Center for Retirement Research – Boston College
Pew Charitable Trust – Public Sector Retirement Systems
Laura and John Arnold Foundation – Sustainable Public Finance
Sustainability Accounting Standards Board
US SIF- The Forum for Sustainable and Responsible Investment
Global Reporting Initiative – GRI
Governance and Accountability Institute
As we approach the third decade of the new millennium, rapid changes are engulfing the investment world. In the last 36 months we have seen assets under management with ESG managers(1) increase to nearly $23 trillion globally, a near doubling in the U.S. alone to over $9 trillion. At the same time we have seen a huge shift of assets from actively managed investments into so-called passive, indexed vehicles with nearly half of all equity funds investments in the U.S. now held in passive strategies.(2)
Turning to public funds, we are likewise seeing dramatic shifts, and generally, not positive ones. The five largest U.S. municipal bankruptcies on record have all occurred nearly every year since 2011. The most recent being Puerto Rico this year, which exceeded the prior record set by Detroit by nearly four-fold. All but one were directly related to pension problems.(3) The implications for municipal bond investors are obvious, as Illinois recently flirted with becoming the first U.S. state to be downgraded to below investment grade by a bond rating agency.
Investors find themselves at a cross roads. Sustainability itself is taking on a dual meaning in this brave new world: can finance sustain itself into the future, and what impact can it have on society at large?
Well, it’s here. After five years of research, over five thousand documents of public pension plan meeting minutes analyzed and culled for data, over 2,500 legal cases examined, hundreds of human hours spent researching, analyzing and modeling, 43 hours of course work, four research analysts working part-time over 2.5 years, one review committee of six experts from governance, finance, law, psychology, economics and philosophy, we did it. We can now measure the governance of asset owners (pensions, endowments, foundations and other dedicated funds). What’s more is not only can we measure governance, but we can relate this to – and even, in part, predict – investment returns, bond yield spreads and funding ratios, specifically as it relates to pensions.
In many ways, our industry is at an inflection point. We will either adapt successfully or become less relevant. As we seek to fulfill our mission of leading the investment profession, we have an opportunity to demonstrate to the broader investment community our understanding of the key issues and help shape the dialogue going forward. – Paul Smith, CEO, CFA Institute