Minnesota’s investment board to create climate risk, DE&I committees

The LP’s retiring CIO said the committees will be created by next quarter ‘so that the work continues’ on ESG initiatives.

Minnesota’s state investment board is establishing permanent committees to study trends related to climate change and diversity, equity and inclusion.

Retiring chief investment officer Mansco Perry III said during Minnesota SBI’s board meeting on 24 February that the institutional investor, which manages $94.1 billion in combined state pension funds, will create Climate Risk and DE&I subcommittees by next quarter “so that the work continues”.

Minnesota is a big investor in private markets and has more than $10 billion invested in private equity, with managers such as KKR, Apax Partners, Nordic Capital and TPG Capital, according to affiliate title PEI‘s databases.

“I personally think that these two ESG initiatives are going to be with us for quite some time,” Perry said during the virtual board meeting, adding that establishing dedicated committees is the best way to ensure research Minnesota SBI has conducted is “not a one-and-done exercise”.

Underpinning the new committees are two reports that were presented at the meeting: part one of a climate change risk assessment; and an internal update on DE&I initiatives.

The Climate Risk Project is a series of three studies being conducted by Minnesota SBI’s adviser Meketa Investment Group. The first study reviewed “high-level global trends”, as well as data and metrics related to climate change investments, sectors and geographies, and regulatory frameworks, according to the report, which was included in board meeting documents.

“The project is to address the impact of climate risk and how best to mitigate its impact on SBI investment assets,” Sarah Bernstein, head of sustainability at Meketa, said during the board meeting. “Institutional investors are dramatically increasing their collaboration and efforts” to address climate risk, she said.

In particular, the climate risk report highlighted an increasing need for environmental data to include Scope 3 greenhouse gas emissions, which has both emissions based on a company’s inputs as well as what’s generated by production.

“The realisation is that decarbonising an investment portfolio, if disconnected from decarbonisation in the real economy, does not address long-term climate risks,” the report said.

The DE&I Task Force provided an update after holding its first meeting last October. The task force provided Minnesota SBI research on how diversity initiatives can impact a company’s value and an investor’s portfolio returns. It also offered recommendations for how the LP can institutionalise DE&I initiatives.

The recommendations include developing a DE&I report based on data that Minnesota SBI is collecting, enhance due diligence practices and amend the LP’s strategy to incorporate “our evolving understanding of the benefits of diversity”, the report said.

“We think it is absolutely critical at this point that we introduce diversity as an investment objective,” Susanna Gibbons, a Minnesota SBI investment advisory council member who co-chairs the DE&I Task Force, said during the meeting. “Over the years, I think there has been objection to incorporate what some see as a non-economic topic. Our research clearly demonstrates precisely the opposite.”

Side by side, both reports show how ESG initiatives are moving at different paces.

The climate risk report featured environmental data and measurements collected over the years from varying financial markets. On the other hand, the DE&I Task Force said less than half of Minnesota SBI’s 84 private markets fund managers provided “some diversity data”.

“The task force discussed the need to balance the depth of information desired with the likelihood of receiving that information,” the report noted.