Certain government investors from Europe to Asia are increasingly adopting socially and environmentally responsible practices, it emerged at a conference in Hong Kong last week.
Malaysian state fund Khazanah Nasional and the UK’s Environment Agency Pension Fund (EAPF) discussed their approaches in this sector at the First Global Investor Forum on Climate Change.
Khazanah is currently focused on two sub-sectors of sustainable development (SD) – renewable energy and waste management – but there is a wide range of investment opportunities arising from climate change, says executive director Shahazwan Harris.
Of Khazanah's $40 billion in total assets, less than $500 million is invested in the SD sector, although it sees the sector as strategic and important in the long term, Harris said during a panel discussion. Asked why such assets only make up 0.1% of AUM, he notes that the size of opportunity in the SD space is fairly small in Asia, which is the fund’s geographic focus.
In addition, he adds, the level of risk versus reward of assets in the Asian renewable energy market is not as attractive as popular recent investment themes in Asia, such as Chinese retail or Indonesian natural resources.
However, Khazanah has been considering adopting SD more widely in its approach. “A question our management and board has been asking is how we look across the whole portfolio with a sustainable development lens to ensure what we’re doing meets SRI [socially responsible investment] objectives,” says Harris.
The fund has been looking at areas such as whether the future cashflow of investee companies is sustainable, although Harris notes it's no easy task to balance economic growth goals versus SD objectives.
Meanwhile, the £2.1 billion ($3.3 billion) EAPF, a local government pension scheme in the UK, is a relative veteran in the SD space. Over the past decade, it has incorporated climate change as part of its overall investment strategy, says Howard Pearce, EAPF's former head of pension fund management, speaking on the same panel.
“We have de-risked and diversified our assets over the past 10 years,” he notes. This has led to a portfolio breakdown today of roughly 50% equities, 30% fixed income and 20% alternatives, compared to a decade ago, when it was 85% equities and 15% fixed income.
Notably, EAPF had shifted its asset exposure to have 12% by 2010 in “the green economy” – that is, in clean technology – and expects that figure to rise to 20% by 2015 and higher after that.
All of these investments are done externally by fund managers “skilled in selecting sustainability-themed stocks”, says Pearce, such as First State, Impax, Generation, RobecoSAM and Sarasin.
For example, the fund now has £350 million invested in public and private energy efficiency, pollution prevention and waste management businesses. Another £250 million is being invested into sustainable property, infrastructure, forestry and farmland via the Townsend Group.
When looking at asset managers’ bids for mandates, Pearce notes the importance of being as detailed as possible.
“I have looked over 200 tenders for 25 mandates – and over time I have put more and more specifics into [what I want from the] mandate,” he says. “It’s quite hard being specific in the area of climate-related investments, but when we are clearer in the details and fund managers understand and respond to that, we tend to get better responses and returns.”
The financial return on the fund has been 1.6% more than its peer group in the last three years, adds Pearce.