Climate Change Will Be Alpha Generator For Next Four Decades, Says CalSTRS CIO

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ESG investing, or when a company’s environmental, social and governance factors are assessed, is booming, and a panel of sustainability-focused investors said the trend would only accelerate to go from there.

Climate change “is a mega-trend that if you take advantage of it and get ahead, it will be an alpha generator for the next 30 or 40 years,” CalSTRS chief investment officer Christopher Ailman said on Wednesday. , on CNBC’s “Delivering”. Alpha. “” If you don’t pay attention, it will be alpha negative and you will be stuck with a low beta return. “

Wendy Cromwell, vice president of Wellington, which had $ 1.4 trillion in assets under management at the end of the second quarter, echoed the comments, saying about climate change “investors need to study it and companies must prepare for it “.

ESG investing is booming, with global assets in sustainable funds reaching $ 2.24 trillion at the end of June, according to Morningstar data. Assets crossed the $ 1 trillion mark for the first time in the second quarter of 2020.

But the ESG boom has drawn its share of criticism. By nature, ESG is subjective, and without standardization across companies and sectors, it is difficult to assess whether an ESG-branded product is actually achieving its stated goals.

“There’s no question that some asset managers are just using these words because it’s a marketing tool,” Ailman said, although he doesn’t think ESG has reached bubble status.

Regulators in Washington are currently studying ESG investments with a number of proposals on the table. Cromwell said first and foremost that it is about data. Regarding element “E”, she said that disclosures regarding scope one, two and three issues should be required for all companies listed in the United States. She added that it’s important for scientists and investors, who often speak different languages, to work together to assess the long-term physical risks for businesses from climate change, such as exposure to wildfires and to flooding.

Carine Ihenacho, head of governance and compliance at Norges Bank Investment Management, said it was essential to reduce noise around corporate promises and the ESG investment boom in general.

“Find out what kinds of issues are important to businesses… how the business is dealing with them and how the business then reports on progress,” she said. Norges is the world’s largest sovereign wealth fund with over $ 1.4 trillion in assets under management.

The fund previously announced its intention to phase out exposure to fossil fuels, particularly around companies engaged in exploration and production. More and more funds are following suit – often succumbing to the pressure – including Harvard University, which said earlier this month it would stop investing in the fossil fuel industry.

But Ailman cautioned against viewing divestment as a comprehensive strategy. He considers divestment to be ESG 1.0, while engagement – a much more useful and important strategy – is ESG 2.0.

“Divestment does not reduce the amount of carbon in the atmosphere. Commitment does. I cannot stress this enough,” he said. “Engaging and changing people’s attitudes, turning around businesses, is what is absolutely essential now, because climate change is not just about the energy industry, it is about a lot of other industries, and the whole world has to change. “

This attitude was manifested when CalSTRS joined upstart activist fund Engine No. 1 in the fight for representation on Exxon’s board of directors.

The fund garnered support from leading investors like CalSTRS and ultimately placed three of its four nominees on Exxon’s board following a close and controversial vote at the oil giant’s annual meeting .

“We took this board. We changed this board and we’re really changing this company from top to bottom,” he said, noting that Exxon had the scientists, the resources and the capital. to get things done on issues such as carbon capture.

“It was huge,” he said, shaking the board. “It was the ascent of Mount Everest when you first came mountaineering.”

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