DiNapoli’s New York retirement fund will assess ESG credentials of all external asset managers

The third largest US pension fund ramps up ESG work

The $179bn New York State Common Retirement Fund (NY State), led by State Comptroller Thomas DiNapoli, will evaluate all of its external managers on ESG grounds as part of a strategy that has also seen it broaden its focus from climate to overall sustainability.

The fund, which represents public sector workers across New York State, has a well-established reputation as a leader in the responsible investments arena. It was a founding signatory of the Principles for Responsible Investment and in 2007, DiNapoli issued an executive order on the environment and energy, outlining the fund’s environmental ambitions. Last year it partnered with the Church Commissioners for England to file a shareholder resolution to improve climate disclosure at ExxonMobil.

According to its inaugural ESG report, released today, the fund has over recent years persuaded 36 portfolio companies to expand their Equal Employment Opportunity policies, filed board diversity proposals at 16 firms and initiated 19 engagements on executive pay.

But its focus has been on climate change. As well as its work at Exxon, the fund sponsored 53 resolutions over the past six years relating to climate change. At COP21 it launched a low-carbon equity index with Goldman Sachs Asset Management, to which it committed $2bn. It plans to invest more capital to this index in near future, it said. Goldman Sachs Asset Management is performing a carbon footprint assessment of the fund, using CDP data.

Now NY State says it will “transition from an environmentally-focused ‘green’ investment approach to a broader ‘sustainability’ investment approach”.

“This broader lens focuses on issues across the ESG spectrum and incorporates forward-looking perspectives on large-scale trends affecting the fund’s investments, such as the transition to a low-carbon economy and evolving regulatory regimes for corporate governance,” the fund said.

As part of this move, it plans to allocate a further $1.5bn to its Sustainable Investment Programme over coming years. The fund already has some $3.5bn dedicated to the programme, including green bonds from the World Bank, private equity in renewable energy companies and commitments to its low-carbon index. It announced the latest pledge in 2015, but has now developed clearer eligibility criteria for potential investments, across three themes: Resources & Environment; Human Rights & Social Inclusion; and Economic Development.Investments must not only fit under one of the sustainability themes outlined, but must be implemented by a manager “with a high standard of ESG integration in its investment process”, as a result of the fund’s new ESG ‘Risk Assessment’ for external managers.

NY State will use an evaluation process to assess the ESG policies and performance of managers, providing “a standard” to help them understand its expectations on ESG integration and “set a benchmark for ongoing improvement”.

The Risk Assessment will grade external managers – even those already running money for the fund and performing well – on a series of criteria across four topics:

1. Transparency: reporting and disclosure on ESG by asset managers

2. Information: whether an asset manager purchases third-party data or uses proprietary disclosures to evaluate ESG

3. Process: metrics, thresholds and how research is integrated into investment decisions

4. Engagement: How managers decide on engagement practices and what approaches are used.

The Risk Assessment will be a “vital component” for the fund’s evaluations, but “may not be decisive for any single investment”.

“The hope is that by laying out the fund’s expectations for managers, and clearly indication its commitment to this issue, we can enhance the value of the fund’s investments and help build robust industry standards that will give ESG issues the consideration they are due,” NY State said.

NY State also plans to use data from MSCI and CDP, academic research, and tools from SASB to help decide which ESG factors are material to its investments. “Each of these sources relies on empirical data to demonstrate the role of various ESG factors as drivers of risk and return in the context of investments across markets, geographies, and asset classes,” it explained. “This approach reflects the fund’s ESG investment philosophy and directs fund time and resources to those factors most material to investment performance.”