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October 2016

ESG and Impact Investing Update


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The Opportunity: Protecting Investments and Addressing Climate Change

The New York State Common Retirement Fund ("Fund") embarked on a comprehensive review of the risk posed by climate change to approximately $180 billion investment portfolio. As an important step in this fiduciary process, the Fund worked with Goldman Sachs Asset Management (“GSAM”) to develop low carbon, sustainable investment strategy that would be central to the long term future of the Fund. The Fund, the third largest public pension plan in the U.S., is committed to developing rigorous, climate-aware investment strategies and to working closely with GSAM as its strategic partner to spur innovation in sustainable investments.

The Solution: Risk Aware, Low Emissions Program

At the 2015 United Nations Climate Change Conference in Paris, New York State Comptroller, Thomas P. DiNapoli, the trustee of the Fund, announced a $5 billion commitment to sustainable investments. Through active engagement with companies, DiNapoli and the Fund had for years been successfully urging companies to adopt more sustainable, climate-friendly business practices. Now the time had come to pursue a solution that would protect the Fund’s investments and spur innovations among companies transitioning to a low carbon economy.

The Fund and GSAM developed a customized "Risk Aware, Low Emissions" (RALE) program to reduce investments in companies that are large contributors to carbon emissions relative to their peer group in a manner that targets similar return and risk characteristics to the Fund's policy benchmark for US large cap equities.

As an initial step, through the RALE program, the Fund and GSAM created a $2 billion equity program that seeks to lower the portfolio's carbon emissions intensity by approximately 70%. The strategy rewards companies on the forefront of carbon efficiency, while enabling the Fund to continue its important corporate engagement work on Environmental, Social and Governance (ESG) issues by encouraging the largest emitters to improve their carbon efficiency.

RALE is highly customized in design and implementation. It had to be seamlessly integrated into the Fund's existing fiduciary portfolio management processes, chosen suite of policy benchmarks, and broader corporate engagement efforts. RALE was also developed with a high level of risk awareness, through two layers of risk management: an explicit target tracking error range relative to the policy benchmark, and industry and sector weight caps, which limit potential sector overweights.

"Low-carbon, sustainable investments are key to our future," New York State Comptroller DiNapoli said. “Our pension fund has long supported investment strategies with strong risk management characteristics, and this expansion of our commitment offers a sensible solution that will protect the Fund's investments. It's an approach to low carbon investment that we can expand across all asset classes and help spur the kind of innovation and ideas that will assist in the transition to a low carbon economy."

"As a long-term investor we are very interested in strategies that manage risk, and there is no question that climate change is one of the biggest risks facing global investors across multiple sectors," notes Vicki Fuller, CRF’s Chief Investment Officer. "By shifting our capital to companies with lower emissions in a portfolio with similar characteristics to our benchmark, we are sending the message that our investment dollars will follow businesses with strong environmental practices."

The Impact: Driving Progress and Innovation

This year, the Fund earned the highest grade possible from the Asset Owners Disclosure Project, which focuses on climate change best practices. The Fund was ranked first in active ownership, highlighting that public pension plans can account for climate risk throughout their portfolio within the bounds investment best practices.

"Our goal is to bring sophisticated risk management and portfolio construction techniques to ESG investing for our clients," said Hugh Lawson, GSAM’s Global Head of ESG and Impact Investing. "The approach CRF has taken is distinctive in substantially reducing the emissions profile of its portfolio while maintaining a similar risk and return profile to its policy benchmark and a strong link with its ongoing corporate engagement efforts."

As forward-thinking leaders in this space, the Fund and GSAM understand the importance of moving toward a sustainable low carbon future. And, by taking steps to reduce the Fund’s carbon footprint in a risk-managed and prudent manner, they will further accelerate progress towards this goal and open the door for additional investors to do the same.


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