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Bretton Woods II Responsible Asset Allocator Initiative

Asset Allocators and Responsible Investing

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Introduction

The Responsible Asset Allocator Initiative (RAAI) is core part of the Bretton Woods II (BWII) effort to help large asset allocators reduce risks and optimize returns through strategic investments in responsible investing and sustainable development. BWII chose to focus on Sovereign Wealth Funds (SWF) and Government Pension Funds (GPF) for the RAAI for a variety of reasons.  First, the assets of this community, comprising tens of trillions of dollars, dwarf all other pools of capital worldwide. When they shift behavior, SWF and GPF exert a gravitational pull on other investors, companies, and projects. With their scalable assets, large internal resources and in-house capabilities, SWF and GPF don’t need to accept the world as we see it and can have a substantial influence on sustainable development outcomes. It is worth noting that just a one percent allocation of the AUM of the 121 SWF and GPF evaluated under the RAAI would be greater than all Official Development Assistance (ODA) dispensed in 2016.

SWF and GPF also invest over generations and have a natural long-term horizon that is consistent with the goals and objectives of sustainability. In addition, with a high AUM to asset-holder ratio, and a close relationship with their respective governments, many of whom are signatories to the SDG, coordination can be efficient and effective. Finally, in terms of alignment, long-term asset allocators are among the investor groups that have the biggest stake in reducing global systemic risks and improving sustainable development.

Integrating Sustainable Investment Practices

No sensible asset allocator would willingly invest in companies that pollute the environment, exploit labor or operate unethically. Most investors would agree that such companies pose an increased risk of destroying value over the long term.  Yet despite this consensus, a surprisingly low percentage of asset allocators assess companies for value-destroying risks or include criteria in their investment process to mitigate them.  The total amount of capital deployed based on responsible investment practices thus remains far below its potential.

A critical reason for this is that asset allocators lack uniform, easy to use standards and guidelines that can help to fully integrate their investment and sustainability decision making. While sophisticated ESG tools exist, many are overly complex, have onerous reporting requirements, and are not very user friendly; they are often geared towards highly specialized teams within companies, asset managers and asset allocators. This is the key challenge Bretton Woods II sought to address with the Responsible Asset Allocators Initiative. The BWII RAAI, is grounded in the realization that for long-term institutions, investing sustainably is not only the right thing to do but also the smart thing to do. 

Most asset allocators still operate under a false choice: that they must choose between optimizing returns for their stakeholders, and environmental, social and governance concerns. Over the last decade, however, what has become clear in academic study after academic study is that companies and projects with higher scores on environmental, social, and governance metrics generate higher financial and economic returns over time. Combining analysis of long-term sustainable risks and traditional financial metrics is an important way to optimize return, reduce risk and identify opportunities for future growth, all while aligning portfolios with broader goals of society. Regulators, too, are coming to support this idea, opening a path for allocators to include non-traditional financial risks such as ESG factors in the portfolio selection process while highlighting their impact on long-term value. Pressure also is mounting from stakeholders and the public, who would like to see sustainability risks incorporated into their pensions and long-term savings funds. As stewards of long-term capital, the question is not whether large institutional investors can afford to integrate responsible investment practices into their portfolios but rather, can they afford not to.

Principles and Criteria

BWII established ten core Principles and Criteria for responsible and sustainable investing that are specific to the asset allocator community, easy to understand and adopt, and that help SWF and GPF mitigate risks and enhance returns over the long term. By assessing and scoring the performance of asset allocators against these principles, and especially by highlighting the performance of the Leaders in the community, BWII believes it can jump-start investment toward sustainability. The ten core principles and criteria were informed by discussions with asset allocators and by guidelines from multilateral institutions and agreements across the field of ESG and sustainability, including the Principles for Responsible Investing (PRI), the United Nations Global Compact (UNGC), the OECD Principles of Corporate Governance, regional and global sustainable investment forums (Eurosif, RIAA, GSIA), the Investor Network on Climate Risk (INCR/CERES), the UN Sustainable Development Goals and the International Forum on Sovereign Wealth  Funds (IFSWF).  The ten principles are Disclosure, Intention, Clarity, Integration, Implementation, Commitment, Accountability, Partnership, Standards, and Development. SWF and GPF are measured against these Principles based on expert analysis of annual reports, websites and other materials in the public domain.


In Depth

Bretton Woods II Responsible Asset Allocator Initiative

About this Project

The Responsible Asset Allocator Initiative (RAAI) is part of the overall Bretton Woods II (BWII) effort to help large asset allocators reduce risks and optimize returns through strategic investments in responsible investing and sustainable development.

Authors

Dr. Tomicah Tillemann was the Executive Director of the Digital Impact and Governance Initiative (DIGI) at New America.

Scott Kalb is the Founder and Director of the Responsible Asset Allocator Initiative at New America, dedicated to mobilizing capital toward responsible investing and supporting the United Nations Sustainable Development Goals. The RAAI publishes the “Leader’s List: The 25 Most Responsible Asset Allocators” in the world. Mr. Kalb is the founder and CEO of KLTI Advisors, a firm dedicated to working with the sovereign and government fund community on long-term investment solutions. In addition, Mr. Kalb serves as the Chairman of the Sovereign Investor Institute, a membership organization of Institutional Investor and leading forum for sovereign and government funds around the world.

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