Government-sponsored pension plans are flush with green as in beaucoup bucks, but they might be replete with a green agenda in the form of Environmental, Social and Governance (ESG).
According to Eric Dutram, a member of the Thought Leadership Team at DWS, this is a movement that is seeing worldwide ramifications. Pension funds hopping aboard the ESG train include Japan’s Government Pension Investment Fund, the California Public Employees’ Retirement System (CalPERS) and leading Canadian pension funds like the CDPQ (Québec’s public pension manager) and the Ontario Teachers’ Pension Plan.
“These massive pools of capital represent trillions of dollars and typically must take an extremely long view in order to help ensure adequate reserves decades down the road,” Dutram noted. “This combination makes government-linked funds a powerful shareholder bloc that must be considered by corporate executives who want to maintain friendly shareholder relations.
“That is partially why any new developments in the pension and sovereign wealth fund (SWF) world can reverberate across the market, and why recent trends in this area may be worth watching closely. In particular, the embrace of Environmental, Social and Governance (ESG) and responsible investing strategies by these investors could potentially shake up the market, at least if you consider the wide scale and scope of the major funds involved.”
Non-Profit Acceptance
The ESG movement is already making headway in the non-profit space. The name “Rockefeller” is one that is synonymous with oil, and the Rockefeller Brothers Foundation’s move to fight climate change is a prime signal that shows the sign of the times–going green could supplant the profits of black gold from a societal perspective.
With a history of building generational wealth through oil, the foundation is also pushing hard to fight climate change.
“Given how important oil was to building the family’s long-term success and fame, one might assume that Rockefeller foundations do not shy away from investments in the energy sector,” wrote Dutram. “This is why it is so astounding that one of his enduring foundations—the Rockefeller Brothers Foundation—is such a large proponent of fighting climate change and has already divested the vast majority of its fossil fuels from its portfolio.”
This latest move by the foundation shows a move towards environmental, social and governance (ESG) exchange-traded funds (ETFs). Although the idea of socially responsible ETFs is not relatively new, it’s still struggling to break into the investment mainstream, particularly within the U.S.
Socially-responsible investing may be turning a corner, however, as demand for ESG fixed income products exceeded supply in Europe, according to new research by Cerulli Associates. The report revealed that inflows into ESG fixed-income products surpassed $11.4 billion the last two years, but a shortage of benchmark indexes that measure ESG-focused criteria makes it difficult for its inclusion in the asset class. However, an influx of new ESG products into the market over the next few years like USSG could help appease increased demand in the U.S.
Earlier this year, DWS Group announced the launch of the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG), which was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The expense ratio for USSG is 0.10%, which is well below the average cost of 0.39% for ESG funds, making it ideal for investors who are also seeking a low-cost solution to add ESG to their portfolios.
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