Table of Contents
Asset Allocators, Principles and Criteria
The Responsible Asset Allocator Initiative at New America seeks to mobilize large pools of capital toward responsible investing, and supports the United Nations Sustainable Development Goals. The RAAI focuses on Sovereign Wealth Funds and Government Pension Funds—a group of institutional investors that have the scale, scope, and inclination to make a positive impact in this space.
Together, these asset allocators manage over $30 trillion of assets on behalf of savers in their respective nations, to help ensure their financial security and to pay for their retirement, healthcare, and long-term savings needs. Sovereign wealth funds and government pension funds are accountable to their contributors and beneficiaries, who in addition to wanting stable returns, are interested in issues related to the SDG: climate action, gender equality, innovative sustainable infrastructure, education, and healthcare.
SWF and GPF are particularly well-suited to be trailblazers in responsible investing and sustainable development, given their long-term investment horizons (that often span generations), scalable assets, large internal resources, and investment capabilities. Where sovereign wealth funds and government pension funds go, companies and capital markets often follow.
While there is general consensus among academics and practitioners on the importance of responsible investing to long-term value creation, some asset allocators still face challenges integrating ESG considerations into their investment portfolios. Although numerous ESG tools exist, they are often onerous and complicated to implement, and they are not customized for the needs of the asset allocator community.
This is where the Responsible Asset Allocator Initiative comes in. The RAAI provides a benchmark of asset allocator best practices, enables knowledge-sharing among peers, and helps set a policy agenda and advocacy program to mobilize more capital into responsible investments. Asset allocators already are shifting investment practices to achieve financial goals without extracting social and environmental value. The notion of investing people’s savings in companies that pollute the environment or that employ child labor, in order to make an extra ten cents of returns, is going away. While supporting this trend, the RAAI takes the next step: helping asset allocators to add social and environmental value in line with the preferences of savers, while generating the risk-adjusted returns they require.
Principles and Criteria
As part of the RAAI, New America partnered with the Fletcher School at Tufts University to analyze and rate almost 200 sovereign wealth funds and public pension funds against principles and criteria for responsible and sustainable investing. RAAI constantly seeks to refine its processes and outputs. As a result, researchers increased the number of criteria for evaluation from 12 in 2017 to 20 in 2019 with two criteria per each of the 10 principles: Disclosure, Intention, Clarity, Integration, Implementation, Commitment, Accountability Partnership, Standards, and Development.
By assessing and scoring the performance of asset allocators against these principles, and highlighting the performance of the Leaders (the 25 highest scoring sovereign wealth funds and government pension funds), RAAI provides a benchmark of peer excellence that serves as a catalyst for responsible investing among the broader community.
The 10 core principles and 20 associated criteria were selected based on discussions with asset allocators and from guidelines by multilateral institutions and agreements across the field of ESG and sustainability, including, but not limited to, the Principles for Responsible Investing (PRI), the United Nations Global Compact (UNGC), the OECD Principles of Corporate Governance, regional and global sustainable investment forums (Eurosif, RIAA, GSIA), the Investor Network on Climate Risk (INCR/CERES), the UN Sustainable Development Goals and the International Forum on Sovereign Wealth Funds (IFSWF).
The 10 principles and 20 criteria can be reviewed below.
Principle 1: Disclosure
| Criteria Number | Criteria | Description |
|---|---|---|
| 1A - Organization | The Fund should disclose information on its organization in a dedicated website or in an annual report. | Information on the organization should include mission, founding principles, formation, structure, constraints, and employee data. |
| 1B - Financials | The Fund should disclose information on its investments in a dedicated website or in an annual report | Information on investments should include investment policy, asset allocation, portfolio weightings, investment beliefs, details of investments, and performance metrics. |
Principle 2: Intention
| Criteria Number | Criteria | Description |
|---|---|---|
| 2A - Statement on RI | The Fund should make a statement of intent on responsible investing. | The statement should define what responsible investing means to the organization, why it should be included in the investment process and the Fund’s intent to do so. |
| 2B - Downloadable Report | The Fund should publish a stand-alone report on its responsible investing or ESG program. | The standalone report may include aspects of the Fund’s responsible investing program, such as principles, goals and objectives, strategies, resources and staff, examples of investments, and performance. |
Principle 3: Clarity
| Criteria Number | Criteria | Description |
|---|---|---|
| 3A - Objectives for RI | The Fund should define the organization’s objectives for responsible investing. | Objectives may include investment themes such as climate change, gender equality, and sustainable infrastructure; targets, such as certifying 80 percent of real estate holdings as GRESB “compliant” or allocations to specific strategies, for example, five percent for renewable energy. |
| 3B - Strategies for RI | The Fund should explain the strategies it employs or intends to employ to achieve its responsible investing objectives. | Strategies may include values-based approaches such as exclusions, normative-based screening, and impact investing, or value-based approaches such as best-in-class investing, thematic investing, ESG integration, and active ownership and engagement. |
Principle 4: Integration
| Criteria Number | Criteria | Description |
|---|---|---|
| 4A - Integrating ESG | The Fund should integrate ESG into the investment decision-making process across the portfolio. | This disclosure may include a description of the fund’s ESG integration program across the portfolio or a detailed look at the approach taken by the firm to integrate ESG into the investment decision-making process of specific asset classes. |
| 4B - Methodology | The Fund should provide information on how ESG is integrated across the portfolio. | Information may include ESG integration in different asset classes, for example public and private equity, real estate and infrastructure, or the inclusion of specific ESG criteria, like environmental issues, across all investments. |
Principle 5: Implementation
| Criteria Number | Criteria | Description |
|---|---|---|
| 5A - Examples of RI | The Fund should provide details on specific responsible investments, in line with its program. | Specific examples may include responsible investing-related funds, such as a clean tech fund or an education fund; or individual investments, such as a renewable energy project or an affordable housing project. |
| 5B - Measuring RI | The Fund should provide information on how it measures and monitors responsible investments in the portfolio. | Information may include benchmarks the Fund uses, e.g. a customized index for exclusions or best-in-class strategies; information on reporting results of proxy votes; or results of engagement with portfolio companies on ESG risks. |
Principle 6: Commitment
| Criteria Number | Criteria | Description |
|---|---|---|
| 6A - Staff, Resources | The Fund should disclose resources and staff dedicated to responsible investing. | Resources may include software and data packages, research tools, consulting services, and meetings or training courses. Staff may include the head of the responsible investing effort, a dedicated team, or a senior executive managing the responsible investing program. |
| 6B - Socializing RI | The Fund should socialize a culture of responsible investing throughout the organization. | Evidence of socialization may include discussion of investment teams adopting responsible investing practices, firmwide meetings, communications from the board and senior executives to stakeholders and to staff, and information on how responsible investing is included in the incentive structure. |
Principle 7: Accountability
| Criteria Number | Criteria | Description |
|---|---|---|
| 7A - Financial Returns | The Fund should provide information on financial returns of responsible investments. | Information may include financial returns of responsible investing-related funds, individual investments—like an alternative energy project—or sections of the portfolio integrating ESG criteria. Financial returns that measure alpha or risk-reduction of responsible investments are especially valuable. |
| 7B - ESG Returns | The Fund should report on progress toward achieving responsible investing goals in the portfolio. | Reporting may include progress toward objectives, such as lowering carbon footprint, creating jobs, producing clean water, fostering greater participation of women on boards, achieving higher graduation rates, building low income housing units, or meeting targets for deploying a percentage of AUM in RI. |
Principle 8: Partnership
| Criteria Number | Criteria | Description |
|---|---|---|
| 8A - RI Partners | The Fund should partner with recognized organizations on responsible investing. | Information should include membership or relationships with organizations that promote responsible investing, for example the PRI, CDP, UNEP, TCFD, and ICGN. |
| 8B - RI Leadership | The Fund should take a leadership role in partner organizations on responsible investing. | Leadership roles in partner organizations may include chairing a committee, sitting on a board, leading projects on ESG or SDG-related investing, or working with government agencies to advocate policy changes and reform. |
Principle 9: Standards
| Criteria Number | Criteria | Description |
|---|---|---|
| 9A - Uniform Standards | The Fund should adopt recognized standards for its responsible investment practices. | The Fund may develop proprietary metrics but it should also identify uniform and consistent standards to use for its responsible investing practices, such as those provided by the PRI, the GRI, SASB, and the GRESB. |
| 9B - External Managers | The Fund should provide information on how it works with external managers on responsible investing. | This may include templates and guidelines for external managers to guide their investing and reporting, such as the GRESB for real estate and infrastructure mandates. It may also include discussion of engagement with external managers to customize mandates in-line with the Fund's responsible investing practices. |
Principle 10: Development
| Criteria Number | Criteria | Description |
|---|---|---|
| 10A - Referencing SDGs | The Fund should reference the UN Sustainable Development Goals (SDGs). | This may include analysis of the SDGs related to the Fund’s investment goals, or information on investments that conform with and reference select SDG goals, such as investments in healthcare (SDG 3), education (SDG 4), sustainable infrastructure (SDG 9&11) and renewable energy (SDG 7&13). |
| 10B - Frontier Markets | The Fund should invest in smaller emerging markets, including foreign frontier markets, and apply responsible investing practices in those markets. | Smaller, non-BRICS EM include EM other than Brazil, Russia, India, China and South Africa. The Fund should invest in these markets not only through passive, market-cap weighted indexes but also in active or customized strategies that incorporate responsible investing practices. Funds not permitted to invest directly in these non-BRIC EM may invest instead in companies with substantial business in these markets. |