Pension System Allocations to Sustainable Finance

Research and text by Cary Krosinsky and Lisa Liu

• One of the most important drivers for helping accelerate progress towards sustainability is ensuring that adequate funding is being brought to bear towards sustainability solutions. 
• Demand, therefore, by large asset owners such as city and state pension funds, sovereign wealth funds, university endowments and foundations, as well as wealthy families and corporations with significant cash on hand, needs to become adequate to match the growing supply of companies and projects that can scale up and deploy innovative solutions where needed. Such supply of sustainable solutions can best succeed when met with adequate demand from investors. At the same time, while interesting techniques such as blended finance can assist solutions which do not provide the sort of risk/return profile asset owners seek against their understandably necessary annual return targets, reaching the sort of necessary scale of investor demand often means fitting mandates within existing asset allocation models and current financial goals and expectations for beneficiaries.
• Carve outs for sustainable finance by asset owners are often a solution for making space for sustainable investment, which then creates more of a supply-demand dynamic which gives space for innovation and sustainability strategy to breath (such as within Climate Tech VC) and scale (such as large public companies seen as both sustainability and financial opportunities).
• Building on our 2020 Sustainable Finance Institute pension fund case studies performed for the World Bank by students at Columbia University's SIPA, here are some of the best practice case studies of the present time, which we are very happy to see continuing to advance and make meaningful progress, acting as examples for other asset owners to learn from and adopt.

Measuring the Impact of the AAFC Equipment “As-A-Service” (EASE®) Program on Healthcare Provision and Equity in Africa 

By Cary Krosinsky & Felicia Collins Ocumarez

• The Sustainable Finance Institute has just taken our work on impact with The Global Impact Investing Network (GIIN) once step further, adding the following case study to the academic literature on Africa, healthcare and positive impact, showing how improved access to critical equipment in frontier and emerging markets helps deliver more positive impact, based on the following findings:

1. The potential to improve access to critical equipment fivefold is clear
2. Improving equipment efficiency can be increased by 300%+
3. Delivered productivity returns of $31.30 per $1 invested in healthcare are also achievable, making both impact and investment success possible

• Many thanks to Felicia Collins Ocumarez from African Asset Finance Company (AAFC)  for her leadership in making this happen, and to Ofori Ohene for his amazing research and writing assistance on behalf of the Sustainable Finance Institute.

Implications of the Outperformance of Active Sustainable Investing

By Cary Krosinsky and Sahil Mulji

• Although many US states such as Florida[i]and Texas[ii]have been recently passing legislation preventing their pension systems from considering environmental, social, and corporate governance (ESG) factors, active sustainable investors have been financially outperforming over the long term, earning higher returns for their clients while managing tens of billions more dollars on the back of such financial success. 
• Other states such as Indiana[iii], Kentucky[iv], and North Dakota[v]considered similar legislation, but are understandably passing on adopting new “anti-ESG” rules out of concern that such laws could reduce the financial returns experienced by beneficiaries. 
• Florida, however, has persisted[vi], even though evidence suggests such “anti-ESG”/”anti-woke” rules are likely to negatively impact financial returns.
• To further illustrate this point of pension funds potentially experiencing lower financial returns due to “anti-ESG” legislation, the Sustainable Finance Institute endeavored to look at how sustainability-focused funds have been performing for their beneficiary clients. 
• The study focused on active sustainable investors, who aim to maximize financial returns for their clients while prioritizing sustainability. For our analysis we selected active fund managers with over $10 billion in assets under management, more than 10 years of operation, and accessibility to US investors.

• [i] https://www.wfla.com/news/politics/desantis-senate-house-leaders-to-speak-in-naples/
• [ii] https://www.bloomberg.com/news/articles/2023-03-03/texas-anti-esg-bill-targets-public-pensions-insurers
• [iii] https://www.wfyi.org/news/articles/anti-esg-bill-passes-indiana-house-with-fewer-losses-expected-for-state-pensioners
• [iv] https://www.natlawreview.com/article/conflict-kentucky-over-esg-investing
• [v] https://www.pionline.com/esg/north-dakota-house-rejects-bill-create-esg-boycott-list
• [vi] https://www.orlandosentinel.com/politics/os-ne-florida-bill-banning-esg-20230301-pz6bcdcxyvf5lny6qg5g6qeocy-story.html

• The Sustainable Finance Institute (SFI) has partnered with SIPA (School of International and Public Affairs) of Columbia University to provide case studies for the World Bank on Pension Systems + Climate Risk.
• To gain insight into how individual pension funds were crafting their sustainable investment strategies within existing climate risk and regulation frameworks, the team conducted extensive desk review and a series of interviews with pension fund administrators. These case studies are intended to be viewed as a complementary, stand-alone counterpart to our main report. However, the conclusions we drew from these case studies were essential to our analysis. 
• The case studies can be downloaded below.
• The original World Bank Report can be accessed from here.