Investing for an ESG-positive retirement with private assets

With regulators raising the bar for pension funds on sustainability and ESG-related investing, Timothy Li explores how funds can make a positive real-world impact while helping investors to make the right decisions for a comfortable retirement.

For pension funds, making a positive impact often stretches beyond ensuring beneficiaries can enjoy a comfortable retirement. How does that sit with regulators in many different jurisdictions bringing in rules requiring pension funds to report on areas beyond their financial positions, including data related to environmental, social and governance (ESG) factors?

These requirements present pension funds with investment and reporting challenges – but also with a growing universe of diverse opportunities. Whether it is a defined benefit, defined contribution or hybrid pension fund, we believe there are many ways to invest to benefit members and the wider society.

Taking action and adding private assets

There are various investment options available to pension decisionmakers to consider allocating in support of ESG goals: listed equities and bonds whether these are thematic, ‘best-in-class’ or exclusion-based approaches.

By diversifying more widely and including private markets, the options increase substantially. The result can be a more rounded multi-asset approach. Often, the nature of private markets asset classes means that managers and investors can make a tangible real-world positive impact as they are closer to the assets in which they are invested.

For example, many new green technologies are being developed by small private companies funded by venture capital. Asset owners can invest directly in infrastructure funds backing renewable energy projects. In real estate, they can invest in sustainable buildings and social housing, providing affordable, quality homes to lower income families.

Such investments have the potential to generate income and a capital return for pension fund investors over time.

Importantly, many of these asset classes are no longer just available to large, sophisticated institutional investors – pension funds of all kinds can access illiquid sectors such as infrastructure and real estate debt through innovative fund structures.[1]

Certifying and reporting impact

Allocating capital to assets with good ESG credentials is one thing, but how do you demonstrate that these investments are having the impact intended?

One way is to align portfolios with international standards such as the United Nations’ Sustainable Development Goals (SDGs). Portfolio companies and assets can be ‘mapped’ onto one or more goals: for example, a renewable energy company would align with SDG 7 (Affordable and Clean Energy), but could also support SDG 13 (Climate Action).[2]

For real estate, sustainability certifications such as BREEAM and LEED are internationally recognised and can be used to attest to the environmental and sustainability credentials of assets and portfolios.

At BNP Paribas Asset Management, we combine proprietary analysis by our Sustainability Centre and data from third-party providers to give investment teams a comprehensive breakdown of the ESG qualities of each potential portfolio asset. This information is then shared with investors to ensure they are kept informed about their portfolio’s performance.

As an active manager, we continually engage with portfolio companies to ensure they remain aligned with our ESG goals, helping them to improve wherever possible. Our track record has been recognised externally: ShareAction ranked BNP Paribas Asset Management as one of the strongest asset managers across a range of governance, stewardship, climate, biodiversity and social factors in its latest survey of the industry.[3]

Our approach allows us to report accurately and timely on the financial and ESG qualities of portfolios, ensuring pension funds have the information they need to meet regulatory requirements.

As regulators continue to scrutinise investors over their sustainability actions as well as statements, we believe investing in private markets can be an important way in which pension funds can demonstrate their credentials while also meeting their financial targets.

We can offer investors access to private markets strategies that have ESG fully embedded in their investment processes. With our innovative and evolving private assets platform, we can provide access to impact and climate-aligned strategies that enable investors to align portfolios with their own sustainability policies.

For more on investing in private assets, see Private assets – BNPP AM Luxembourg professional investor (bnpparibas-am.com) or your local country website

References
[1] Also read An introduction to private asset investing (bnpparibas-am.com)
[2] Also read What links impact investing and private equity? (bnpparibas-am.com)
[3] Source: ‘Point of No Returns 2023’, ShareAction survey and report, March 2023. BNP Paribas Asset Management ranked second overall out of 77 asset managers assessed on a range of ESG criteria. See the full ranking here: https://shareaction.org/reports/point-of-no-returns-2023-part-i-ranking-and-general-findings/ranking-and-performance

Disclaimer

Private assets are investment opportunities that are unavailable through public markets such as stock exchanges. They enable investors to directly profit from long-term investment themes and can provide access to specialist sectors or industries, such as infrastructure, real estate, private equity and other alternatives that are difficult to access through traditional means. Private assets do, however, require careful consideration, as they tend to have high minimum investment levels and may be complex and illiquid.

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.