ESG is splitting institutional investors into three camps. LPs are either going full-bore on responsible investing and expect no less of their managers, maintain that ESG is solely about capturing sustainable returns or are continuing with business as usual.

The New Zealand Superannuation Fund, a NZ$57 billion ($39.9 billion; €34 billion) sovereign wealth fund, is an example of the first. The investor has adopted industry initiatives covering a wide range of issues but has built its forward-looking mandate with climate change at the core.

NZ Super is a founding member of the United Nations-supported Principles for Responsible Investment, signed the Paris Pledge for Action in 2015 and released a climate impact report last year based on reporting recommendations from the Taskforce on Climate-related Financial Disclosures.

The fund also prioritises corporate governance. It has joined the International Corporate Governance Network and evaluates company performance on issues ranging from human rights to labour and anti-corruption using the UN Global Compact Principles.

“ESG is not just a priority, it’s an underpinning investment belief,” Del Hart, head of external investments and partnerships at NZ Super, told New Private Markets in an email. To secure capital from this investor, GPs must show that NZ Super’s priorities are “at the heart of their investment strategy”, Hart explained.

“Managers are under pressure from stakeholders to think about ESG […] it’s the direction of travel for our industry,” she said.

In the middle is the $308.6 billion California State Teachers’ Retirement System, a pension that has faced criticism from activists for not divesting from fossil fuels fast enough while, at the same time, participating in a scheme with other investors to place climate-friendly representatives on ExxonMobil’s board of directors.

CalSTRS views its ESG policy as a “tool” to assess the sustainability risks and financial implications of investments, according to a CalSTRS spokesperson. The LP’s ESG investment beliefs provide a “foundational framework” to focus on “value creation from sustainability integration”, the spokesperson told New Private Markets.

CalSTRS has adopted framework guidance from the Sustainability Accounting Standards Board’s Investor Advisory Group to help price ESG-related risks and opportunities. It also adheres to a number of initiatives including TCFD and Climate Action 100+, the diversity-focused Thirty Percent Coalition, Human Capital Management Coalition, and the Principles for a Responsible Civilian Firearms Industry.

Expect more disclosures

Regardless of which framework an investor adopts and for what reasons, it’s all done in the name of transparency. Reporting and measuring sustainability is about shining a different light on a portfolio.

That’s why pushing for more GP disclosures has become “critical” to building a sustainable portfolio at APG, a €603 billion pension based in the Netherlands and managing 75 percent of its assets internally, a spokesperson for the LP told New Private Markets.

“It’s not just expected by APG and its clients, but it is increasingly expected by all industry members and also for regulatory reporting purposes,” the spokesperson said.

APG’s real assets group is a founding member of the reporting benchmark GRESB, which aims to standardise and validate performance data for infrastructure and real estate investments. APG also requires alignment with the UN PRI and the UN Global Compact and incorporates disclosure guidelines from TCFD, SASB and the International Finance Corporation.

In addition to industry initiatives, APG has developed its own internal ESG framework, the SDI Asset Owner Platform, which is a data-driven approach to helping investors identify and evaluate companies on their contribution to the UN Sustainable Development Goals.

“To an extent, there will always be some ‘bespoke’ internal and client reporting that might not be able to be addressed by an external standard framework,” the spokesperson explained.

Gaps in the data that frameworks collect is one of today’s challenges in integrating ESG, said Kate Bromley, head of responsible investment at QIC, a A$93 billion ($69 billion, €58.3 billion) investment company owned by the Queensland government. QIC is among the world’s largest institutional investors directly owning infrastructure, with more than $16 billion deployed across a portfolio of 20 investments.

While QIC has been an early adopter of disclosure frameworks such as TCFD, SASB and the Global Reporting Initiative, Bromley said that the proliferation of these initiatives has fragmented the data that gets reported.

“We are requiring more granular and specific metrics for particular industries and asset classes that can provide better insight from an investment decision-making perspective,” Bromley told New Private Markets. “But it’s very difficult to make comparisons across sectors when we lack availability of comparable data.”

Bromley believes the industry needs to move towards a set of “universally applicable” ESG metrics as a baseline for investors around the world.

“Much in the same way that accounting sets a means and a way to construct information around the way companies are run,” she added, “I think a standard set of sustainability metrics gives us a starting point to understand the principles and key things that a company needs to demonstrate how sustainably its operating.”

Whether that moves in the direction of fewer ESG measurement approaches, or if investors seek to have their own priorities met through more specific guidelines, they still seem to be in the driver’s seat for determining how sustainability best practices ultimately mature.

However, not all LPs have yet embraced ESG at the same pace as these investors. Some, such as Teacher Retirement System of Texas, are in the early stages of establishing how sustainability sits within its fiduciary duty. But the influence that these four ESG leaders will exert over the direction of the industry is significant because it is likely to play a role in the standards that end up catching on.