calstrs crhis ailman
Chris Ailman

CalSTRS’ ‘long debate’ with ESG laggards
The $283.4 billion California State Teachers’ Retirement System is by all accounts a progressive pension when it comes to sustainability. This month it agreed to invest $150 million per year in sustainable private equity co-investments to focus on “low carbon solutions” to the climate crisis (details here).

It’s significant, then, that when it comes down to it, a lack of an ESG policy at a manager is not a deal-breaker for the pension. That’s according to comments from chief investment officer Chris Ailman at an online event hosted by The Economist last week. Ailman was challenged by Carlyle’s David Rubenstein, who is almost as good at interviewing as he is at raising capital, with a hypothetical dilemma: “Let’s suppose I am a private equity person… I come to CalSTRS with a 10-year track record of 35 percent net internal rate of return… I am a technology software specialist… and I say to you, ‘Give me some money.’ And you say to me, ‘Well what is your ESG policy?’ and I say, ‘I don’t care about that; you want a 35 percent net internal rate of return, give me money.’ … Would I get the money from you or not?”

“You would get a long debate, David,” replied Ailman. “And in the end that’s going to be part of a tough call. I don’t know a firm that doesn’t have an ESG policy at this point. If they are making 35 percent in the tech field, they are going to be paying attention, because they’ll have university endowments, sovereign wealth funds, who all care about E, S and G.

“By and large private equity is looking at long-term business risks, many of which I define as E, S and G risks. So we would probably be pretty reticent to invest if they were really adamant that they did not have a policy… We want every firm that we do business with to have an ESG mandate or at least an ESG screen on their investment decisions.

“We think it is absolutely critical to be able to make money and to manage risk. And private equity is all about managing risk.”

The downside of hard targets
Private markets giant EQT has found its ambitious diverse hiring targets to be a little too ambitious. Writes CEO Christian Sinding in the firm’s annual sustainability report (released yesterday): “Last year, we set a gender diversity target to have women account for 65 percent of the investment advisory professionals hired in 2020. A majority of our teams accomplished this.”

Digging into the data – which to the firm’s credit is in the report – 54 percent of the investment professional hires were female, with only 60 percent of the teams hitting the target. It was “challenging in a year where the pandemic slowed down recruitments”, notes the report, although it is unclear how this would affect the gender balance of recruits.

Credit where credit is due: EQT is ahead of the game in terms of having specific targets and is moving the right direction. As CFO Kim Henriksson told New Private Markets this morning, the firm is “not satisfied at all” with progress, and noted that it is a long-term project. He also noted that there are financial consequences to missing ESG related targets: “Our performance related pay is tied to a number of different metrics… including various ESG-related metrics, including this.”

ESG-linked sub lines: Modern marvel or ‘meh’?
A handful of firms now have subscription credit facilities with costs linked to ESG performance. Better “non-financial” performance translates into financial reward in the form of less expensive bridge facilities. In this 14-minute podcast, four PEI editors discuss the trend.

Don’t have time to listen? My takeaway from the conversation was that these facilities (which come in various shapes and sizes) should be a welcome innovation… but their value could be undermined by a couple of question marks:

  • Can the financial consequence of missing an ESG target really be meaningful if – as we have been told before – these facilities are relatively inexpensive?
  • Will we know whether a fund has hit or missed its targets?

Both points come down to transparency: important if these facilities can be considered more than just window-dressing.

BlackRock hire
BlackRock has hired a new global head of sustainable investing, Paul Bodnar, a former advisor to President Obama on climate. The $8.7 trillion AUM firm is a major player in private markets (see its announcement yesterday that it has raised $3 billion for its debut secondaries fund) and a vocal proponent of sustainable investing through its chairman and CEO Larry Fink. It will be hoping Bodnar will be more “on message” than his predecessor. The former sustainable investing chief, Tariq Fancy, described BlackRock’s (and other investors’) commitment to SRI as “greenwashing the economic system” in a USA Today op-ed in March.

‘Helpful’ taxonomy
Investors are hopeful about the effects of EU’s “taxonomy” regulation. “I think there has to be transparency in the marketplace: driving towards a common taxonomy… so we know what we’re talking about when somebody says ‘green’,” said Saadia Madsbjerg, former managing director of the Rockefeller Foundation, speaking at The Economist’s Sustainability Week. “There’s a way of understanding who’s having impact and who’s not. I think those things are hugely beneficial.” Adam Matthews, chief responsible investment officer at the Church of England Pension Board, described taxonomy as “a horrible word,” but “nonetheless helpful”.

The EU taxonomy regulation requires managers to disclose pre-contractual environmental sustainability and impact information from 1 January, 2022. And it provides definitions for common environmental terms such as ‘economically sustainable’. Read more on EU regulation here.

Net Zero
Stafford Capital Partners, a private markets and real assets firm with $7.7 billion in assets, has signed up to the Net Zero Asset Managers initiative (press release here). Signatories commit to “support the goal of net zero greenhouse gas emissions by 2050 or sooner.” Among the other 72 signatories are Brookfield, IFM Investors, LGT Capital Partners and M&G Investments.