Our project sought to examine how institutional asset owners in the U.S. (pension and university endowments) are integrating impact investing into their portfolios. Researching this topic allowed me to understand how ESG, DEI, and climate policies are being implemented in real-life practice. The final deliverable was a research tool which offered a comparative analysis of how 12 different institutional investors, representing $875 billion in assets under management, are aligning their investment priorities with ESG considerations.
What we found through our research was very interesting. Our topline findings were that most asset owners have an ESG investing policy, but none have a dedicated team or capital outlay for ESG investment. The most often-practiced ESG investment strategy was a climate-related exclusion, i.e. negatively screening fossil fuel companies, followed by divestment from the tobacco industry. While ESG was better integrated than DEI in portfolio construction, there was a lack of ingenuity in impact investing, with only a few asset owners actively investing in ESG-rated companies.
However, the most interesting insight was the domino effect that being a signatory or a member of a global climate alliance had on asset owners’ investment strategy. Once an investor had committed to a carbon emissions reduction target, which was most commonly net-zero greenhouse gas (GHG) emissions by 2050, it was compelled to calculate their financed emissions. Financed emissions are the indirect GHG emissions attributable to financial institutions due to their involvement in providing capital or financing to the original emitter.
As a public policy student, I found this cause and effect between international agreements and individual actions to be fascinating. I believe asset owners that commit to a net-zero timeline and target are more conscious of their carbon footprint and will lead the way in impact investing. There was also a higher correlation between investors that considered financed emissions and adopted climate disclosure frameworks. The project was definitely an eye-opener in understanding the role that regulators have to play in harmonizing current disclosure frameworks and mandating net-zero targets to support large asset owners in the ESG transition.