Side Letter: The $2trn ESG push from GPIF, CalSTRS and USS; Brexit bargains

The sustainability agenda just got real for fund managers. Here’s today's brief, for our valued subscribers only.

Just happened

Major statement of ESG intent

Three of the asset class’s biggest names yesterday published a joint statement urging sceptics to wake up and smell the burning coffee.

This is a significant development: arguably the clearest signal yet that “the money” will actively discriminate against managers who present their financial returns without giving heed the wider impact of their investment activity.

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.

The news comes as we enter day two of PEI’s Responsible Investment Forum in New York. Some key takeaways from the discussions on day one:

  • What are you doing for climate change? Get your answers ready. As one LP pointed out, this has 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.
  • Markets are pricing in the energy transition faster than it’s happening, resulting in valuation premiums, Carlyle’s head of impact Megan Starr (above right) told delegates, referencing the firm’s recent report From Impact Investing to Investing for Impact.
  • Blurring the lines between ESG and impact strategies is where the real power is, said one impact investor. Keeping such strategies separate may only serve to blunts the effect of each.
  • Stakeholder capitalism, as outlined at Davos just over a month ago is beginning to enter people’s minds as many navigate a maturing ESG framework.

ESG: How to do it

Our infrastructure senior editor Bruno Alves is in typically eloquent form this week, weighing on the topic du jour. His commentary is must-read regardless of your asset class. An extract for those who don’t subscribe to Infrastructure Investor:

“The larger point is that licence to operate – the ‘S’ in ESG, if you will – is, arguably, where the cutting edge of asset management is at these days. That’s not to diminish the importance of ‘traditional’ asset management. Clearly, the ability to add value, mitigate risk and financially optimise investments will continue to be of paramount importance. Disaster-preparedness, as the current coronavirus epidemic is demonstrating, is equally key.

“It’s just that a lot of what falls under traditional asset management comes across as arcane. Suitable for the pages of trade publications like ours, yes, but less likely to survive contact with the outside world. Or put differently, you won’t find ‘Make platform-building great again’ on a baseball cap anytime soon.

“So, it doesn’t feel like we’re going out on a limb in saying that the firms that are able to speak fluently about licence to operate and demonstrate how they’re working to keep it are best-suited to navigate this brave new world we find ourselves living in.”

They said it

“Since our commitment to providing financial stability spans decades, we do not have the luxury of limiting our efforts to maximising investment returns merely over the next few years.”

The leaders of three of the world’s largest institutional investors make a ground-breaking joint statement urging their partners to make more disclosures about their interactions with “stakeholders, society and the environment”.

Essentials

More Brexit bargains. Earlier this week Clayton, Dubilier & Rice agreed to buy UK-listed communications company Huntsworth for about £400 million ($511 million; €458 million). The price of 108 pence per share represented around a 50 percent premium to the company’s Monday closing price, but was also roughly equal to its share price of about a year ago. The deal is another example of a theme we’re exploring – the attractiveness of UK deals for GPs investing in US dollars. Read Blackstone’s take on UK deals here.

Coronavirus and Carlyle travel. Alternatives heavyweight Carlyle Group has “restricted all nonessential business travel” as of this week, reports Reuters, citing people familiar with the matter.

Africa appetite. More than three-quarters of LPs polled in African Private Equity and Venture Capital Association’s latest Industry survey plan to increase their Africa PE allocation over the next three years. The continent’s risk-return profile was the driving factor, followed by performance, impact investing and portfolio diversification. Other findings:

  • Kenya and Nigeria are the most attractive markets;
  • Consumer goods, agribusiness and financial services are most attractive sectors;
  • Majority of LPs have an average commitment not more than $25 million; and
  • Over two-thirds of LPs expect domestic capital to play an important role in Africa PE.

Dig deeper

Institution: Ohio Police & Fire Pension Fund
Headquarters: Columbus, United States
AUM: $15.97bn
Allocation to alternatives: 24.30%
Bitesize: $10m-$50m

Ohio Police & Fire Pension Fund has agreed to commit up to $20 million each to Francisco Partners VI and Altaris Health Partners V, a contact at the pension informed Private Equity International.

The $15.97 billion US public pension has an 8.0 percent target allocation to private equity that currently stands at 8.30 percent.

For more information on Ohio Police and Fire, as well as more than 5,900 other institutions, check out the PEI database.


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Today’s letter was prepared by Toby MitchenallIsobel MarkhamCarmela Mendoza and Connor Hussey.


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