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.
<div class="accordion"> <div class="accordion-item"> <button class="accordion-trigger">1. Disclosure</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should provide public disclosure of its mission, investment beliefs, objectives, asset allocation, portfolio and long-term performance on its website or through an annual report.</p> <h4>Description</h4> <p>The Fund must publish information that reflects their investment practices and objectives. This type of disclosure helps to demonstrate that the Fund is properly set-up, and that investments are made on an economic basis. This information must be accessible to the general public, either on the Fund's website or in an annual report.</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">2. Intention</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should publish an annual statement that discusses what sustainable investing means to the organization and how it manages long-term non-traditional financial risks including ESG issues</p> <h4>Description</h4> <p>The Fund should provide information that indicates its intent to engage in sustainable investing. This provision of intent helps demonstrate that any sustainable investing activity was deliberate, and not simply coincidental.</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">3. Clarity</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should define the organization's objectives as they relate to addressing non-traditional long-term sustainable risks</p> <h4>Description</h4> <p>The Fund should state specific goals for its sustainable investing program, in terms of assets to be deployed, strategies to be pursued and targets it hopes to achieve</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">4. Integration</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should explain how the management of long-term sustainable investment risks is applied to the whole portfolio</p> <h4>Description</h4> <p>The Fund should integrate sustainable investing criteria in the overall investment process. The fund may practice sustainable investing in various forms, for example through negative screening (exclusions), best in class and thematic strategies, active ownership and engagement, and impact investing, but extra points are awarded for ESG integration</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">5. Implementation</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <div class="accordion-sub"> <h4>5a. Implementation – Strategies</h4> <h5>Criteria</h5> <p>The Fund should explain how sustainable investing practices are implemented in specific investment strategies</p> <h5>Description</h5> <p>The Fund should provide examples of its sustainable investment practices.</p> </div> <div class="accordion-sub"> <h4>5b. Implementation – Benchmarks</h4> <h5>Criteria</h5> <p>The Fund should report on the benchmarks it is using for these sustainable investment strategies</p> <h5>Description</h5> <p>The Fund should identify the benchmarks it is using to manage and monitor its sustainable investing strategies. For example, this could be a customized benchmark, an index provided by an external service, or a template from an independant organization</p> </div> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">6. Commitment</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should disclose resources dedicated to implementation of sustainable investment practices and the management of long-term non-traditional investment risks</p> <h4>Description</h4> <p>The Fund should have staff that is dedicated to, or responsible for, the firms's sustainable investment strategies. This may include a resource who heads sustainable investing, a team that is dedicated to sustainability, or a senior executive responsbile for managing the sustainable investing program</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">7. Accountability</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should provide information on how it measures, monitors and reports the financial and non-financial performance of sustainable investments</p> <h4>Description</h4> <p>The Fund should not only disclose it financial performance, but also its non-financial performance with respect to its sustainable investment activity. The performance results for its sustainable investing activity can include ESG benefits such carbon footprint reduction and job creation.</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">8. Partnership</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should provide information on partners it is working with to manage long-term, non-traditional investment risks and strategies</p> <h4>Description</h4> <p>The Fund should be engaged with organizations that promote sustainable investing such as the UN PRI or the CDP. Through its partnership with these organizations, the Fund can establish a network through which it can stay at the forefront of emerging ESG issues, learn about new developments in the ESG space and collaborate with other institutional investors on best practices.</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">9. Standards</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <h4>Criteria</h4> <p>The Fund should provide information on uniform, independent, external standards it has adopted to guide and measure its sustainable investing strategy</p> <h4>Description</h4> <p>The Fund may develop proprietary standards for sustainable investing, where applicable, but should also adopt external, uniform and consistent standards (such as those provided by the UNPRI, the UNGC or the GRESB) for its sustainable investing efforts. In addition the Fund should require external managers to report on the companies held on behalf of the asset allocator using these standards. This well help to avoid "greenwashing," provide greater transparency and help the Fund make meaningful comparisons of sustainability criteria across the portfolio.</p> </div></div> </div> <div class="accordion-item"> <button class="accordion-trigger">10. Development</button> <div class="accordion-panel"><div class="accordion-panel-inner"> <div class="accordion-sub"> <h4>10a. Development – Frontier Markets</h4> <h5>Criteria</h5> <p>The Fund should provide information on asset allocation and sustainable investment practices in emerging markets, specifically foreign frontier markets</p> <h5>Description</h5> <p>The Fund should not only invest in the larger well known emerging markets (BRIC nations), but also in foreign frontier markets.</p> </div> <div class="accordion-sub"> <h4>10b. Development – Sustainability</h4> <h5>Criteria</h5> <p>The Fund should apply sustainable investment criteria in these foreign frontier emerging markets</p> <h5>Description</h5> <p>The Fund should apply responsible investing practices in emerging and frontier markets. The Fund should not invest in these markets only through passive, market cap weighted indexes. The fund should not invest only in extractive industries in emerging and frontier markets.</p> </div> </div></div> </div> </div>
