The Deal that Ensures ESG Remains at the Top of the Investment Agenda
The increasing prominence of environmental, social and governance (ESG) investing reached new heights last week as the Dutch state pension fund, Pensioenfonds PGB, awarded a contract worth $4.5bn to the UK boutique asset manager, Osmosis. This landmark deal represents the largest new inflow into an ESG strategy and one of the largest overall ESG investment mandates in history.
The Chief Executive and Co-Founder of Osmosis, Ben Dear, told the Financial Times that the contract will allow investors to “address environmental risk in their portfolios” without being forced to accept “sub-optimal returns” in the pursuit of addressing climate change. This will be achieved through investment in “resource-efficient companies”, which have received positive scores on various metrics, including carbon emissions, water consumption and waste generation.
Pensioenfonds PGB is one of the largest pension funds in the Netherlands and its commitment to this contract reflects a critical aspect of its new climate action plan, which was approved in December 2022 and aims to halve carbon emissions across its listed equity portfolio.
Meanwhile, Osmosis’ recent performance, and the substantial returns generated from its investments, display its credentials as an appropriate recipient of this sizeable ESG mandate. Since May 2017, Osmosis’ net annualised returns of 9.6% exceed the MSCI World Index return of 8.7%. The ESG mandate given to Osmosis will be structured in a similar manner to Osmosis’ $730mn Resource Efficient Core Equity Fund. However particular company exclusions, specified by Pensioenfonds PGB, will also be accounted for. The key implication of the deal for Osmosis is the doubling of their assets under management to $9bn, whilst for Pensioenfonds PGB, Osmosis now represents over one-third of their listed equity portfolio, the total of which has now reached $30.1bn.
Over the past decade, ESG has featured as a prominent trend in investment, and its growth has seen it become a new engine of finance, as outlined in this previous Leeds Finsights article. Regarding the ‘environmental’ aspect of ESG, the threat of climate change has inspired governments, firms and pension funds to aim for net-zero carbon emissions by 2050 through the creation of short-term ESG targets. This provides familiar territory for Osmosis, who already commands similar ESG mandates on behalf of the Oxford University Endowment Fund, the Danish pension fund PKA and the IMAS Foundation, the charitable arm of IKEA. However, the significance of the Osmosis-Pensioenfonds PGB contract is derived from its size.
Only three previous deals involve larger ESG mandates than the contract awarded to Osmosis by Pensioenfonds PGB. In Q4 2020, the Japanese Government Pension Investment Fund (GPIF) awarded a $7.6bn contract to an undisclosed manager. Meanwhile, in Q1 2022, the Universities Superannuation Scheme (USS) agreed to a $6bn deal with Legal and General Investment Management, and GPIF secured a $5.8bn agreement with another undisclosed manager. However, according to MandateWire, the Osmosis-Pensioenfonds PGB deal represents the largest new inflow of investment into an ESG strategy because the aforementioned deals all represent incumbent managers moving funds from an existing non-ESG portfolio into a new ESG strategy.
The prominent role of pension funds in ESG investment, as highlighted by the Osmosis-Pensioenfonds PGB deal, is only likely to increase moving forwards. According to MandateWire, the awarding of ESG mandates is “increasing rapidly as more pension funds adopt net-zero emission targets”, and the pressure currently being applied by European regulators to address climate change risks will only amplify this. European regulators believe that a delay in the transition process to a low-carbon economy could inflict heavy financial losses on retirement savings pools. According to a climate stress test conducted by the European Insurance and Occupational Pensions Authority in December 2022, a “disorderly transition process” to a low-carbon economy could eliminate approximately 12.9% of the EU’s pension assets. Therefore, this area of investment is certain to remain at the top of the agenda for pension funds and we should expect to see the awarding of more high-profile and high-value ESG mandates in the months and years to come.