Scientists at the City University of New York and Harvard University are using Dutch pension fund PGGM as a guinea pig to test metrics they've designed for sustainable investing.
Their study of a $2.1 billion PGGM portfolio managed by UBS Group's asset management unit will help investors make informed decisions when allocating capital based on environmental, social and governance principles, according to a paper in a Science journal this month. Piet Klop, senior adviser of responsible investment at PGGM, said in a phone interview that the pension fund wants to invest in companies that have a positive impact on water resources, climate, human health and food security, all while delivering market rate returns.
“This is a real departure from what we had been doing before,” Klop said. “Our main client had the desire to make a positive impact in the world, while still doing its main job of paying out pensions.”
The biggest challenge is measuring this impact, as many money managers, institutional investors and government agencies take different approaches to sustainable investing. McKinsey & Co. estimated in an October report that more than a quarter of the $88 trillion of assets under management globally were invested in ESG principles.
The effort by CUNY and Harvard to introduce scientific methods to assess the positive contributions made by PGGM’s portfolio should spur other pensions to invest in a similar way, according to Klop. “Very few pension funds care about the impact of their investments, and if they do, very few then try to measure that impact,” he said.
The research group evaluating whether PGGM's sustainable investment goals are met is led by Charles Vörösmarty, founding director of the Environmental Sciences Initiative at the Advanced Science Research Center at CUNY, and John Spengler, a professor at the Harvard T.H. Chan School of Public Health. For example, investors may look at whether factories are built in a way that doesn’t harm the environment, but they don’t have a way to evaluate whether or not it’s actually working.
The scientists are using findings from new technologies in areas like epidemiology and earth observation and modeling, and then tying them back to corporate financial data, according to the paper. The idea is to develop standards and transparency, so investors don’t have to solely rely on companies’ own reporting.
PGGM’sportfolio is showing early signs of producing returns that match benchmarks.
“Although our own impact investment experiment has just begun, we see early promise that the fund being tested could ultimately generate returns competitive with a broad benchmark while producing measurable environmental and health benefits,” the scientists wrote in the paper.