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.”
