Author: Ted Ballantine

U.S. institutions are at the “vanguard” of ESG investment strategies, but their Asian peers are behind the curve, according to a report from Asia Asset Management.

But that could change soon, as many Asian institutions and businesses are already exploring ESG strategies.

From Asia Asset Management:

“Comparatively, the US market is at the vanguard of ESG investment, which is predominately due to its government placing clear regulatory guidance on matters relating to national security, resource allocations and population migration,” he notes. As an example, he singles out the California Public Employees’ Retirement System (CalPERS), which was one of the first pension funds to employ ESG strategies.

According to the USSIF – the Forum for Sustainable and Responsible Investment, sustainable and responsible investment (SRI) in the US amounted to US$6.57 trillion in 2014, up from around $3 trillion in 2010. Of this, 74% of the SRI was sourced from ESG-related investments.

“To facilitate the adoption of ESG solutions, Asian regulators [will] have to press ahead with educational and regulatory reforms,” Mr. Drum points out. According to him, some Asian institutions are “dipping their toes in the water”.

[…]

For instance, the Stock Exchange of Hong Kong, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), decided to strengthen its ESG guide for listing rules in December 2015 by upgrading the disclosure obligations for ESG investments, which was met with strong support from a broad range of market practitioners.

[…]

“Over 75% of the S&P Index constituents in the US provide reporting on carbon emissions and other environmental factors whereas most Asian companies don’t have such disclosures. It’s just not part of their corporate DNA,” he explains.

In terms of investment mentality, Mr. Drum opines that Asian pension funds should take ESG factors into consideration more when they come to structuring their portfolios, particularly because of their long-term investment horizons.

Zero Hong Kong institutions have issued ESG mandates – yet.

 

Photo credit: “Asia Globe NASA”. Licensed under Public domain via Wikimedia Commons 

The Department of Labor on Thursday sent the White House its final version of a proposed fiduciary rule that would raise standards for investment advice related to retirement accounts.

The rule, which is expected to be OK’d, poses new costs and complexities to broker-dealers as it raises the bar for industry transparency.

Details of the rule, from InvestmentNews:

The measure includes a legally binding requirement for brokers to act in the best interests of their clients and mandates a long list of fee disclosures. Right now, brokers need only make sure the investments they recommend are suitable for their clients.

[…]

Under the measure, advisers must sign a so-called best-interest-contract exemption, a legally binding document that requires them to act in their clients’ best interests, in order to accept commissions or third-party payments for investment products.

Instead of dealing with the contract, some independent advisers are abandoning products with varying adviser payments, such as variable annuities, and embracing products with level compensation.

According to Financial Advisor magazine, the approval of the rule is nearly certain:

The OMB has 90 days to accept or reject the rule. But considering that the proposal is viewed as a legacy accomplishment for President Obama, its approval is almost certain.

Department of Labor spokesperson Mike Trupo said he could not estimate when the final version of the extensive conflict of interest regulations for pension plan advisors would be made public and official by the agency.

The action by the DOL makes it inevitable that a final rule will be out by the end of the year, said Investment Adviser Association lobbyist Neil Simon.

The final text of the rule isn’t yet available.

 

Photo by Tom Woodward via Flickr CC License

The Institutional Limited Partners Association (ILPA), a group that includes CalPERS, CalSTRS and a dozen other large pension funds, released a template on Friday designed to standardize and improve the reporting of fees associated with private equity investments.

The ILPA has no authority to force general partners to adopt the template. But it appears several firms, such as the Carlyle Group and others (see below) have endorsed its use.

From Financial News:

The template would detail all capital collected from investors and portfolio companies, including fees charged, fund expenses, carried interest amounts and income received through related parties or parallel vehicles to the fund.

The fee reporting template was created after consulting nearly 50 global investor groups and 25 fund manager organisations.

[…]

Though the template is not legally binding, a spokesman for ILPA remained confident it would be adopted across the sector. He said: “We have received broad-based input, feedback and support from numerous private equity firms and we remain confident that it [the template] will be adopted as an industry standard.”

Industry expert Phalippou also welcomed the launch as a major step forward.

He said: “I think it will help a lot. When people see how much we are talking about, and it is right in front of them, they can no longer keep their head in the sand and pretend they do not know, cannot get the information, or that they wish they could but it is too costly.”

But he added a note of caution: “There are still things missing though – like expenses charged directly to the company – and I am unclear about unrealised carried interest. But it is a great start, even if it is not mandatory.”

The GPs that have said they support the use of the template:

Cambridge Associates

Carlyle Group

Capital Analytics

CEM Benchmarking

Conifer Financial Services

TorreyCove Capital Partners

Upwelling Capital

 

Photo by thinkpanama via Flickr CC License

Officials at New Jersey’s pension system defended the performance of the system’s alternative investments at a board meeting on Wednesday.

But the same officials also indicated interested in driving fees lower in 2016, whether through renegotiating fees with external managers or bringing more investment management in-house.

The system paid $600 million in fees in 2014. Last year’s total is not yet calculated.

More from NJ Spotlight:

The stakes in private equity, hedge funds and other investment firms produced results that beat the pension system’s assumed rate of return over the last five years, even when fees paid to private fund managers that some have criticized as excessive were accounted for, a report compiled by Aon Hewitt showed.

[…]

Pension-system officials yesterday defended their overall alternative-investment strategy, pointing to the numbers compiled by Aon Hewitt that showed the investments have produced 9.2 percent net returns over the last five years. That beats the pension system’s assumed rate of return of 7.9 percent, and the overall 7.3 percent rate of return the system experienced during the same five-year period.

[…]

But Christopher McDonough, director of the Division of Investment, which oversees the management of the pension system on a daily basis, also outlined goals for the agency for 2016 that included a review of alternative-investment fees that could be renegotiated down. Exploring whether some asset management could be brought back within the 65-employee division is another goal, he said.

“We recognize the importance of minimizing fees and costs,” McDonough said. “We’re looking at lower-cost strategies.”

New Jersey’s public pension system manages $71 billion in assets.

 

Photo by jypsygen via Flickr CC License

A Kentucky Senate committee on Wednesday passed a bill that would give the chamber the power to confirm certain high-ranking pension officials.

More controversially, the bill would require full disclosure of all investment fees and contracts.

More from the Courier-State Journal:

The bill will require Senate confirmation of gubernatorial appointees on the KRS Board, Senate confirmation of the KRS executive director and that the system must disclose all fees and investment contracts associated with the funds it manages.

Furthermore, if the bill passes the House and is signed into law, open records exemptions shall “not prevent the disclosure of investment fees and contracts.”

[…]

Thielen spoke in opposition to the bill saying it would cause disruption in the retirement system board’s decision-making process, impose additional administrative cost to the system and create inefficiencies.

“The administrative costs in the grand scheme of things are not great. I have no idea how much it would be. I anticipate in excess of $100,000 because we would need to bring on another staff person or two depending on what it takes to meet the requirements,” Thielen said. “We haven’t budgeted for any increases (for this year)…so additional administrative costs could work a hardship.”

The bill would also usurp the authority of the KRS Board, Thielen said, and ultimately give the authority to the secretary of the Finance and Administration Cabinet could eliminate a KRS Board’s contract.

The bill comes days after Gov. Matt Bevin vowed in his budget proposal to conduct an independent audit of the state’s pension systems.

But Bevin also promised to give the systems a huge funding boost.

 

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons

There is growing interest among institutional investors in ESG strategies, and it will continue to grow in the coming years.

But institutions still have concerns, according to a recent report from Natixis Global Asset Management.

The report surveyed 660 institutional investors in 29 countries.

Here’s more on ESG, from the report:

Many are also beginning to see that ESG may also provide direct investment benefits. Half (50%) of those surveyed say these strategies could also be a source of potential alpha, but there is much more to be learned as only 26% have found that incorporating ESG into investment decision-making has had a positive impact on investment performance.

Managers identify some of the key challenges to seeing more broad-based adoption of ESG: the difficulty in measuring performance (52%) and a lack of transparency in reporting (38%). With a growing number of managers offering specialist capabilities within this realm, these concerns will likely dissipate.

These specialists are looking at ESG through a new lens, investing in key trends such as green energy, in which businesses will benefit from increased societal focus on sustainability. This kind of impact investing may be the opening for more managers to incorporate ESG into institutional strategy. It may be one critical reason why more than four in ten (44%) of those surveyed say ESG will be a standard practice for most managers within five years.

The report, which is full of insights ESG-related and otherwise, can be accessed here.

Newly elected Kentucky Governor Matt Bevin on Tuesday gave his budget address yesterday, and the speech – along with the accompanying budget – made pensions a top priority.

The proposed budget has the state making its full actuarially required contributions to the state pension systems, along with tens of millions of dollars in extra funding for the systems.

The budget also allocates money for an audit of the pension systems to look for reform possibilities.

More from the Courier-Journal:

With Kentucky facing a $30 billion pension shortfall, Gov. Matt Bevin’s budget proposal includes a substantial funding increase for public retirement plans along with money to audit all of the state’s pension systems for potential reforms next year.

Bevin said that Kentucky must send a message to the world that it is serious about tackling problems in government pensions. He said his budget will direct money to the issue like no administration before.

“We cannot afford to kick it down the road,” he said.

KTRS needs $520 million in additional allocations in the first year of the biennial budget and nearly $513 million more in the second year.

Bevin’s proposal would channel $300 million in additional funds to the system in the first year and $291 million in the second.

Meanwhile, Kentucky Retirement Systems would receive the full contribution – $60 million in the first year, and $70.5 million in the second. On top of that, the budget allocates an additional $44.7 million each year to improve the system’s finances, an approach commonly known as “ARC plus.”

Bevin’s budget also relies on a more conservative investment outlook, which assumes that investments in KERS non-hazardous will grow at 6.75 percent rather than 7.5 percent.

You can watch Bevin’s speech, specifically the part focused on pensions, in the above video.

 

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons

The Ontario Municipal Employees Retirement System (OMERS) this week bought a large stake in Compania Logistica de Hidrocarburos (CLS), Spain’s largest oil storage and pipeline operator.

Borealis Infrastructure, OMERS’ infrastructure investment arm, made the purchase. It was the BI’s first investment in Spain.

More from the Vancouver Sun:

Borealis Infrastructure — part of the OMERS pension system — is acquiring a 9.15 per cent stake in Compania Logistica de Hidrocarburos, or CLH, from Cepsa and a 15 per cent stake from Global Infrastructure Partners.

Financial terms of the two deals were not immediately available.

CLH, Borealis Infrastructure’s first investment in Spain, expands the pension fund manager’s European infrastructure portfolio which already includes investments in the United Kingdom, Germany, Sweden, Finland and the Czech Republic.

CLH has 40 storage facilities and 4,000 kilometres of pipelines in Spain. The company also has 16 storage facilities and more than 2,000 km of pipelines in the United Kingdom.

OMERS managed $69.8 billion (CAD) in assets as of December 2014.

 

Photo by ezioman via Flickr CC License

President Obama issues his budget next month, and it will contain several proposals designed to expand access to retirement savings accounts for the country’s private-sector workers.

Details from US News & World Report:

The White House says Obama’s proposals, if enacted, would provide more than 30 million people access to a retirement account.

The biggest chunk of that increase would occur through legislation requiring employers that don’t offer a retirement plan to automatically enroll their workers in an Individual Retirement Account. The employers that did so would get a tax credit of $3,000 to help them offset the administrative expense. The proposal was also part of last year’s budget, but Congress did not pass it.

On the new front, Labor Secretary Thomas Perez says the administration will seek to make it easier for multiple employers to join together to offer retirement plans. For small employers. That would mean lower administrative expenses.

“We are willing to take steps to make it easier and cheaper for employers to offer a path to dignified retirement,” Perez said. “They should be willing to do the right thing and set up more plans so their workers can save.”

Perez said that employers with a common bond, say auto dealers, can now pool together to offer a retirement plan. He said the president will recommend doing away with the “common bond” requirement and let people from all kinds of businesses join together. The White House says it’s recommending that Congress pass legislation that would ensure the long-term sustainability of such arrangements.

Obama’s previous retirement-related initiative, MyRA, rolled out last November.

 

Photo by  Bob Jagendorf via FLickr CC License

Illinois Senate President John Cullerton said this week that he’d struck a tentative deal with state Gov. Rauner on pension legislation that would alter the way beneficiaries accrue benefits.

The bill would save the state $1 billion annually. But it was not immediately clear if the plan would hold up in court as constitutional.

Details of the deal, from WTTW:

That bill would force state workers to make a choice: Keep the yearly compounded cost of living adjustment they get in retirement but agree that future raises they get while working will not apply to their pension – or vice versa – accept a lower COLA in retirement in exchange for having all of their raises apply to their final pension formula.

Cullerton made his remarks at the City Club this afternoon – and explained that he and the governor ironed out their differences from last week, when Rauner announced an agreement, only to have Cullerton minutes later say, ‘Not so fast.’

“He called me and said he was going to have a press conference and he was supporting the concept, but we didn’t have the language worked out,” said Cullerton. “As a result, I had to clarify that I wasn’t agreeing to what I thought he was saying. So now, we’ll just calm down, sit down, draft a bill and then we’ll get an agreement.”

Cullerton says he talked to the governor this morning about the bill, and that he expected Speaker Madigan to support elements of it because he has in the past. This move is seen by some as a way to drive a wedge between Cullerton and House Speaker Madigan – Madigan’s spokesperson said he wanted to see an agreement in writing before commenting on the bill.

Cullterton’s comments suggest that Democrats’ support of the pension bill come with strings attached: Rauner needs to change the way the state funds education.

 

Photo by Tricia Scully via Flickr CC License