Category: Investments

CalSTRS’ board sets science-based emissions goal for 2030 and commits to additional net zero actions

Mary Pat Campbell

Link: https://www.calstrs.com/calstrs-board-sets-science-based-emissions-goal-for-2030-and-commits-to-additional-net-zero-actions

Excerpt:

The board set four initial measures for integrating the net zero strategy across the portfolio, with a specific focus on emissions reductions:

  1. Interim science-based goal. Reduce greenhouse gas emissions across the investment portfolio by 50% by 2030, consistent with the latest findings of the United Nations’ Intergovernmental Panel on Climate Change.
  2. Systematic decision-making process. Adopt processes to incorporate greenhouse gas emissions into investment decisions as part of traditional risk-and-return analyses and their potential impacts on the CalSTRS Funding Plan.
  3. Reduced emissions. Target a 20% allocation of the Public Equity portfolio to a low-carbon index to significantly reduce portfolio emissions while managing active risk.
  4. Integration of climate scenarios. Incorporate future climate-related scenarios into CalSTRS’ asset-liability modeling framework to help guide CalSTRS’ investment allocations.

These actions reflect increasing global momentum toward achieving a net zero economy. CalSTRS will review its net zero goals and strategy annually to adjust for the latest available data, market fluctuations and related scientific advancements.

“CalSTRS’ net zero pledge is rooted in its century-long promise to deliver a secure retirement for California’s hard-working educators and their families,” said Board Chair Harry Keiley. “Taking these interim actions to reduce emissions in our portfolio is a profound step forward and underscores our commitment to considering the impacts of climate change fully and systematically as we manage our fund on every level.”

Author(s): Rebecca Forée

Publication Date: 31 August 2022

Publication Site: Calstrs

New York Announces Historic Fossil Fuel Divestment Plan

Mary Pat Campbell

Link: https://www.nrdc.org/experts/rich-schrader/new-york-announces-historic-fossil-fuel-divestment-plan

Excerpt:

As part of the plan, the Comptroller announced an aggressive schedule of divestment activity over the next four years. This year already, the Common Fund has divested from 22 coal companies. In the next few months, it will divest from companies with tar sands investments. After that, over the next several years, it will divest from these subsectors of the fossil fuel industry:

  • Shale oil and gas firms;
  • Integrated oil/gas majors like Exxon and Chevron as well as smaller integrated companies;
  • All oil/gas exploration and production firms;
  • Fossil fuel service firms, like Schlumberger;
  • And finally, fossil fuel transportation and pipeline companies like Kinder Morgan and Williams.

In addition, the Common Fund is moving forward with two key steps, both supported by the 2018 Decarbonization Panel that was jointly appointed by Governor Cuomo and Comptroller DiNapoli. First, the Fund will hire new staff trained in financial analysis of climate impacts and dangers. And second, the Common Fund will actively vote against board directors of non-fossil fuel companies that do not prioritize climate concerns in alignment with the Fund’s decarbonization goals.

Author(s): Rich Schrader

Publication Date: 9 Dec 2020

Publication Site: NRDC

So Are ESG Investments Lousy, or Not?

Mary Pat Campbell

Link: https://www.ai-cio.com/in-focus/market-drilldown/so-are-esg-investments-lousy-or-not/?oly_enc_id=2359H8978023B3G

Excerpt:

One criticism of ESG investing is that, when it shows good returns, this might be because of temporary factors that have an outsize impact. Such superior returns are  often driven by climate-news “shocks,” declared Robert Stambaugh, a professor at the University of Pennsylvania’s Wharton School, and two other academics, in a recent paper. The reference is apparently to a spell of severe drought or destructive hurricanes. The professors expressed uncertainty as to whether any future ESG outperformance can be assumed.

Of course, with climate-oriented investing now a partisan issue, a welter of claims and counter-claims has appeared. To pro-ESG folks, science is on their side, hence the opposition is just blowing smoke to confuse people.

Anti-ESG politicians appear to be convincing the public that a “false equivalence” exists between their stance and the sustainability advocates, contended Witold Henisz, director of Wharton’s ESG Initiative, in a recent article in the Knowledge Wharton periodical. He wrote that “ideological opposition [is] cynically seeking a wedge issue for upcoming political campaigns — and, so far, it appears to be working.”

Whatever the outcome of the current debate over ESG-related bans and the like, the climate change question is not going away. Says CalSTRS’s Ailman, “It will be with us for the next 50 years.”

Author(s): Larry Light

Publication Date: 8 Sept 2022

Publication Site: ai-CIO

Transcript: Tom Rampulla

Mary Pat Campbell

Link: https://ritholtz.com/2022/10/transcript-tom-rampulla/

Excerpt:

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest, Tom Rampulla has been with the Vanguard Group since 1988. He has worked with every CEO, starting with Jack Bogle, all the way up to the current CEO Tim Buckley, and has essentially helped to establish the Financial Advisors Group, essentially the group at Vanguard that works with RIAs and broker dealers and other financial professionals who provide portfolios, advice, financial plans to the investing public.

He has a unique perch from with which to view the financial services industry, both from within Vanguard as well as looking out over the financial landscape and seeing what’s going on with such trends as mutual funds, ETFs, direct indexing, the rise of passive, the rise not just of Vanguard, but the dominance of Vanguard, and the associated Vanguard effect, the pressure on fees that have helped make investing so affordable. We discussed all these things as well as why there has never been a better time to be a retail investor than right now, right here in this era. I found the conversation to be absolutely fascinating, and I think you will also.

So with no further ado, my conversation with the Vanguard Group’s Tom Rampulla.

I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My special guest this week is Tom Rampulla. He is the managing director of Vanguard’s Financial Advisor Services Division, where he began back in 2002. That group provides investment services, education and research to more than a thousand financial advisory firms, representing more than $3 trillion in assets. Tom joined Vanguard back in 1988. Tom Rampulla, welcome to Bloomberg.

THOMAS RAMPULLA, MANAGING DIRECTOR, FINANCIAL ADVISOR SERVICES DIVISION, VANGUARD: Thanks, Barry. It’s great to be here.

……

RAMPULLA: You talk to them off the ledge. My clients, the advisors are really earning their fees right now, and providing a tremendous amount of value. So there’s a lot of phone volume, a lot of digital volume, so we’re very, very, very busy. And you know, it’s all about calming people down, we’ll get through this, you look at the long term. Things tend to work out. We — you know, our investing philosophy is, first of all, get an objective, put a plan together, make sure it’s a low cost plan.

And the other thing is be disciplined, right. Stick to your plan, just get rid of the noise. This is big noise. This isn’t just some little blip. This is big noise, but you know, get rid of noise and be disciplined. Most times that’s around rebalancing. This time, stocks and bonds are both going down, so you’re not rebalancing so much. But you know, March of 2020 was a great opportunity to rebalance and add some value. So it’s really sticking to that long-term approach and that discipline is what we really recommend.

Publication Date: 18 Oct 2022

Publication Site: Barry Ritholtz

Why private equity sees life and annuities as an enticing form of permanent capital

Mary Pat Campbell

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

Graphic:

Excerpt:

Once they’ve acquired a book, firms can turn their attention to driving value. Building on our guidelines for closed-book value creation, owners have six levers that can collectively improve ROE by up to four to seven percentage points (exhibit):

  • Investment performance: optimization of the SAA and delivery of alpha within the SAA
  • Capital efficiency: optimization of balance-sheet exposures—for example, active management of duration gaps
  • Operations/IT improvement: reduction of operational costs through simplification and modernization
  • Technical excellence: improvement of profitability through price adjustments, such as reduced surplus sharing
  • Commercial uplift: cross-selling and upselling higher-margin products
  • Franchise growth: acquiring new blocks or new distribution channels

Most PE firms view the first lever, investment performance, as the main way to create value for the insurer, as well as for themselves. This lever will grow in importance if yields and spreads continue to decline. Leading firms typically have deep skills in core investment-management areas, such as strategic asset allocation, asset/liability management, risk management, and reporting, as well as access to leading investment teams that have delivered alpha.

Capital efficiency is also well-trod ground, and for private insurers it presents a greater opportunity given their different treatment under generally accepted accounting principles, (GAAP), enabling them to apply a longer-term lens and reduce the cost of hedging. However, most firms have yet to explore the other levers—operations and IT improvement, technical excellence, commercial uplift, and franchise growth—at scale. Across all these levers, advanced analytics can enable innovative, value-creating approaches.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 February 2022

Publication Site: McKinsey

Beware of Private Equity Gobbling Up Life Insurance and Annuity Companies

Mary Pat Campbell

Link: https://cepr.net/report/beware-of-private-equity-gobbling-up-life-insurance-and-annuity-companies/

Graphic:

Excerpt:

Private equity (PE) firms have had their eye on individual retirement savings since 2013 when they were first allowed to market directly to individuals. Pension funds already allocate workers’ retirement savings to PE firms, which use these assets to fund a range of risky equity and debt investments. Access to personal retirement savings, including IRAs and 401(k)s, would open up a huge new source of capital for PE.

PE firms’ first attempts to get a piece of these very sizable direct contribution assets were largely unsuccessful. More recently, however, they have turned to acquiring and/or managing life insurance and annuity assets. Some PE firms buy out life insurance and annuity companies, acquiring their assets. Others take a minority stake in a life insurance or annuity company in exchange for the right to manage all of the company’s assets. In both cases, the PE firm substantially increases assets under its management. They have also stepped-up efforts to recruit near-wealthy as well as wealthy investors, so-called retail investors, to allow PE firms to manage their assets. These activities have been a game changer for the largest PE firms. As Blackstone CEO Stephen Schwarzman put it as he lauded the firm’s third quarter 2021 performance, this quarter has been “the most consequential quarter [in history] . . . a defining moment in terms of our expansion into the vast retail and insurance markets.”1

Meanwhile, policyholders find that a PE firm now manages their retirement savings. This raises a major concern for individuals and government regulators: Given PE firms’ track record of failing to observe their duty of care as owners of Main Street companies as well as their poor fund performance in recent years,2 can they be trusted to protect the retirement savings of millions of Americans?

Author(s): EILEEN APPELBAUM

Publication Date: 13 January 2022

Publication Site: CEPR (Center for Economic and Policy Research)

Why do pension schemes use liability-driven investment?

Mary Pat Campbell

Link: https://lotsmoore.co.uk/why-do-pension-schemes-use-liability-driven-investment/

Excerpt:

Liability-driven investment allows schemes to invest in the growth assets they need to close the funding gap while reducing the impact of interest rates on the liabilities. This is achieved by assigning a portion of a portfolio to an LDI fund. Rather than this fund just holding gilts, it holds a mixture of gilts and gilt repos.

A gilt repo is re-purchase agreement. The LDI manager sells a gilt to a counterparty bank while arranging to buy back that gilt at a later date for an agreed price. This gilt repurchase agreement provides cash to the pension scheme which it can then use to invest in other assets.

This mixture of gilts and gilt repos in an LDI fund uses leverage to provide capital to the pension fund. It is akin to using a mortgage to buy a house. Different levels of leverage were available in the funds – the more leverage, the greater the ratio of gilt repos to gilts in a fund.

The more leverage in a fund, the less capital a pension scheme had to lock up in government debt and the more it could use to invest in assets which could help to close its funding gap. This was helpful when interest rates were low but became problematic when gilt yields rose.

Author(s): Charlotte Moore

Publication Date: 17 Oct 2022

Publication Site: Lots Moore

Bank of England Bought Only Small Amounts of Bonds even Today, Warns Pension Funds They Have “Only Three Days Left” to Unwind Derivatives with BOE Support

Mary Pat Campbell

Link: https://wolfstreet.com/2022/10/11/bank-of-england-bought-only-small-amounts-of-bonds-even-today-warns-pension-funds-they-have-only-three-days-left-to-unwind-derivatives-with-boe-support/

Graphic:

Excerpt:

The relatively puny amounts of actual purchases show that the BOE is trying to calm the waters around the gilts market enough to give the pension funds some time to unwind in a more or less orderly manner whatever portion of the £1 trillion in “liability driven investment” (LDI) funds they cannot maintain.

The small scale of the intervention also shows that the BOE is not too upset with the gilts yields that rose sharply in the run-up to the crisis, triggering the pension crisis, and have roughly remained at those levels. The 10-year gilt yield today at 4.44% was roughly unchanged from yesterday and just below the September 27 spike peak.

And it makes sense to have these kinds of yields in the UK, and it would make sense for these yields to be much higher, given that inflation has spiked to 10%, and yields have not kept up with it, nor have they caught up with it. And to fight this raging inflation, the BOE will need to maneuver those yields far higher still:

So today, BOE Governor Andrew Bailey, speaking at the Institute of International Finance annual meeting in Washington D.C., warned these pension fund managers that the BOE will only provide this level of support, however little it may be, through the end of the week, to smoothen the gilt market and give the pension funds a chance to unwind in a more or less orderly manner the portions of their LDI funds that they cannot maintain.

Author(s): Wolf Richter

Publication Date: 11 Oct 2022

Publication Site: Wolf Street

Princeton to ‘Dissociate’ Fossil Fuel Investments

Mary Pat Campbell

Link: https://www.ai-cio.com/news/princeton-to-dissociate-fossil-fuel-investments/

Excerpt:

Princeton University’s board of trustees has voted to dissociate from 90 companies as part of an administrative process established last year that focuses on companies involved in the thermal coal and tar sands segments of the fossil fuel industry, or that are engaged in climate disinformation campaigns.

Thermal coal, which is burned for steam and used to produce electricity, was made a priority because it emits significantly more carbon dioxide than alternative available fossil fuels, the university said. It also said that tar sands oil, which is derived from loose sands or sandstone, also produces much higher emissions than conventional crude oil, including in its extraction and production process. However, Princeton said thermal coal and tar sands businesses can be exempt from dissociation if they can prove they can meet a rigorous standard for greenhouse gas emissions.

And in a move to help the university reach its goal of eventually having an endowment portfolio that is net zero of greenhouse gases, the Princeton University Investment Company, which manages the university’s $38 billion endowment, will also eliminate all holdings in publicly traded fossil fuel companies. PRINCO said it will also ensure that the endowment does not benefit from any future exposure to fossil fuel companies.

Author(s): Michael Katz

Publication Date: 6 Oct 2022

Publication Site: ai-CIO

Fiscal Year 2022 Brings Outperformance for Illinois State Teachers’ Retirement System

Mary Pat Campbell

Link: https://www.ai-cio.com/news/fiscal-year-2022-brings-outperformance-for-illinois-state-teachers-retirement-system/

Excerpt:

The Teachers’ Retirement System of the State of Illinois has avoided a significant portfolio downswing despite the equity slowdown that has burdened asset managers with thus far in 2022. Through the second quarter, the fund has returned-1.17% net of fees, a favorable rate of return compared to other public pension systems across the country in fiscal year 2022.

At the end of FY 2022, the 40-year rate of return was 9.3%. This 40-year annualized return eclipses the system’s estimated long-term investment rate of 7%.

The net investment loss will not impact the plans’ ability to pay out benefits to its more than 434,000 members. In 2022, TRS will pay more than $7 billion in benefits to more than 128,000 members and their families.

Author(s): Dusty Hagedorn

Publication Date: 6 Oct 2022

Publication Site: ai-CIO

19 GOP Attorneys General Slam BlackRock Over ESG Investments

Mary Pat Campbell

Link: https://www.ai-cio.com/news/19-gop-attorneys-general-slam-blackrock-over-esg-investments/

Excerpt:

A group of 19 Republican state attorneys general have written a letter to BlackRock stating that the asset manager is using state pension fund assets in environmental, social and governance investments that “force the phase-out of fossil fuels, increase energy prices, drive inflation and weaken the national security of the United States.”

The eight-page letter outlines how the group believes BlackRock is using “the hard-earned money of our states’ citizens to circumvent the best possible return on investment.”

“Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda. The time has come for BlackRock to come clean on whether it actually values our states’ most valuable stakeholders, our current and future retirees, or risk losses even more significant than those caused by BlackRock’s quixotic climate agenda,” the letter says.

The attorneys general asked BlackRock to respond by August 19.

Author(s): Amy Resnick

Publication Date: 9 Aug 2022

Publication Site: ai-CIO