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Top asset owners usher in new era of ESG
Leader funds aim for real-world impacts without sacrificing risk-adjusted returns, study finds
20 Nov 2020 | The Asset

The Asset Owners 100 (AO100), the world’s 100 largest asset owners, grew by 6% last year to reach over US$20 trillion, according to research from the Thinking Ahead Institute. Pension funds remain the single biggest group of asset owners, accounting for over 60% of assets, followed by sovereign wealth funds (32%) and Outsourced Chief Investment Officers (OCIOs) and Master Trusts combined (7%).

Roger Urwin, co-founder of the Thinking Ahead Institute, comments: “With responsibility for over one-third of all asset owner capital globally, the AO100’s influence on other investors and society is growing and becoming more important.”

According to the research, the AO100 have become more prominent in integrating environmental, social and governance (ESG) strategies and being more active owners, including aiming for real-world impacts in their investment strategies.

These strategies increasingly include new elements, such as factoring in member views; adopting new investment benchmarks; reporting on the impacts of their investment strategies  (via the Task Force on Climate-related Financial Disclosures framework and the Sustainable Development Goals); reducing carbon emissions from portfolio holdings and investing in assets that will support the transition towards a low-carbon economy; and devising and implementing climate transition strategies that align with the Paris Agreement.

Says Urwin: “At the larger end of the AO100, funds are pursuing so-called universal owner strategies which contribute to safeguarding the financial system and addressing other systemic risks, including climate change, without sacrificing risk-adjusted returns. This is consistent with a new era of ESG – which we call ESG 3.0 – that is fundamentally different from previous versions in that it includes real-world impacts on the environment and society, while delivering better outcomes for beneficiaries.”

The research indicates that universal owner strategies are highly collaborative and involve working through industry groups, such as the Principles for Responsible Investment and Net-Zero Asset Owner Alliance, and improve long-term financial outcomes through beta (market return) rather than alpha (securities relative return).

“Increasing numbers of the AO100 are following nation states and corporations in declaring their intention to align with the Paris Agreement and be net-zero by 2050, via their investment portfolios,” Urwin notes.

“This is an ambitious goal and will require new types of investment mandates that explicitly incorporate a third dimension of investment after risk and return: impact. These three-dimensional mandates will, of necessity, have to be highly innovative portfolios and engagement strategies if they are to deliver a combination of real-world impacts and improved portfolio outcomes.”

Jayne Bok, head of Investments Asia at Willis Towers Watson, says the relative influence of asset owners compared to asset managers continues to rise, in part through the building of bigger teams with stronger leadership.

“Governance is improving but has historically lagged other financial services organizations,” Bok says. “We suggest that there are up to 20 very large asset owners globally that are well-governed, with effective cultures, providing leadership for others as a considerable force for change. The business model of asset owners is evolving, and in Asia that is happening alongside the additional challenge of managing growth while dealing with the complexity of Asian markets.”