Environmental, social and governance risks and opportunities in investment programs have quickly developed in recent years as more research backs the material impact of climate change risk, human capital management, governance best practices, and other ESG issues on long-term value creation.
In an interview with State Street Corporation chairman and CEO Ron O’Hanley, Jagdeep Singh Bachher, Chief Investment Officer of the UC Regents, argued that investors should approach climate change issues from the perspective of a student who is open to learning, rather than a stance of just maximizing returns and minimizing risk.
“You need to open your mind, because otherwise you limit the ideas that can really expand how you think as an investor,” Bachher said.
He also underscored the financial risk to the economy and to humanity driven by higher temperatures and other issues climate change presents.
“Especially as long-term investors, we need to understand the financial risks around climate change and the implications of that risk for investing. Speaking about climate change in the language of financial risk neutralizes concerns around social or moral agendas,” Bachher said.
Additionally, Bachher does not believe investors should approach this theme in a binary way.
“In other words, addressing climate change risk is not a question of just getting out of one thing. We are in the business of problem-solving, so we need to acknowledge that there is a trajectory of solutions that include investing in things that might have a more positive impact,” Bachher said.
Following these three general guidelines, University of California pension, endowment, working capital, and retirement savings plans no longer invest in oil and gas, coal, and oil sands until they could figure out what the risks were. Over that six-year period, they made choices in the context of financially de-risking the portfolio in the same way we would address other financial risks. In addition to understanding those long-term risks, we also started learning about the opportunities around wind, solar and hydropower.
“So those three principles guided us throughout the six years: approach the problem as a student with much to learn, think in terms of financial risks and recognize that there are no binary solutions,” Bachher added.
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