magic formula” for achieving a sustainable global economy. We accept the validity of some anti-ESG critics who point to oversimplification or overpromising related to ESG. However, we do not believe ESG is a bogeyman, lurking out of sight, waiting in the wings to say “gotcha.” It is a proactive investment strategy where investors seek to understand how sustainable investment issues can positively or negatively affect their portfolios.

Prudent asset owners must understand how public policy may impact specific market sectors, and how political instability in certain areas of the world can affect global economies. We cannot ignore the complexities of myriad environmental, social, and governance issues that, if not adequately addressed, jeopardize the financial security of our stakeholders.

Let’s take a closer look at some recent ESG critiques:

ESG is a partisan wolf in investment clothing.

By focusing on issues that represent unmitigated risks to the global economy and the future solvency of investors’ assets, we can cut out the political noise.

For example, some may perceive certain sustainability actions, such as climate change, as political. We view climate change not as political, but as an incredibly complex issue that the world must proactively address as a danger to sustainable economies and markets. Calling on the EPA to strengthen methane management, which multiple oil and gas majors support, or addressing larger universal topics, such as the Net-Zero Asset Owner Alliance’s call for thoughtful carbon pricing, are two examples. In addition, a call for carbon pricing is echoed by a large bipartisan group of prominent economists.

That said, there are plenty of sustainable investment issues not remotely viewed as political. Community development loans that serve families, seniors, veterans and individuals with special needs and demanding opioid accountability from pharmaceutical firms are issues that we all can support. While skeptics may focus on what they believe are controversial ESG topics, we believe there are many issues where we can find more common agreement.

ESG is anti-fossil fuels

The world’s transition away from fossil fuels is laden with complexities. Fossil fuels will play an important role in fulfilling the world’s energy needs for some time. We know abandoning the fossil fuels sector would cause undue hardship on broader global society, generating negative impacts on workers and communities.

To that end, Wespath does not support wholesale divestment from the fossil fuels sector, but instead we seek to use our influence as a shareholder to enact change within oil and gas companies. Wespath has successfully accomplished this, having engaged several oil and gas giants, most notably Occidental Petroleum.

The company recently stated its intentions to become the first U.S. oil and gas major to achieve net-zero emissions from its operations by 2040 and reach net-zero for all emissions by 2050 including those generated by suppliers and customers.

ESG leads to high fees and underperformance/it is a way for asset managers to increase their fees

ESG should not be an “add-on” expense. Rather it is a comprehensive approach for achieving successful investment performance over the long-term by better understanding the companies and the systemic risks that may affect them. We maintain that the integration of sustainable investment practices should not cost more or lead to underperformance.

Rather, we expect integrating sound sustainable investment practices will add long-term value to investment portfolios. In our experience, it has done just that. Integrating comprehensive sustainable investment practices into investment management is simply prudent investing.

ESG ratings are unreliable

Investors should make their own informed decisions with the external inputs they deem appropriate— ESG scores being one potential source.

This is not dissimilar to brokerage firms’ “buy/hold/sell” ratings for stocks. ESG scores should never be the sole determining factor in an investment decision.

Wespath does not use ESG scores in its sustainable investment strategies, instead choosing to apply our more holistic Sustainable Economy Framework as our core methodology.

“Shareholder capitalism” doesn’t align with the interests of asset owners

While some reject the notion that corporations must manage their businesses in a manner that serves the interests of all related stakeholders, we recognize that the overall health of the economy ultimately drives investment performance.

A narrow view that does not acknowledge the broad impact companies can have on customers, suppliers, and other stakeholders is a hinderance to achieving overall strong economies and resilient markets.

Investors must think globally about how their stewardship resources can strengthen the economy in ways aligned with their broad and long-term economic interests. In our co-authored white paper, “The Future of Investor Engagement,” we have called on other investors to pursue such a holistic and systemic approach.

For Wespath, integrating ESG considerations through our Sustainable Economy Framework is about addressing material systemic risks that threaten a robust and thriving global economy.

We believe every asset owner has a fiduciary obligation to their stakeholders to identify and mitigate these risks. Through action, investors can create and support a sustainable global economy, one that delivers healthier financial markets, more resilient companies and greater financial security for various stakeholders.

Is this “harmful” ESG investing? We think not.

Dave Zellner is chief investment officer of Wespath Benefits and Investments.