Did anyone else feel a slight shift in the tectonic plates of private capital last week?
Three of the asset class’s biggest investors published a joint statement urging sceptics to wake up and smell the coffee.
CalSTRS, Japan’s GPIF and the UK’s USS Investment Management warned that focusing solely on short-term returns without considering other stakeholders would be to ignore “potentially catastrophic systemic risks”. The trio – representing nearly $2 trillion of AUM between them – cited an estimate by Moody’s Analytics showing that climate change alone has the potential to destroy $69 trillion in global economic wealth through 2100, noting that managers who don’t embrace this reality are quickly becoming the minority.
This was a significant development – arguably the clearest signal yet that “the money” will actively discriminate against managers who try to sell their services on the strength of financial returns alone.
While important from a symbolic standpoint, the letter was not without detail. The three investors urged their managers and investee companies to “enhance their disclosures (using frameworks such as the TCFD) regarding their interactions with stakeholders, society and the environment”. In other words: get ready to provide us with hard data around environment, social and governance issues.
News emanating from sister title Private Equity International‘s Responsible Investment Forum in New York last week suggests that other institutions are in step with the three pensions in question.
The UK’s Railways Pension Trustee Company (Railpen) and the British Columbia Investment Management Corporation have also signed on to the initiative.
As one LP pointed out, questions about how investors are tackling climate change have already hit public equity “like a steam train” and investors should be prepared to answer how their portfolio is helping to meet the goals of the Paris agreement. An investment advisor predicted “a very big divide between the pricing of assets that are under very capable stewardship with respect to ESG and climate issues and those that are not”.
There is still plenty of cynicism in parts of the private capital markets about ESG, perhaps because the term itself has become tired and confused. Depending on who you talk to, the acronym “ESG” can be an investment strategy, a value creation lever, an arduous DDQ or (whisper it) an unwelcome distraction.
With last week’s events, it has become just a bit harder to remain a cynic.