NYS Common Further Integrates ESG Within Manager Selection, Risk Frameworks

As part of its risk management framework, the fund created an ESG Risk Assessment to guide its due diligence. 

Environmental, social and governance (ESG) factors now play a more pivotal role within the manager selection process and the risk management framework for the $178.6 billion New York State Common Retirement Fund (CRF). In its inaugural Environmental, Social and Governance Report,the fund outlines its previous ESG strategies and current objectives regarding sustainability, its methodology in determining material ESG risks, and plans to commit capital to sustainable investments in the future.

“As a long-term investor, Comptroller [Thomas] DiNapoli and the New York State Common Retirement Fund seek out sustainable economic growth and strives to align its interests with the stable, enduring success of the companies in which it invests,” said Matthew Sweeney, a spokesman for New York State Comptroller Thomas DiNapoli. DiNapoli serves as a trustee of CRF.

“This report is developed to memorialize the long-term commitment to ESG strategy to multiple stakeholders. Particularly, our intent is to send the signal to the financial market that CRF integrates ESG factors into capital allocation decisions,” Sweeney said.

As part of its ESG risk management framework, the fund created an ESG Risk Assessment to guide its due diligence when evaluating external managers’ ESG polices and performance. “The purpose of the Risk Assessment is to guide investment decisions by ensuring uniformity of information and a common language for the Fund’s investment team to discuss ESG issues,” Sweeney said.

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Manager evaluations will be based on the following criteria:

  • Transparency – including public disclosure of ESG performance, establishment of ESG policy, compliance as a signatory to any public campaigns
  • Information – how the manager sources ESG information, including the use external and in-house metrics
  • Process – how the manager integrates ESG evaluations within investment decision process
  • Engagement – how the manager uses its shareholder engagement rights and decides when to engage

In addition to its new manager evaluation process, the Fund also formalized how it will assess material ESG risk within the investment selection process. Outside of shareholder engagement, the fund will gauge its direct investments against material ESG factors using tools such as MSCI rating metrics, and assess indirect investments by evaluating external managers’ ESG policies. 

“The Fund’s evaluation of the ESG performance of its securities holdings and external managers will ensure that such material issues are appropriately addressed,” said Sweeney, “either by avoiding at-risk investments or by working with companies and managers to mitigate the risks they face.”

Sustainable investment themes the Fund will target include: resources and the environment, human rights and social inclusion, and economic development.

While the fund has committed more than $5 billion to sustainable investments, it also intends to commit an additional $1.5 billion to its Sustainable Investment Program (SIP), over the next few years. SIP investments need to clearly address a sustainable investment theme, focus on generating attractive risk-returns and score well on the ESG Risk Assessment. The plan considers the program as a way to better prepare for trends that may impact the plan’s portfolio, including evolving regulatory polices and a transition to a low-carbon economy.

“The Fund has long recognized that ESG factors could have a significant impact on the value of its investments,” Sweeney said. “The Fund aspires to be an industry leader in addressing ESG concerns and practicing sustainable investing. We can enhance the value of the Fund’s investments and help build robust industry standards that will give ESG issues the consideration they are due.”

by Amrita Sareen-Tak

Norwegian Pension Fund Boycotts Dakota Access Pipeline Companies

KLP divests $68.4 million from four companies tied to the controversial pipeline.

Kommunal Landspensjonskasse (KLP), a $70.5 billion Norwegian pension fund, is divesting a combined $68.4 million from Phillips 66, Enbridge Inc., Marathon Petroleum, and Energy Transfer Partners, calling the companies’ involvement with the Dakota Access Pipeline (DAPL) “an unacceptable risk of contributing to serious or systematic human rights violations.” 

The nearly 1,200-mile long pipeline was built to transport oil through North Dakota, South Dakota, Iowa, and Illinois. It has drawn heavy opposition over a potential risk of water contamination at the Lake Oahe pipeline crossing, as well as issues concerning Native American tribal sovereignty.  

“This has been a difficult case,” Annie Bersagel, acting head of responsible investments at KLP Kapitalforvaltning, said in a statement. “In making the decision to divest, KLP places significant emphasis on the UN Special Rapporteur’s assessment, a previous recommendation on exclusion from the Council on Ethics for the Government Pension Fund Global, as well as the lack of progress through active ownership.”

KLP had equity and fixed income investments of approximately $22.5 million in refining and logistics company Phillips 66, which owns 25% of the pipeline, and $32.3 million in Canadian energy infrastructure firm Enbridge Inc., which owns a 27.6% stake.

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KLP had investments of approximately $7 million in Marathon Petroleum Corporation, a refiner, retailer, and distributor of oil and gas products. Marathon Petroleum has a 9.2% stake in the pipeline.

Energy Transfer Partners (ETP), a subsidiary of Energy Transfer Equity L.P., is a US-based pipeline and energy infrastructure company, and is the DAPL project operator. KLP had fixed income investments in ETP of approximately $6.6 million.

The fund said it has been actively following the events surrounding the construction of and protests over the pipeline during the past six months. It said it engaged in dialog with the companies, the Standing Rock Sioux Tribe, the tribe’s attorney, environmental and human rights organizations, pipeline experts, and individuals demonstrating near the construction site.

 

In order to get back in good graces with the fund, KLP said it expects the companies to:

 

  • Develop policies and practices designed to address flaws in the consultation process that the UN Special Rapporteur has outlined by aligning company policies with international standards.  
  • Cooperate fully in the pending lawsuit filed by the Standing Rock Sioux Tribe.
  • Develop a plan for addressing concerns related to the risk of water contamination from a pipeline spill that also includes collaboration with the affected tribes and communities.  
  • Conduct a full accounting of any deficiencies in the Dakota Access Pipeline human rights due diligence process and develop a plan for future collaboration with affected stakeholders that addresses deficiencies identified.

 

We have had a long and thorough process on this case,” said KLP CEO Sverre Thornes. “It has been complicated, but I am confident that we have now reached the right conclusion.”

 

By Michael Katz

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