THE LANDSCAPE FOR INSTITUTIONAL INVESTING IN 2018 PERSPECTIVES OF INSTITUTIONAL INVESTORS AN INPUT INTO THE INVESTOR FORUM October 2018 THE LANDSCAPE FOR INSTITUTIONAL INVESTING IN 2018 PERSPECTIVES OF INSTITUTIONAL INVESTORS AN INPUT INTO THE INVESTOR FORUM October 2018 World Bank Group Acknowledgements This report, which was based on a summary of conducted interviews, was prepared by Eric Bouyé, Lead Invest- ment Officer, IBRD-IDA Treasury, World Bank, email: ebouye@worldbank.org; Robert Eccles, Visiting Profes- sor of Management Practice, Saïd Business School, Oxford University, email: Robert.Eccles@sbs.ox.ac.uk; Svetlana Klimenko, Lead Financial Management Specialist, Operational Policy and Country Services, World Bank, email: sklimenko@worldbank.org; and Daria Taglioni, Principal Country Economist, Country Econom- ics and Engagement, IFC, email: dtaglioni@ifc.org. The authors would like to thank the interviewees (listed in Annex 1) for the time they allocated for open discussions in the preliminary stage of preparation for the Inves- tor Forum. This report benefited from contributions or suggestions from Gilles Alfandari, Sharon Felzer, Cati- ana Garcia-Kilroy, Julius Gwyer, Andy Jobst, Alexander Leipziger, Gabriel Petre, Fiona Stewart, (all World Bank), and Morten Lauridsen, Euan Marshall, Albena Melin (all IFC). This work was done under the supervision of Ste- fan Emblad (Director, Multilateral and International Affairs, World Bank) and John Gandolfo (Director and Chief Investment Officer, Pensions & Endowments, World Bank). Standard Disclaimer This report is produced by the staff of the International Bank for Reconstruction and Development (World Bank). The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Furthermore, this report neither endorses nor challenges views of the respondents expressed in the course of conducted interviews. Copyright Statement The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work with- out permission may be a violation of applicable law. The International Bank for Reconstruction and Develop- ment/World Bank encourages dissemination of its work and will normally grant permission to reproduce por- tions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete infor- mation to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. 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Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Executive Summary. 1.  Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Importance of Institutional Investors for 2.  Sustainable Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.  Current Investment Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Aftermath of the 2007–09 Global Financial Crisis. . . . . . . . . . . . . . . . . . . . . . . . 5 3.1   3.2 Post-2008 Prudential Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Rise of Passive Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.4 Shift in Capital Formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.  Global Mega-trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Environmental Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1   4.2  Social Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3  Technological Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.4  Geopolitical Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.5  Interconnectedness of Mega-trends and Their Consequences for Public Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.  Sustainable Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Strategies for Sustainable Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.1   5.2  Long-termism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.3  ESG integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.4  Engagement and Stewardship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.5 The Role of the Corporation in Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.6 Intergenerational Equity and Pressure from the Millennials. . . . . . . . . . . . . . . 21 5.7 The Sustainable Development Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.8  The Blurring of the Line between Impact Investing and Sustainable Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.9 Barriers to Sustainable Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.  Infrastructure Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Opportunities Presented by Investments in Infrastructure. . . . . . . . . . . . . . . 26 6.1   6.2 Challenges Related to Investing in Infrastructure. . . . . . . . . . . . . . . . . . . . . . . . 26 6.3 Infrastructure Investments in Emerging Markets. . . . . . . . . . . . . . . . . . . . . . . . 30 6.4 Facilitating Investments in Infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 . . . . . . . . . . . . . . . . . . . . 33 7.  Expectations for Dialogue with the Public Sector. 8.  Role of the World Bank Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.  Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Annex 1. Summary of Interviewed Institutions . . . . . . . . . . . . . . . . . . . . . . . . . 41 Selective List of Initiatives Involving and/or Annex 2.  Targeting Institutional Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Executive Summary T he high-level Investor Forum will take place on and (vii) their guidance on how to make the Forum a November 29, 2018, in Buenos Aires, hosted success. by the President of Argentina, this year’s chair Given the geographic diversity, number, and level of the G20, and co-organized with the World Bank of seniority of the interviewed executives, we believe Group. The Forum will bring together leaders from that these inputs can be considered a good reflection the public sector and the global investment com- of views widely held by the global investment com- munity to explore how their combined power could munity. A key finding from the interviews was the sig- contribute to sustained global economic growth and nificant degree of consensus among global investors increase the flow of long-term sustainable invest- on what were the principal concerns, opportunities, ments to where they are needed most. It is hoped and actions needed. that the Forum will build strong momentum to sup- There was a strong consensus in the inter- port collaboration to address areas of shared inter- views regarding the current investment landscape. est, concern, and opportunity. Nearly all the executives agreed that the extraordi- As part of preparing for the Forum, the World nary international macroeconomic policies—in par- Bank Group (WBG)  conducted semi-structured ticular, monetary policies—and regulations insti- interviews with senior executives—mostly chief exec- tuted in response to the 2008 global financial crisis utive officers and chief investment officers—in 34 are still in place, and are a major factor shaping global institutional investors, soliciting their views today’s investment environment. While these mea- on the current operational and investment environ- sures were largely effective in containing the cri- ment; strategic priorities going forward; and actions sis, they also continue to have unintended conse- required to scale up investments in sustainable, quences affecting markets and the global business long-term projects, particularly investments in infra- environment. Financial regulations, (such as Sol- structure. The major topics covered were (i) current vency II and Basel II/III), in particular, were cited as perceptions regarding today’s economic and invest- potentially disincentivizing long-term investments, ment environments; (ii)  mega-trends shaping exist- especially in infrastructure, due to their capital ade- ing and future investment strategies; (iii) sustainable quacy requirements and liquidity risk standards. investing along a number of dimensions; (iv)  infra- Investors shared a concern that once central banks structure investing; (v)  investing in emerging mar- return to ‘traditional’, non-crisis and less accom- kets; (vi) the potential role of the WBG and, by exten- modative policies this could exacerbate economic sion, other international financial institutions (IFIs); instability, triggering a potential increase in market volatility and greater fragility of global economy. and consumers. Coupled to this support was a grow- They also noted that unconventional monetary pol- ing interest in long-termism, a natural corollary to icy cannot be the solution for the next financial cri- sustainable investing, since its benefits play out over sis, and appropriate fiscal and economic measure years, not days or months. need to be put in place to ensure continued eco- The investors noted that shifts toward sustain- nomic growth. able investment practices—including the adoption Four categories of mega-trends were seen as of environmental, social, and governance (ESG) prin- creating both risks and opportunities: (i)  environ- ciples in investing—are driven in part by consum- mental (climate change and resource scarcity dis- ers and employees who are increasingly reluctant rupt supply chains and markets, but also create to work for, or buy from, companies with poor ESG new investment opportunities, such as in renewable practices. Another important driver is companies’ energy technologies); (ii) social (demographic trends growing recognition of the system-level implica- shift the distribution of human capital, affect labour tions of their investment decisions. Increased media markets and the sustainability of existing pension attention and global advocacy through international schemes, but also open new markets, while grow- political platforms such as the Sustainable Develop- ing inequality presents increasingly serious systemic ment Goals support this trend, making it increasingly risk); (iii)  technological (disruptive technologies in difficult for investors to turn a blind eye to the sys- the short to medium term threaten to eliminate tra- temic and sustainability impacts of their investment ditional jobs and sources of income, but in the lon- decisions. ger term contribute to productivity improvements The interviewees saw infrastructure as an attrac- and create new opportunities); and (iv)  geopolitical tive investment because, like all long-term invest- (political polarization and disruption of the multilat- ments, it acts as a hedge against inflation, gener- eral world order). Executives noted that public policy ates stable cash flows, and is a potential buffer to and market solutions designed to address the chal- returns in the next financial crisis. Fresh investment lenges raised by any of these trends must simultane- in sustainable infrastructure is also essential to miti- ously consider their consequences for other ones, to gate the pressures that the world will face in the next optimize the overall positive impact on the “state of decade and to adapt to the emerging mega-trends. the world.” These needs cannot be met by the public sector or Interviewees identified the advancement of sus- commercial banks alone. Overall, infrastructure tainable, long-term investing, and investing in infra- investment was seen as an under-realized invest- structure, as important areas of shared interest and ment opportunity. Many of the executives were look- opportunity. Such opportunities can be enabled, ing to increase their asset allocation to infrastruc- they added, by the collective and coordinated action ture. Infrastructure investments were also seen as of the global investment community, multilateral a win from the global resource-allocation optimi- institutions, and governments, through channels zation and macroeconomic stability perspectives, such as the G20. providing countercyclical, stabilizing effects, help- There is growing support for sustainable invest- ing to offset short-termism, and promoting sustain- ing, which was seen as having the potential to lower able economic growth. There was similar enthusi- financial and reputational risks, improve returns, and asm for investing in emerging markets, although it provide long-term revenue streams. The adoption of was less uniform, given perceived barriers (e.g., polit- sustainable investing is expected to increase, and ical, foreign-exchange, and credit risks, and a lack of it has the potential to become an investment mar- bankable projects). ket component in the short to medium term, and a Key obstacles to increasing sustainable, potential standard for a significant share of invest- long-term investing and scaling up infrastructure ments in the medium to long term, reflecting shifts in investments across G20 economies include the the standards and values of asset owners, investors, following: vi The Landscape for Institutional Investing in 2018 Sustainable, long-term investing • Transaction-intensive nature of infrastructure investments due to project uniqueness and insuf- • Lack of a common definition of sustainable and ficient standardization; impact investing, as well as the need for consis- • Lack of a pipeline of projects of sufficient size; tent product labeling and taxonomy; • Political, foreign exchange, and credit risks in • Long-standing lack of uniformity on how the con- emerging markets; and cept of fiduciary duty is defined and applied by • Insufficient capacity of governments to work with regulators; institutional investors, especially in emerging • Lack of high-quality, harmonized ESG data and markets. performance benchmarks; • Lack of reporting and measurement frameworks Overall, interviewees were supportive of the to price long-term value creation; Forum’s objectives. They emphasized the impor- • Excessive short-term-oriented contracts and fee tance of meeting with their public sector counter- structures between asset owners and asset man- parts, but noted that success would be measured by agers that are incentivizing suboptimal global the event’s ability to generate tangible higher-level allocations of investment; outcomes. They recommended that the Forum • Post-2008 financial and prudential regulations focus on a limited number of topics; that a number blocking capital allocation to certain types of of actionable solutions be agreed upon and dissem- assets and investments; and inated among the G20 governments at the event’s • Inadequate pricing of externalities and tax conclusion; and that periodic updates on progress be regimes that favor short-termism. provided. They see the WBG and other IFIs as play- ing a key role in de-risking infrastructure projects and Infrastructure investing in building institutional capacity and enabling envi- ronments in emerging markets to make them more • Insufficient information-sharing and inade- attractive to investors. Executives also appreciated quate access to information about existing the knowledge-sharing capacity, convening power, opportunities; and analytical evidence-base that the WBG and other institutions can provide in support of this work. Executive Summary vii 1 Introduction T he high-level Investor Forum (the Forum) jointly representing over US$20 trillion in assets will be held in Buenos Aires, Argentina, on under management. November 29, 2018, in the lead-up to the G20 The major topics covered were (i)  concerns Heads of State Summit. Organized by the Govern- about today’s macroeconomic and investment envi- ment of Argentina, which is this year’s chair of the G20, ronments; (ii)  mega-trends shaping their invest- together with the World Bank Group (WBG), the Forum ment strategies; (iii)  sustainable investing along will bring together leaders from the public sector and a number of dimensions, including the role of the the investment community to develop a shared view Sustainable Development Goals (SDGs); (iv)  infra- on how their combined power could contribute to sus- structure investing; (v)  investing in emerging mar- tained global economic growth and increase the flow kets; (vi) the potential role of the World Bank and, by of long-term sustainable investments to where they extension, other international financial institutions are needed most. It is hoped that the Forum will build (IFIs); and (vii) guidance on how to make the Forum strong momentum to support collaboration between a success. The emphasis on each topic varied over the public and private sectors. the course of the interview process for two reasons. Because the public and private sectors often First, certain common themes became clear early “speak different languages,” the organizers on, and it was not necessary to spend as much time of the Forum decided that it would be import- on them in subsequent interviews. Second, while all ant to gather the views of leaders in the invest- of these topics were of interest to all of the execu- ment community to identify areas that would be tives, because of their roles and their institutions of sufficient common interest, and in which prog- there were topics of particular interest and exper- ress could be made through actions taken in collab- tise specific to them. Drilling down into more detail oration between the public and private sectors. A on these topics added to the insights gained in the series of semi-structured interviews was conducted interview process. with senior executives, primarily chief executive offi- It is important to note that this paper is not cers (CEOs)  and chief investment officers (CIOs), in a structured survey based on a large number a global sample of 34 financial institutions, includ- of respondents conducted to gather quantita- ing asset managers, asset owners, insurance com- tive data intended to have empirical validity. panies, and sovereign wealth funds (see Annex 1), The “n” is too small for that, and a semi-structured approach does not gather data that are strictly these executives on a particular topic. This paper comparable in a numerical sense. It is also not a neither endorses nor challenges their views. It research paper meant to address a set of ques- is simply meant to report on them to provide an tions or hypotheses in an academically rigorous aggregate view of these executives at a particular way. Thus, experts might challenge the views of point in time. 2 The Landscape for Institutional Investing in 2018 2 The Importance of Institutional Investors for Sustainable Development I t is estimated that there is an annual funding at its foundation are the relationships connecting gap of US$2–3 trillion for achieving the SDGs. asset owners and asset managers. Institutional asset Blended finance, which involves a mix of money owners include pension funds (around US$45.0 tril- from public and private sector sources, is seen as a lion),6 insurance companies (around US$26.8 tril- way of closing this gap. This raises the obvious ques- lion),7 sovereign wealth funds (around US$8.1 tion of whether theprivate sector has the capacity to contribute to such investments.1 In terms of numbers alone, the answer is 1  https://www.publicfinanceinternational.org/news/2018/01/ sustainable-development-goal-funding-gap-could-be- clearly yes. Around US$200 trillion in global private plugged-blended-finance. See also http:/ /s3.amazonaws. sector financial assets is being managed for mar- com/aws-bsdc/BFT_BetterFinance_final_01192018. ket rates of return.2 In comparison, there is around pdf#asset:614:url. US$228 billion in impact funds, largely invested 2  https://www.allianz.com/v_1538638715869/media/eco- in the private markets (vs. the public capital mar- nomic_research/publications/specials/en/Allianz_Global_ kets)  at, or close to, market rates of return.3 The Wealth_Report_2018_e.pdf. 3  https://www.barrons.com/articles/impact-investors- multilateral development banks (MDBs)  and devel- hold-us-228-billion-in-assets-1528294454. Exhibit 2 p. 10 in opment finance institutions (DFIs)  jointly invested http://s3.amazonaws.com/aws-bsdc/BFT_BetterFinance_ around US$220 billion in 2016.4 Given that private final_01192018.pdf#asset:614:url. sector financial assets are roughly 900 times the 4  Exhibit 2 p. 10 in http://s3.amazonaws.com/aws-bsdc/BFT_ size of private impact investing and the investments BetterFinance_final_01192018.pdf#asset:614:url. https:// of the MDBs and DFIs in investable assets, it is clear www.ipe.com/reports/special-reports/top-400-asset-man- agers/top-400-asset-managers-2018–10-years-of-asset- that the private sector has an essential role to play in growth/10025004.article. achieving the SDGs and contributing to the sustain- 5  See https://www.blackrock.com/corporate/literature/whi able development agenda. tepaper/viewpoint-investment-stewardship-ecosys- But simple numbers alone do not tell the tem-july-2018.pdf for a description of this ecosystem from the whole story. It is also important to understand perspective of stewardship and engagement. 6  https://www.willistowerswatson.com/-/media/WTW/ the structure of the private sector, and of the Images/Press/2018/01/Global-Pension-Asset-Study-2018- investment industry within the private sector, if Japan.pdf. There isUS$41.4 trillion for the P22 and additional we are to create the appropriate incentives for US$3–4 trillion for the rest of the P195. these investments to be made. The investment 7  https://unfccc.int/files/adaptation/workstreams/loss_and_ industry is a complicated ecosystem5 of actors, but damage/application/pdf/unep.pdf. trillion),8 and foundations (US$1.5 trillion).9 In addi- objectives such as the SDGs must come from the tion, high-net-worth individuals hold around US$66 asset owners, both in terms of their own invest- trillion in assets.10 Asset managers manage the ment decisions and the mandates they give to assets for asset owners. Some of the largest asset their asset managers. Acting jointly, asset owners owners manage some, or most, of their own assets, and asset managers can select and enable compa- typically for equities and fixed income in developed nies and projects that they believe are doing work to markets, while employing third-party asset manag- support their shared objectives, while recognizing ers for other asset classes, such as emerging mar- that in all cases these investments must earn com- kets, private equity, real estate, and infrastructure. mercial returns. Smaller asset owners typically use asset managers to manage all of their assets. The world’s largest 400 asset managers, which account for the vast bulk of 8  h t t p s : //w w w. s w f i n s t i t u t e .o r g /s ove re i g n - w e a l t h - fund-rankings/. managed assets, have around US$76 trillion in assets 9  http://www.pionline.com/article/20180508/INTER under management.11 Also important are the wealth ACTIVE/180509883/global-foundation-assets-reach- management platforms of the large banks, such 15-trillion. as UBS (US$2.40 trillion), Bank of America-Merrill 10  https://www.oliverwyman.com/content/dam/oliver-wy- Lynch (US$1.08 trillion), Morgan Stanley (US$1.05 man/v2/publications/2018/april/Global-Wealth-Managers- trillion), Credit Suisse (US$792 billion)  and JPMor- Dare-To-Be-Different.pdf p.5. 11  https://www.ipe.com/Uploads/y/f/g/IPE-Top-400-Asset- gan (US$526 billion).12 Managers-2018.pdf. Within the parameters of this ecosystem, 12  https://www.businessinsider.com/the-15-biggest-wealth- support for a certain type of investment strategy managers-in-the-world-2018–6#6-citi-private-bank-460-bil- aiming to address a particulat set of high-level lion-10. 4 The Landscape for Institutional Investing in 2018 3 Current Investment Environment T he views of the interviewed executives of tools” to deal with any new major episode of finan- about today’s investment environment cial turmoil.14 were quite uniform, and generally more Many interviewees noted that governments cautious than optimistic. One key concern was now need to prioritize structural and fiscal pol- about what would happen if economic growth, which icy reforms such as labor market reforms, pen- is a major driver of investment returns, slowed, as sion/retirement system reforms, and tax system many felt it would. The major areas of focus identi- reforms. Investors perceived some countries to fied in the interviews included the aftermath of the have made better progress in these areas than oth- 2007–09 global financial crisis (GFC), changes in ers. The expectation is that this restructuring of the regulations since 2008, the rise of passive investing, real economy can provide the foundation for sus- and the shift in capital formation from the public to tained economic growth and help to prepare coun- the private markets. tries to cope with the next financial crisis when it finally occurs. Aftermath of the 2007–09 Global 3.1  Another important element of concern Financial Crisis for institutional investors was the increase in income inequality since 2008,15 which may have The 2007–09 GFC was seen as one of the factors, if not the major factor, shaping today’s invest- 13  See Borio C. and A. Zabai (2016) for a review of the empir- ment environment, and that of the immediate and ical literature exploring the benefits and costs of the uncon- more distant future. The interviewees expressed ventional monetary policies. concern about the effects of unconventional mon- 14  This is a concern shared by central bankers. For example, etary policies13—for example, so-called “quantita- Yellen (2016) mentioned that “new tools should be suffi- tive easing” and substantial purchases of financial cient unless the recession were to be unusually severe and assets—used by central banks to halt and control the persistent.” 15  Growing inequality predates the GFC, but since 2008 this GFC (Box 1). As central banks have started to gradu- trend has accelerated. While the bottom 20 percent of the pop- ally normalize their monetary policies, there are con- ulation has had only a modest growth in income since 2008, cerns regarding the negative effects on the real econ- the top quintile of the population has benefited from steep omy and, perhaps more worrisome, the widely held increases. Moreover, funding to resolve the crisis was financed perception that the central banks may now be “out predominantly through cuts in public spending rather than Box 1. The global financial crisis and unconventional monetary policies The Global Financial Crisis (GFC) turned out to be worse than the Great Depression, according to sev- eral parameters: stock market prices contracted more (-57.8 percent in the GFC against -42.7 percent in the Great Depression), nominal house prices fell more (-18.3 percent vs. -6.2 percent), and the decline in household wealth was greater (-14.8 percent vs. -6.0 percent) (see Brookings and Yale School of Management, 2018). To break the panic and stabilize the global financial system, policymakers made an unprecedented response. The inherent ambiguity and unpredictability associated with navigating effectively the first truly GFC of modern times led policymakers to adopt many novel and unconventional measures, which tested the traditional boundaries of institutional authorities and mandates. In particular, central banks of major economies embraced three types of monetary policy: balance sheet policies aiming to affect financial conditions by modifying central bank assets and liabilities—for example, through purchases of public debt or credit assets (“quantitative easing”); forward guidance consisting in providing private sector participants with information about the possible future path of the policy interest rate over time in a more or less precise way; and a low-interest-rate policy and negative interest rate policy (NIRP), aiming to provide liquidity to financial markets (Borio and Zabai, 2016). By mid-2009 the panic was halted, the financial system stabilized, and the credit market and bank lending restarted, but the mix of policies deployed focused on restoring the functioning of the financial system and markets, without addressing the strains on the real economy. In an effort to buy time for the recovery of private consumption and to gain momentum for the investment, central banks kept in place for the entire decade the unconventional monetary policies that were meant as emergency measures, and in this way continued injecting liquidity into the global financial system at unprecedented rates, as underscored by their balance sheets. CENTRAL BANK TOTAL ASSETS (% OF GDP) (LEFT) AND MAJOR DEVELOPED MARKETS’ CENTRAL BANK TOTAL ASSETS (RIGHT) 100 17.5 90 15.0 80 12.5 70 USD, trillion Percent (%) 60 10.0 50 7.5 40 5.0 30 20 2.5 10 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2010 2012 2014 2016 2018 Bank of Japan FED ECB SNB BOE ECB BOJ FED Note: ECB: European Central Bank, FED: Federal Reserve, SNB: Swiss National Bank, BOE: Bank of England, BOJ: Bank of Japan. Source: World Bank Treasury, Macrobond, Bloomberg. 6 The Landscape for Institutional Investing in 2018 FIGURE 1:  VALUATION INDICATORS S & P 500 – Cyclically Adjusted P/E Ratio (Shiller) 45 35 32.3 28.2 25 23.9 19.5 15 5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Shiller PE 68% con dence bands 10 yr MA MSCI World – Forward PE Valuation 28 23 18 16.5 15.8 14.5 13 12.5 8 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Forward PE 68% con dence bands 10 yr MA The top graph provides the Price/Earnings Ratio cyclically adjusted for the S&P500. The red line is the 10-year moving aver- age. The bottom graph represents the Forward Price/Earnings Ratio for the MSCI World. The red line is the 10-year moving average. been exacerbated by the monetary policy response investment decisions, driven primarily by the search to the GFC. Increasing income inequality is reducing for financial returns rather than by long-term, sus- the purchasing power of many households, pricing tainable economic and financial results. them out of markets, and is tilting disposable income Respondents also discussed the difference and capacity further away from the poor and more between the equity and fixed-income markets. toward the rich. Many of the executives interviewed Low interest rates have made it challenging to earn thought that the extraordinary and protracted exten- sion of access to liquidity, associated with several through higher taxes, tilting disposable income further away years of historically low interest rates and volatility, from the poor and toward the rich. LIS microdata: Luxembourg may have also encouraged a short-term approach to Income Study (LIS) Database, http:/ /www.lisdatacenter.org. Current Investment Environment 7 returns in fixed-income investments. As interest invest. While passive investments cannot take over rates rise, which is inevitable, fixed-income invest- the markets entirely, since at least the initial price is ments could become more attractive, but their rise set by active investors, this shift introduces a num- could also put pressure on equity prices, which ber of important dynamics into the way capital mar- some felt were too high. Investors with heavily equi- kets function. In particular, it gives index providers a ty-weighted portfolios were concerned about the great deal of influence and makes them an import- effect this will have on their returns. Moreover, equity ant stakeholder in any dialogue focused on the markets show signs of over-valuation, especially in future of investing strategies. For example, the tar- U.S. and emerging markets (Figure 1). geted introduction of certain indexes (e.g., indexes In this context, several interviewees felt that emphasize companies with strong environmen- that the crisis demonstrated that modern port- tal, social, and governance [ESG] records)  could folio theory may no longer be valid as the basis have a significant impact on global capital flows. for diversification. The GFC negatively affected all This also means that asset owners need to find new portfolios, regardless of asset class and country of ways to engage with the companies whose stock the asset. Some interviewees felt that the best way or debt they own, acting in close collaboration with to position themselves for higher yields going forward other asset owners and asset managers. In contrast was to have portfolio allocations with higher exposure to the “hands-off” passive investing of the past, to real assets, such as infrastructure or real estate, today the large passive investors are more focused which were perceived to offer more stable cash flows. on engaging with their portfolio companies. Since they are not going to “sell the stock (or bond),” they Post-2008 Prudential 3.2  want to “fix the stock (or bond),” including on ESG Regulations dimensions they believe are inhibiting or contribut- ing to value creation. Several respondents cited the post-2008 regu- lations as a “disincentive” for long-term invest- Shift in Capital Formation 3.4  ments. Investors cited in particular Solvency II, the European Union’s prudential regulation for insurance A number of investors noted the growing impor- companies, which is intended to strengthen the cap- tance of private equity and the decline of listed ital structure. Perceived disincentives, which stem companies, especially in the United States.17 A from the fact that capital requirements and the defini- recent McKinsey study notes that “private asset tion of risk linked to the volatility of asset prices intro- managers raised a record sum of nearly US$750 duced by such regulations limit the amount of cap- billion globally, extending a cycle that began eight ital available for certain kinds of investments, were years ago.”18 The business model of private equity is viewed as particularly harmful for investing in infra- structure. Investors also felt that these regulations make it more difficult to increase productive capi- 16  Another important regulation introduced in the wake of the 2008 financial crisis that has had significant impact on tal (e.g., through equity, infrastructure, and unlisted financing and investing strategies and trends is Basel III—a securities), especially in emerging markets.16 There global, voluntary regulatory framework addressing such was a frequent reference to the need to review and issues as bank capital adequacy, stress testing, and market adjust these policies, often referred to as the “unin- liquidity risk. Since banks were not included in the scope of tended consequences” of the post-2008 regulations. these interviews, Basel III is not covered in this report. 17  The number of public companies has declined in the U.S., from a peak of around 7,400 to less than half of that today. Rise of Passive Investing 3.3  https://www.wsj.com/articles/fewer-listed-companies-is- that-good-or-bad-for-stock-markets-1515100040. A few respondents observed that the rise of 18  www.mckinsey.com/~/media/mckinsey/industries/pri- passive management had affected the way they vate%20equity%20and%20principal%20investors/our%20 8 The Landscape for Institutional Investing in 2018 changing, shifting from simply cost-cutting to reve- available, the money going into the public markets nue growth.19 It is also characterized by longer hold- is driving stock prices higher. The concern about the ing periods, going from 4.1 years in 2008 to 5.9 years decline in the number of public companies is that in 2014.20 The interviewees saw the superior returns small investors have less access to young companies available in this asset class as attractive, although with great growth potential. Unlike wealthy individu- they also expressed concerns regarding it: fee struc- als and institutions, they do not have access to pri- tures (the classic “2 percent management fees and vate equity funds. This could be another factor pro- 20 percent of the upside past some hurdle rate” ducing inequality, albeit in a rather selected group of model being seen as too rich)  and a shift in human people. capital from the public to the private markets. At the same time, the holding periods of pub- insights/the%20rise%20and%20rise%20of%20private%20 lic equities in the U.S. have been declining. In equity/the-rise-and-rise-of-private-markets-mckinsey-global- 2016, the average holding period of stocks traded on private-markets-review-2018.ashx. 19  www.forbes.com/sites/baininsights/2018/04/09/how- the New York Stock Exchange was only 8.3 months,21 private-equity-is-shifting-from-cost-cutting-to-growth/#- the shortest since the 1920s, and down from around 2f9948512a20. 8 years in the 1940s and 1950s. The stringent report- 20  http://docs.preqin.com/newsletters/pe/Preqin-PESL-May- ing and other regulatory requirements of being a 15-Buyout-Holding-Periods.pdf. public entity make this a less attractive proposition 21  http://topforeignstocks.com/2017/10/01/average- for smaller enterprises, especially given the amount stock-holding-period-on-nyse-1929-to-2016/ 22  There were 486 IPOs in 1999 and 406 in 2000, but only 105 of private equity capital available and the longer hold- in 2016 and 160 in 2017. See https:/ /www.statista.com/sta- ing periods. tistics/270290/number-of-ipos-in-the-us-since-1999/. Also, If anything, the decline in the number of pub- for a good analysis of the reasons for the decline in IPOs, see lic companies has been good for large, blue-chip https://www.sec.gov/spotlight/investor-advisory-commit- stocks. 22 With fewer investment opportunities tee-2012/jeffrey-solomon-presentation.pdf. Current Investment Environment 9 4 Global Mega-trends T here was a strong consensus in views change was discussed in varying degrees of detail, about eight mega-trends—two each in the depending on the type of investor and the inves- categories of environmental, social, tech- tor’s location. There was universal agreement that nological, and geopolitical—creating investment the risks and opportunities associated with cli- opportunities and risks. In addition to the short- mate change come from multiple interacting driv- and long-term consequences of central banks’ inter- ers: physical and natural resources, regulatory ventions to resolve the GFC, respondents cited the action, and technological innovations. Much of the following mega-trends as important for current and discussion was about the downside effects of cli- future investment decisions: mate change—that is, the consequences of extreme weather events, especially for certain industries • Environmental (such as agriculture and insurance) and companies’ • Climate change balance sheets (e.g., overvalued/stranded assets • Resource scarcity in general, and food and and understated liabilities in energy companies)— water in particular and the general uncertainty climate change creates • Social for generating returns.23 • The double demographic challenge of aging At the same time, many saw investment and of unemployed youth opportunities in technologies being developed • Growing inequality to combat global warming, such as renewable • Technological energy technologies. Investors varied in the extent • Disruptive technologies to which they were reshaping their investment port- • Cyber-risk folios to help combat climate change—for exam- • Geopolitical ple, divestment from certain sectors such as coal, • Political polarization • The breakdown of the multilateral global The report and recommendations provided by the Finan- 23  order and trade wars cial Stability Board Task Force for Climate-related Financial Disclosures, chaired by Michael Bloomberg, have often been referred to as the key pilot project that, if successfully Environmental Trends 4.1  operationalized, could help the business and investment community to fully assess and incorporate the financial Nearly all investors raised concerns about cli- impact of climate-related risks and opportunities in market mate change and resource scarcity. Climate operations. Box 2. Institutional investors and climate change The institutional investor community has a number of initiatives addressing the implications of climate change on investment decisions. The Institutional Investors Group on Climate Change (IIGCC) is a European network of 155 pension funds and asset managers (including 9 of the 10 largest pension funds and asset managers) repre- senting €21 trillion in assets under management. Its mission is “to mobilise capital for the low carbon future by amplifying the investor voice and collaborating with business, policymakers and investors.” U.S.-based CERES has formed an Investor Network on Climate Risk and Sustainability made up of “more than 150 institutional inves- tors, collectively managing more than US$24 trillion in assets, advancing leading investment practices, corporate engagement strategies and policy solutions to build an equitable, sustainable global economy and planet.” The International Centre for Pension Management (ICPM)—a global, research-based network of pension organiza- tions that stimulates leading-edge thinking and practice about pension design and management—has recently formed a “Climate Change Working Group” that is developing a 10-step practical guide to help asset owners inte- grate climate change into the investment process. high levels of engagement with oil and gas compa- developed world’s pension system was designed nies concerning their transition strategies for a +2 C° for a time when people lived an average of 60–65 world, and decarbonization of their portfolios. years; today’s average life expectancy is 80–85. Life Increasing scarcity of resources (particu- expectancy at birth and at 60 years old has signifi- larly food and water)  was another environmen- cantly increased over the past two decades in devel- tal trend that many cited. 24 This trend was also oped countries and will continue to go up (Figure 3). seen as providing both risks and opportunities. How- For example, Japan’s life expectancy at 60 years ever, it received less attention than climate change, old, which was 23.7 years in 1995–2000, will rise to and respondents generally spoke in less detail about 28.5 years in 2035–40. how it was affecting their investing strategy. One Increased longevity is exacerbating two strong sentiment was that given the “public good” problems: most people are not saving enough for nature of some of these resources, governments and their retirement, and a growing number of peo- international organizations need to be more actively ple do not have an adequate pension scheme. involved through policy actions, funding, and inno- This creates not only societal challenges, but also vative solutions, perhaps with the support of institu- opportunities for investors to develop new prod- tional investors. ucts to address these problems. For example, lon- gevity risk can be transferred from individuals and 4.2  Social Trends employers to insurance companies, which can pool the risk. Life insurance contracts are a natural hedge Nearly every respondent cited two social to the longevity risk faced by pension funds, espe- trends: changing demographics and increased cially for defined benefit plans. With experience and inequality. In the area of demographics, the key deep knowledge of this type of risk, insurance com- issues are an aging population in the developed panies have been able to develop products for both world and emerging markets (particularly in Asia), retail and institutional clients. Three types of product and the need to create jobs for a large number of young people across the developing world. Inves- h t t p : //w w w.v a l o r a l .c o m /w p - c o n t e n t /u p l o a d s / 24  tors noted that the fastest-growing cohort of people 2018-Global-Food-Agriculture-Investment-Outlook-Valo- in the world is people aged 80 years or more. The ral-Advisors.pdf. 12 The Landscape for Institutional Investing in 2018 FIGURE 2:  LIFE EXPECTANCY AT BIRTH AND AT 60 Life Expectancy at Birth Life Expectancy at 60 28.5 88 29 86.6 27.9 86.0 27.5 85.5 28 86 84.9 26.9 84.4 84.0 26.3 27 83.3 25.9 25.8 84 82.8 82.6 26 25.2 81.8 81.3 24.7 82 25 80.5 Years Years 23.9 23.7 79.6 23.3 24 23.3 80 78.8 78.3 22.6 23 22.3 77.3 77.2 78 76.5 21.3 22 21.2 20.8 76 21 74 20 Japan UK Germany France Italy US Japan UK Italy France Germany US 1995–2000 2015–2020 2035–2040 1995–2000 2010–2015 2035–2040 Source: UN and SSGA (State Street Global Advisors) Demographics. are available to pension funds: buy-out, buy-in, and perceived as a systemic risk in the same way that longevity swaps.25 climate change is viewed, were seen as dire. If poli- At the same time, it is estimated that by ticians see trade restrictions as a solution to reduc- 2034, over 90 percent of the world’s popula- ing inequality—for example, by preserving domestic tion will be in emerging markets. Over the next 10 jobs—this could result in trade wars, or even armed years, 1 billion young people will enter the labor mar- conflict between nations, all of which would have a ket. The private sector will need to create 90 per- negative impact on economic growth. cent of the jobs these young people will need,26 most of them in emerging markets. A number of respon- 4.3  Technological Trends dents cited the increasing gap between countries with a concentration of aging populations relying on Two technological trends were seen to be of retirement savings, and countries that are the key great importance: disruptive technologies and source of future economic growth, as a particularly cyber-risk. While most of the discussion was about worrisome trend, as well as a key feature defining the the effects of these trends on the world and the future of investing strategies (see section below on investing environment, it was also noted that they investing in emerging markets). had implications for the investors themselves in Nearly every respondent cited increased terms of how they managed their own organizations. inequality as a concern. As noted above, the GFC was seen as having exacerbated inequality, but respon- 25  A pension plan can enter a buy-out transaction that allows dents cited a number of other causes such as new the transfer of liabilities (and corresponding assets) to an technologies (discussed below). Inequality was dis- insurer. A buy-in is similar, but the responsibility is kept at cussed primarily in risk terms, with few respondents the plan level, and the insurer makes payments to the plan. In a longevity swap, the pension fund makes a regular pay- seeing it as a source of investment opportunities. In a ment to a counterparty versus a payment corresponding to 66-country study, Grechyna (2016) identifies income a loss because pensioners are living longer than expected. inequality as the most robust determinant of politi- 26  h t t p s : //w w w. s e e d s t a r s . c o m /m a g a z i n e / f u t u r e - cal polarization. The consequences of inequality, emerging-markets/. Global Mega-trends 13 The most cited issue was the impact of artifi- recommends greater cooperation at the global level cial intelligence (AI) and other disruptive technol- to promote information-sharing, technology literacy, ogies on jobs. In the short term, AI was seen as elim- monitoring, and early incorporation of cyber-security inating certain types of jobs, thereby contributing to in IT systems.28 inequality (among different population groups and Cyber-risk was discussed mostly in terms between countries), although creating new types of of the threats it posed to investment returns, jobs in the longer term. The majority of respondents although some investment opportunities exist in com- were sanguine about the long-term consequences of panies that are developing solutions to deal with these AI, citing economies’ adjusting during previous peri- threats. As with good corporate governance, compa- ods in history, such as the shift from an agricultural nies that are better placed to deal with cyber-risk (an to an industrial economy. A short-term benefit inves- increasingly important governance topic)  are more tors mentioned was the potential for AI and other attractive investments than those that are not. technologies to contribute to productivity improve- ments—a major factor in GDP growth. Companies 4.4  Geopolitical Trends developing these technologies were seen as provid- ing opportunities for investment. Several respon- Two geopolitical trends—political polarization dents noted the potential impact of AI on their own and the weakening of the multilateral world investment process in supplementing the capabili- order—were seen as consequences of the trends ties of their current staff—for example, the changes discussed above. Both were seen only in risk terms; a big-data approach could make in key operational no one cited any investment opportunities as a result processes (e.g., processing claims in the insurance of these trends. Income inequality was seen as a industry)—or requiring different skills within their major factor contributing to political polarization. organizations. Other contributing factors are the perceived lack of A few also cited growing cyber-risks, including opportunities to achieve a “good” life (e.g., educa- those coming from sovereign states. Cyber-risk, tional and employment opportunities for youth; sta- a rapidly growing concern in all industries, is espe- ble employment and living conditions for those in cially prevalent in financial services. While financial middle age; and ample retirement benefits for the technology allows companies to rapidly expand their elderly to live comfortably, such as those enjoyed by customer base and offer more connectivity options, previous generations), as well as the “replacement” this expansion also increases the number of poten- of the major media supporting a broader social dis- tial access points for cyber-attacks, which have the course with social media. Two potentially dire con- potential to cripple companies, entire industries, and sequences of political polarization are that it inhibits even whole countries. Cyber-attacks also pose major the development of the economic and fiscal policies threats to investors in terms of information about what needed to foster economic growth and deal with the is in their portfolios, who is managing their assets, and next financial crisis, and that it makes it more likely who their beneficiaries are. According to a 2015 report that a country will lack the political will (i.e., the sup- by the U.S. Securities and Exchange Commission’s port of a critical mass of its citizenry) to deal with the Office of Compliance Inspections and Examinations, next financial crisis. 74 percent of registered investment advisers have Political polarization was regarded as one experienced cyber-attacks, either directly or through factor contributing to the decline of a multilateral their vendors. A recent International Monetary Fund study suggested that in the financial sector the aver- 27  h t t p s : // b l o g s . i m f.o r g / 2 0 1 8 / 0 6 / 2 2 /e s t i m a t i n g - age annual potential losses from cyber-attacks may cyber-risk-for-the-financial-sector/. be close to 9 percent of banks’ net income globally, 28  Financial Stability Board, “Financial Stability Implications or around US$100 billion.27 To mitigate these risks, from FinTech” http:/ /www.fsb.org/wp-content/uploads/R270 a Financial Stability Board report from June 2017 617.pdf. 14 The Landscape for Institutional Investing in 2018 world order, both a cause and a consequence of glo- address the challenges raised by any of these trends balization. Globalization has ushered in an unprec- must simultaneously consider their consequences edented era of growth, lifting millions of people out for other ones. For example, a carbon tax might slow of poverty (since 1990, nearly 1.1 billion people have global warming but it could also increase inequality. moved out of extreme poverty). Openness and part- Or providing government funding to support pen- nership between countries have played a critical part sioners could reduce the funding available for public in this success, which has also been underpinned by infrastructure investments. the multilateral political and economic system. But Taken together, all of these mega-trends and the benefits of globalization have been unequally dis- their interrelationships have market-level con- tributed, and increasing inequality and polarization sequences, since they are changing the “state are outcomes that must be addressed. of the world.” Interviewees saw that while many of these trends are creating new opportunities, they Interconnectedness of Mega- 4.5  also increase uncertainty and therefore risk. The trends and Their Consequences result is an investment environment that is chal- for Public Policy lenging for earning the returns beneficiaries expect and need. This also explains why sustainable invest- In conclusion, a number of respondents noted ing is increasing in importance. Investments that the importance of understanding the interrela- earn market-rate returns while having a positive tionships among these various trends and their impact can help to change the “state of the world” consequences for public policy. For example, in a positive direction. Sustainable infrastructure there were a few references to the implications of dis- investments are a particularly good example since ruptive technologies on the changing future of jobs they directly respond to the needs posed by vari- and the need for the public sector to adapt its role in ous aspects of the demographic, social, and envi- education. Today’s government focus is on early-age ronmental mega-trends, especially in emerging mar- education (usually primary and secondary)  and kets. However, making these kinds of investments providing unemployment benefits and retirement more attractive and supporting the investment com- benefits for those out of work. In the future, more munity’s commitment will require governments and emphasis will have to be placed on reskilling people international organizations to take actions that may throughout their (longer) productive lives. Generally, be challenging in a context of the ongoing weakening it was noted that public policy solutions designed to of the multilateral world order. Global Mega-trends 15 5 Sustainable Investing I nterviewees identified advancement of sus- “investing” and ”sustainable investing.” In his words, tainable, long-term investing and investing in “sustainability has driven and will continue to drive infrastructure as areas of significant interest global economies. Issues including climate change, and opportunity that could be used as effective challenges around water scarcity, inequality, and tools to deal with the system-level challenges poverty are drivers of change.” they face. Such opportunities could be enabled, Several respondents cited the report issued they added, by the collective and coordinated action by the European Commission’s High-Level Expert of the global investment community, multilateral Group on Sustainable Finance,31 which starts institutions, and governments, through channels with the notion that the purpose of finance is such as the G20. to serve the real economy, rather than being an end in itself. Sustainable investing is about invest- Strategies for Sustainable 5.1  ing in companies and projects that will grow the real Investing economy because they are profitable, they min- imize negative externalities, and they maximize Sustainable investing is on the rise. According positive externalities. In turn, sustainable invest- to the 2016 Global Sustainable Investment Review ing promotes sustainable development,32 taking an (GSIR),29 “globally there is now US$22.89 trillion of assets being professionally managed under respon- 29  http://www.gsi-alliance.org/wp-content/uploads/2017/03/ sible investment strategies, an increase of 25 per- GSIR_Review2016.F.pdf. 30  https://www.mckinsey.com/industries/private-equi- cent since 2014.” Most of these assets are in Europe ty-and-principal-investors/our-insights/from-why-to-why- (US$12,040 trillion)  and the U.S. (US$8,723 tril- not-sustainable-investing-as-the-new-normal. lion) (Figure 3). According to a McKinsey study,30 “at 31  https://ec.europa.eu/info/sites/info/files/180131-sustain- the start of 2016 sustainable investments constituted able-finance-final-report_en.pdf. The Final Report of the EU 26 percent of assets that are professionally managed High-Level Group on Sustainable Finance emphasizes the role in Asia, Australia and New Zealand, Canada, Europe, of sustainable investing in ensuring a sustainable economy. 32  Sustainable development is defined by the Report of the World and the United States—US$22.89 trillion in total.” Commission on Environment in Development, Our Common David Blood, the former CEO of Goldman Sachs Asset Future (also known as the Brundtland Report) as “development Management, who co-founded London-based Gen- that meets the needs of the present without compromising eration Investment Management with former U.S. the ability of future generations to meet their own needs” Vice President Al Gore, saw no difference between http://www.un-documents.net/our-common-future.pdf. Box 3. The argument for sustainable investing The origins of “sustainable investing,” defined in more detail below, are in the values-based “socially respon- sible investing” (SRI) movement. The essential strategy of this movement was the exclusion of companies on the basis of political, social, or ethical considerations—for example, companies in such industries as alcohol, tobacco, and munitions. A major objection raised about these funds in the investment community was that such screening reduced diversification and thus increased risk. It was also argued that eliminating profitable invest- ments on moral grounds would violate the fiduciary duty of fund trustees to maximize financial returns for their beneficiaries. The argument for sustainable investing in a current sense is as much economic as it is values-based. At the heart of sustainable investing is incorporating ESG factors into the decision-making process. A recent Bank of America-Merrill Lynch report notes: ESG is too critical to ignore. Asset potential is substantial: we conservatively estimate that flows into ESG-type funds over the next few decades could be roughly equivalent to the size of the S&P 500 today. Corporate America is waking up to ESG as it pertains to sustainable growth, and the role of ESG in investing is fast becoming institutionalized via regulators, indices, exchanges and consultants. The Bank of America-Merrill Lynch research joins a growing body of empirical research by academ- ics and investors that sustainable investing, based on the integration of ESG factors with traditional fun- damental financial analysis, has a number of economic benefits. Companies with strong ESG performance demonstrate less risk (e.g., probability of going bankrupt or suffering stock price or earnings declines) and show higher accounting (e.g., return on assets and return on equity)  and stock price returns. While some skeptics remain, the debate has largely shifted from “why not to do SRI” to “why to do ESG.” Two reasons help explain why ESG factors can affect a company’s financial performance and, thus, an investor’s returns. The first is the changing expectations of customers and employees, who are increasingly reluctant to buy from or work for a company with poor ESG practices. This has obvious implications for hiring the best people and getting a fair price and the largest market share possible for products and services. The second reason is the growing recognition that, in the aggregate, how companies are managing their ESG factors has system-level implications affecting the business environment. For example, climate change due to carbon emissions, political instability due to social and income inequality, and the collapse of the financial system due to poor governance in financial institutions can result in a “state of the world” where the economic environment will limit possible investment returns. These system-level implications are increasingly important for two types of investors: (i) the largest ones, and (ii) those with a long-term view. The largest asset managers and asset owners are “universal owners” that cannot diversify away from the system-level risks. At the same time, the system-level effects are particu- larly important over the long term. Shift toward passive investing, which is long-term by definition, and the high concentration in the asset management industry, with many active managers now looking to take a longer-term perspective, are repositioning sustainable investing.. 18 The Landscape for Institutional Investing in 2018 FIGURE 3:  GROWTH OF SRI ASSETS BY REGION, 2014–16 GROWTH OVER COMPOUND ANNUAL REGION 2014 2016 PERIOD GROWTH RATE Europe $ 10,775 $ 12,040 11.7% 5.7% United States $ 6,572 $ 8,723 32.7% 15.2% Canada $ 729 $ 1,086 49.0% 22.0% Australia/New Zealand $ 148 $ 516 247.5% 86.4% Asia ex Japan $ 45 $ 52 15.7% 7.6% Japan $ 7 $ 474 6,689.6% 724.0% Total $ 18,276 $ 22,890 25.2% 11.9% Source: 2016 Global Sustainable Investment Review. intergenerational perspective, which is important to investors were aware of, and involved in, some a number of long-term investors. At the same time, important initiatives focused on getting both the line between impact investing and sustainable companies and investors to take a longer-term investing is also blurring. view when making and evaluating their invest- While there was no consensus regarding what ment decisions (see Annex 2 for a selective list of constitutes “sustainable investing,”33 all of the initiatives involving/targeting institutional investors). executives interviewed were interested in it and Examples of these initiatives include CECP’s Strate- stated that their funds were practicing sustain- gic Investor Initiative, the Coalition for Inclusive Capi- able investing to various degrees and in different talism and its Embankment Project, and FCLTGlobal. ways. A significant portion of the ensuing discussion Long-termism and sustainable investing were seen as was dedicated to what this meant in practical terms. “two sides of the same coin,” since all seven strate- The interviewees had examples of using most gies described in Box 4 are patient ones, expected to of the strategies described in Box 4, with a par- earn returns over time rather than short-term trad- ticular interest in ESG integration and corporate ing profits. Academic studies show that there is a pos- engagement and shareholder action. One respon- itive relationship between sustainability performance, dent stated that his entity now managed its portfo- lio through inclusion rather than exclusion by creat- 33  Sustainable investing is often used as an umbrella term ing a sustainability case along with the investment for a variety of investing styles that evaluate companies on case for each decision. Respondents gave a number the basis of ESG factors, alongside traditional stock-picking of reasons for sustainable investing: an increasingly metrics. 34  According to Towers Watson (2011), Sustainable investing longer-term focus; the desire to support a sustain- – The role of Universal Owners “A Universal Owner is a large able real economy; the changing role of the corpora- asset owner who, as a consequence of its size, owns a slice tion in society; being a “universal owner”34 and tak- of the whole economy and market through its portfolios. Uni- ing a system-level view; the rising voice of millennials versal Owners adapt their actions with the intent of improv- who want their money managed for purpose, as well ing long-term performance by benefiting the whole economy as for profit; and the SDGs. and market in a logical but ambitious extension of sustainable investing. They justify these actions on financial grounds.” A universal owner cannot diversify away its macro-risk. Its 5.2  Long-termism returns are based on the “state of the world.” Systemic risks created by such trends as climate change and inequality neg- Long-termism was a major theme and covered a atively affect the state of the world and, hence, investment number of related topics. To varying degrees, many returns. Sustainable Investing 19 Box 4. Strategies for sustainable investing GSIR (Global Sustainable Investment Review) has created a widely accepted taxonomy of seven sustainable investing strategies: 1. Negative/exclusionary screening (US$15,023 trillion): the exclusion from a fund or portfolio of certain sectors, companies, or practices on the basis of specific ESG criteria. 2. Positive/best-in-class screening (US$1,030 trillion): investment in sectors, companies, or projects selected for positive ESG performance relative to industry peers. 3. Norms-based screening (US$6,210 trillion): screening of investments against minimum standards of business practice based on international norms. 4. ESG integration (US$10,369 trillion): investment managers’ systematic and explicit inclusion of ESG fac- tors in financial analysis. 5. Sustainability-themed investing (US$331 billion): investment in themes or assets specifically related to sustainability (e.g., clean energy, green technology, or sustainable agriculture). 6. Impact/community investing (US$248 billion): targeted investments, typically made in private markets, aimed at solving social or environmental problems, and including community investing, in which capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is pro- vided to businesses with a clear social or environmental purpose. 7. Corporate engagement and shareholder action (US$8,365 trillion): the use of shareholder power to influence corporate behavior, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines. in which the company focuses on its material ESG Many cited lack of high-quality and compa- issues and financial performance, but that it takes 5 rable data on companies’ ESG performance as a to 7 years to obtain the financial benefits from sus- major barrier to better ESG integration. Noting tainability performance.35 the proliferation of nongovernmental organizations (NGOs)  and initiatives seeking to set standards 5.3  ESG integration and frameworks for nonfinancial information (e.g., the Carbon Disclosure Project, the Climate Disclo- The majority of respondents were practicing sure Standards Board, the Global Reporting Initia- ESG integration to some extent, and it was con- tive, the International Integrated Reporting Coun- sistently cited as being particularly relevant for cil, the Sustainability Accounting Standards Board, mainstreaming sustainable investing. All respon- and the Task Force on Climate-related Financial dents viewed ESG integration as a way to mitigate downside risk, although some also felt that it was a source of upside opportunities, such as by identify- 35 Khan, Serafeim, and Yoon (2016) used SASB’s industry clas- ing companies with good or improving ESG perfor- sification system to create portfolios of companies that were performing well and poorly for the material issues in their mance. The most sophisticated investors had inte- industry. The firms with the highest annualized alpha of 4.8% grated ESG considerations into all their asset classes were those performing well on the material issues and poorly down to the portfolio manager level, although they on the immaterial issues (versus a 2.2% alpha for those per- noted that this was done differently by asset class. forming poorly on both). 20 The Landscape for Institutional Investing in 2018 Disclosures)36 and of ESG data vendors (e.g., MSCI, The Role of the Corporation in 5.5  Oekom, Sustainalytics, and Vigeo Eiris), whose rat- Society ings can vary widely for a single company, some called for standards for nonfinancial reporting, The trend toward sustainable investing was also such as through the EU Directive on Non-financial associated with changing perceptions about the Reporting.37 Ideally, it was felt, all companies should role of the corporation in society. While all respon- be required to report on their nonfinancial perfor- dents still saw creating value for shareholders as fun- mance according to a set of standards, just as listed damental, beliefs about how this is best done are companies are required to do for their financial per- changing. One respondent said that “stakeholder formance. Some felt that AI technologies for ESG capitalism has arrived,” while another drew a contrast measurement, such as those being developed by between “Anglo-Saxon capitalism and Rhine capital- TruValue Labs,38 could be a short- or even long-term ism.” The basic point of both is that the sustainability solution to uneven and uncomparable corpo- of the corporation itself, and its ability to earn returns rate reporting. Poor corporate reporting was seen over the long term, now requires more attention to as especially problematic in emerging markets, identifying and balancing various stakeholder inter- although a few investors said this created opportu- ests. The changing role of the corporation includes nities for them in their emerging market portfolios, a change in its relationships with shareholders, from since they had found ways to make the necessary a purely transaction-based relationship in which a assessments. stock is bought or sold, to a long-term relationship requiring engagement on both sides. It also requires 5.4  Engagement and Stewardship clarification of the fiduciary duty of the board. Another strategy critical to the evolution of sus- Intergenerational Equity and 5.6  tainable investing and long-termism is engage- Pressure from the Millennials ment and stewardship (referred to as corporate engagement and shareholder action in the GSIR tax- Several respondents pointed out the need for onomy), and many respondents discussed the efforts a balance between generations so that returns they were making in this regard. A long-term share- earned for current generations do not inhibit holder wants to ensure that its portfolio companies the returns that can be earned for future ones. A have sustainable long-term strategies in place, and long-term view takes account of the effect of invest- engagement was seen as a powerful instrument that ment decisions on future generations. Most of the could contribute to advancing this agenda. Those using passive investment strategies saw engage- ment as important in improving a company’s perfor- 36  https://www.cdp.net/en; https:/ /www.cdsb.net/; https:/ / mance from the point of view of sustainable returns. www.globalreporting.org/Pages/default.aspx; http:/ /integrat- “Fix rather than sell” is the logic here. For both passive edreporting.org/the-iirc-2/; https:/ /www.sasb.org/; https:/ / www.fsb-tcfd.org/. and active investors, engagement could take reac- 37  Directive 2014/95/EU of the European Parliament and of tive (dealing with a problem)  or proactive (prevent- the Council of 22 October 2014 amending Directive 2013/34/ ing a problem from occurring)  forms. Engagement EU as regards disclosure of nonfinancial and diversity informa- was also seen as a way of ensuring that companies tion by certain large undertakings and groups. The objective followed through on promised sustainable strate- of the Directive is to increase European companies’ transpar- gies. Some respondents highlighted the importance ency and performance on environmental and social matters and, therefore, to contribute effectively to long-term economic of supporting engagement strategies with changes growth and employment. in the fee structures, timeframes, and performance 38  https://www.truvaluelabs.com/. One of the authors of this metrics in the contracts between asset owners and report, Robert Eccles, acts as a senior advisor to to TruValue asset managers. Labs. Sustainable Investing 21 FIGURE 4:   PERCENTAGE OF INVESTORS WHO the relevant elements of different SDGs. Others HAVE REVIEWED THEIR INVESTMENT expressed skepticism about whether the SDGs lent PORTFOLIO FOR IMPACT themselves to creating or influencing investment strategies. Despite this variation, there was a gen- 76% 80% 73% eral consensus that the SDGs were a useful orga- nizing framework for thinking about collaboration between the public and private (both companies and 60% investors) sectors. 47% 49% An issue closely related to the SDGs is mea- 40% 40% 39% suring impact. This is different from measuring 40% 29% companies’ ESG performance, discussed below. For 27% 22% 23% ESG metrics, the company is the unit of analysis. In 20% 21% measuring impact, the community or the world— 19% 16% 15% the focus of the SDGs—is the unit of analysis, since 13% the measure is about a positive or negative external- 0% 2013 2014 2015 2016 2017 ity being created by the company. Impact measure- Millennials Gen X Boomers Silent ment was seen as a “frontier issue,” with most inves- tors feeling that they were at best in the early stages Source: U.S. Trust Annual Survey 2017. of being able to do this. Several cited the work being done by Dutch pension funds APG and PGGM.40 interviewees (particularly pension funds)  that have The Blurring of the Line 5.8  long-tailed liabilities raised this strategic imperative. between Impact Investing and In the same vein, several respondents dis- Sustainable Investing cussed how the growing wealth and voice of mil- lennials is putting pressure on them to create A number of respondents referred to the evolu- investment products that both earn required tion of impact investing and its role as a cata- returns and contribute to a sustainable world. lyst of sustainable investing. Although “impact This pressure will grow as the wealth of the Baby investing” is currently defined as just one strategy Boomer generation is passed on to its millennial chil- in the broad category of sustainable investing, the dren. This is confirmed by the 2017 U.S. Trust Annual line of meaning between these two terms is start- Survey 2017, in which millennials exhibit the high- ing to blur. One factor driving this is the SDGs whose est percentage of investors who have reviewed their emphasis is on impact—positive and negative exter- investment portfolio for impact (Figure 4). nalities being created in the world by companies and those who invest in them. BlackRock has suggested The Sustainable Development 5.7  a continuum that goes from the negative screen- Goals ing of traditional socially responsible investing, to ESG integration that takes account of a company’s There was substantial variation in the extent to performance on ESG factors, to impact investing, which the 17 SDGs were influencing investment strategies, although all respondents were famil- iar with them.39 Some investors were using them as https:/ 39  /sustainabledevelopment.un.org/sdgs. In May 2017, the big Dutch pension funds APG and PGGM 40  the basis for sustainability-themed strategies, such published “Sustainable Development Investments (SDIs): Tax- as climate and low carbon, water scarcity, and food onomies,” which identifies investable sub-goals for each of the security. Those doing so pointed out that 17 is a large SDGs except 16 (Peace and Just Strong Institutions) and 17 number, so they had created themes by combining (Partnerships for the Goals). 22 The Landscape for Institutional Investing in 2018 thereby focusing on those companies whose prod- As the impact investing industry evolves ucts and services target measurable social or envi- and gains momentum and importance within a ronmental impact.41 broader stream of sustainable investing, it will be As Box 4 shows, impact/community invest- important to develop a set of principles defining ing is the smallest of the seven “Strategies for what actually constitutes impact investing, along Sustainable Investing.” However, global assets with robust methodologies for impact measure- in impact investing showed the highest growth ment and reporting. rate between 2014 and 2016. 42 Even so, there was no clear consensus on the meaning of impact invest- Barriers to Sustainable Investing 5.9  ing. If anything, the term “impact investing” is being used in an increasingly broad sense, extending into Several barriers to sustainable investing were private equity and the public markets. For example, cited: continuing concerns that sustainable Lumberg (2017) essentially equates impact investing investing means inherently lower returns and with socially responsible investing.43 New financial promotes short-termism, the constraints imposed instruments are being developed to support impact by the existing definition of fiduciary duty, and a lack investing, such as “Pay for Success” Social Impact of the necessary market “infrastructure” to main- Bonds, pioneered by Social Finance.44 Impact funds stream sustainable investing. Only a few of the have been launched by major private equity firms, investors interviewed expressed a concern them- such as TPG’s US$2 billion “The Rise Fund,” which selves regarding underperformance from sustain- is “committed to achieving social and environmental able investing. Indeed, most viewed such a concern impact alongside competitive financial returns.”45 In as a false perception, with sufficient evidence to now the public markets, mainstream investors are start- disprove it, including several studies they had done ing to create impact products, such as BlackRock’s themselves. A 2016 State Street global survey of US$60 million “Impact U.S. Equity Fund,” which 582 institutional investors found that 48 percent of “accounts for the positive and negative outcomes within a benchmark aware portfolio.”46 Even activist hedge funds, such as JANA Partners,47 are moving 41  https://www.blackrock.com/investing/investment-ideas/ into impact investing. sustainable-investing. 42  h t t p s : //w w w. u s s i f.o rg /f i l e s / Pu b l i c a t i o n s /G S I A _ What all of these different instruments and asset classes have in common is the need to Review2016.pdf, Table 3. 43  https://www.investopedia.com/news/history-impact-in- measure the social and environmental impact vesting/. Impact investing in its narrow sense has classically of their investments, not simply the ESG perfor- been associated with foundations, development finance mance of their portfolio companies. This is espe- institutions, and wealthy individuals making relatively small cially challenging for public company investments, investments in the private markets. At times, the line also blurs since investors have to rely on data that are available between philanthropy and impact investing, especially when in the public domain, either reported by the company impact investing is seen as sacrificing at least some return. 44  http:/ /socialfinance.org/. or from other sources. To date, the focus of impact 45  http:/ /therisefund.com/. measurement has been in the private markets, such 46  https://www.blackrock.com/investing/products/279570/ as IRIS48 (“the catalog of generally-accepted perfor- blackrock-impact-us-equity-fund-class-a. mance metrics used by a majority of impact inves- 47  “Jana Impact Capital Fund,” announced in January 2018, will tors”) developed by the Global Impact Investing Net- “invest in companies the hedge fund believes are good bets but work (GIIN).49 This is not the case for the stock or could do better for the world https:/ /www.wsj.com/articles/ wall-street-fighters-do-goodersand-stingconverge-in-new-ja- bond of a public company, which can be encouraged na-fund-1515358929. Eccles is on the Advisory Board of this to report data on impact but cannot be forced to fund. do so. Even if companies are interested in reporting 48  https:/ /iris.thegiin.org/, accessed July 2018. impact data, little guidance exists on how to do so. 49  https:/ /thegiin.org/, accessed July 2018. Sustainable Investing 23 respondents thought that returns were not sacrificed nonfinancial performance metrics and pricing in sustainable investing, although 35 percent still felt mechanisms for positive and negative external- that they were, and 17 percent did not know.50 ities, which would adjust capital allocation to Inputs reinforcing short-termism were reward companies that are creating long-term quarterly conference calls, the media focus shareholder value, but not at the expense of society. on short-term movements in stock prices, and The Global Reporting Initiative and the Sustainability the relatively short-term mandates asset own- Accounting Standards Board were cited as leading ers give to asset managers, even though they the work to create ESG measurement and reporting have long-term investment horizons for the reasons standards at the company level. The World Bench- described above. The State Street survey found that marking Alliance was cited as having the potential although 62 percent of asset owners have invest- to contribute to standardizing impact measurement ment time horizons of 5 years or more, 79 percent through benchmarking. of them evaluate their external managers on time Respondents generally felt that as sus- frames of 5 years or less. Even more dramatically, 70 tainable investing itself is going mainstream, percent said they evaluated the performance of port- so should the efforts to introduce market-level folio managers annually.51 adjustments to create a level playing field in this The issue of fiduciary duty is a complex one, new era. This kind of shift will require consistent based heavily on laws and regulations in each leadership and ownership on the part of all key stake- country. It is also not clear just how big a problem holders (including institutional investors), as well as the definition of fiduciary duty is. The State Street close coordination between governments/regulators survey found that only 10 percent of respondents felt and the private sector. that regulations or a general counsel’s interpretation of fiduciary duty represented a barrier to sustainable investing. In this context, several respondents cited 50  http://www.statestreet.com/content/dam/statestreet/doc- the work of the Principles for Responsible Invest- uments/Articles/The_Investing_Enlightenment.pdf, p.8. 51  http://www.statestreet.com/content/dam/statestreet/doc- ment I on “Fiduciary Duty in the 21st Century.”52 One respondent felt that regulators should establish a uments/Articles/The_Investing_Enlightenment.pdf, p.23–24. 52  https://www.unpri.org/fiduciary-duty/fiduciary-duty-in- uniform definition of fiduciary duty, emphasizing that the-21st-century/244.article. The UN PRI “Fiduciary Duty in the duty is to both beneficiaries and society. the 21st Century” aims to end the debate about whether fidu- There were also many references to creat- ciary duty is a legitimate barrier to investors’ integrating ESG ing the necessary market “infrastructure” of issues into their investment processes. 24 The Landscape for Institutional Investing in 2018 6 Infrastructure Investing I nstitutional investors expressed considerable has a duration of 12–15 years, while a typical life interest in infrastructure investing. In the post- insurer has a duration of 7–10 years.54 2008 environment, the traditional bank-centric However, most of the investors who were intermediation (transforming savings into long-term interested in infrastructure investing said that investments)  is shifting toward a system in which their allocation to this asset class was below what institutional investors play an increasingly import- they would like it to be. Investing in infrastructure is ant role in providing long-term capital. Many of the difficult. Many argued that infrastructure investing is interviewees said they were trying to figure out how not sufficiently well defined as an asset class. There to become successful players in this space. From was also a sentiment that, just as institutional inves- the perspective of long-term investors, infrastruc- tors are expected to increase their involvement and ture is a very attractive investment—especially in play a bigger role in infrastructure financing, national sectors such as energy and telecommunications,53 governments also need to step up their participa- where projects can generate sufficient returns. Such tion, particularly in the sectors that are seen as pub- investors see investment in infrastructure as a hedge lic goods. From the government perspective, crowd- against inflation, one that provides a stable source ing in the private sector requires creating an enabling of cash flow, can act as a potential buffer to returns business environment through macroeconomic sta- when the next financial crisis strikes, and presents an bility, transparent and predictable regulatory frame- attractive alternative to government bonds and other works, and a reorientation of public investment from fixed-income securities that are increasingly unable commercially inviable projects to viable ones. A proj- to generate cash flows over an extended period. ect pipeline and robust public-private partnership For the broader economic outlook, the poten- frameworks are also needed. tial benefits of institutional investor involvement in infrastructure financing are significant, pro- viding a countercyclical, stabilizing effect and help- 53  UN Report of the Inter-agency Task Force on Financing for ing to offset short-termism and promote sustained Development states that, for example, investments in ecosys- economic growth (Box 5). Those who invest in infra- tems or water and sanitation will largely be publicly financed because of the public good nature of the sector, while energy structure typically have a long-term investment hori- and telecommunications are much likelier to be funded zon, driven by the long-term nature of their liability through private finance. structure (e.g., life insurers or pension funds). The 54  Swiss Re publication (2015). “Infrastructure Investing. It average defined benefit pension fund liability profile matter.s. Box 5. Investing in sustainable infrastructure to build a sustainable world Fresh investment in sustainable infrastructure is essential if the world is to face the pressures of the next decade and adapt to the emerging mega-trends discussed in Section III. By 2050, the planet will be hotter by 2 degrees Celsius;a agricultural land will have been degraded by 50 percent because of soil erosion and desertification;b the world’s population will have increased by 29 percent or 2.2 billion;c and 68 percent of the world population will live in cities, against 55 percent now.d Sustainable infrastructure will be needed to satisfy the needs for more food (+40 percent),e more water (+55 percent),f more electricity production (+80 percent),g and more mobility (1 billion additional cars).h Investing in infrastructure could also lead to significant gains for the world economy in the long run. There would be positive effects from construction and power generation, and—over time—second-round effects on broader economic activity due to greater productivity, lower costs, and improved connectivity. Infrastructure is already a major part of investment expenditure in the economy, but it must nearly dou- ble to close the existing gap. Infrastructure consists of “hard infrastructure” (transport, electric power, water and sanitation, and ICT), social infrastructure (hospitals, schools, prisons, etc.), extractives (oil, gas, mining), and real estate. Between 1992 and 2013, the world spent on average 3.5 percent of GDP annually on hard infrastruc- ture, with Asian countries leading and Western Europe and Latin America having the most modest investments. Worldwide spending on hard infrastructure is currently about US$2.5 trillion per year, and annual spending on social infrastructure and extractives is about US$1.2  trillion each. Spending on real estate is equal to US$4.7 trillion. A 2016 study by the McKinsey Global Institute estimates that in 2016–30, US$3.3 trillion per year will be needed in infrastructure investment. Other estimates place future infrastructure financing needs even higher, in the range of US$70–90 trillion through 2030.i These needs cannot be met by the public sector or by commercial banks alone. Many governments have limited fiscal space to finance infrastructure through taxation and borrowing. Commercial banks find it increas- ingly difficult to take the long-term exposure needed in infrastructure finance. Syndicated bank loans used to be the financing norm for infrastructure projects, but with the new Basel III regulations and the EU Solvency II, which (continued on next page) Opportunities Presented by 6.1  cited by a number of respondents include technol- Investments in Infrastructure ogy transfers across geographies—for example, renewable energy, and connectivity infrastructure in The world has substantial needs for investment emerging markets. in both new (greenfield)  and existing (brown- field)  infrastructure, in both developed and Challenges Related to Investing 6.2  emerging markets. The public investment corner- in Infrastructure stones of an agenda for sustainable infrastructure are the SDGs and COP22. Infrastructure is deeply Institutional investors have investment require- embedded in many of the SDGs (Table 1), although, ments. They need stable cash flow, moderately as discussed above, there is a very significant gap low risk, acceptable rate of return, and assets between the funding that is needed and what is cur- that hold a credit rating (investment grade rently available through private and government assets). Many available infrastructure projects financing. Some notable investment opportunities do not meet these requirements. 26 The Landscape for Institutional Investing in 2018 Box 5. Investing in sustainable infrastructure to build a sustainable world (continued) favor shorter-tenor loans for infrastructure, banks must adhere to stricter regulations. Another complication for bank-driven investment is that rating agencies’ “sovereign ceilings” limit individual infrastructure project ratings to that of the country in which the infrastructure is located, exaggerating the risk profile of profitable invest- ments (Collier et al., 2014). Hence, realizing infrastructure investment at scale requires the mobilization of pen- sion funds and other institutional investors that are not subject to the same stringent regulatory and prudential provisions as banks. This means that infrastructure needs long-term, institutional investors, and that by investing in infra- structure institutional investors need to have the opportunity to directly influence outcomes for society in a way that reduces their risk. To succeed, they will need adequate planning, execution, and a strong mac- roeconomic framework from the countries receiving the investment. On the other hand, by enforcing best (sus- tainable) practices in their investments, they can create powerful incentives for strengthening the regulatory and business environment at the national, regional, and global levels. a  Adrian E. Raftery, Alec Zimmer,  Dargan M. W. Frierson,  Richard Startz, and Peiran Liu “Less than 2 °C warming by 2100 unlikely” Nature Climate Change volume7, pages 637–641 (2017). b  Donald Sparks, 2018 Advances in Agronomy, Elsevier – London. c  United Nations DESA/Population Division https:/ /www.un.org/development/desa/en/news/population/world-population- prospects-2017. d  https://www.un.org/development/desa/en/news/population/2018-revision-of-world-urbanization-prospects.html. e  Information Resources Management Association (2018) Climate Change and Environmental Concerns, breakthroughs in research and practice. IGI Global. f  OECD (2012), OECD Environmental Outlook to 2050, OECD Publishing. g  Zenya Liu (2015) Global Energy Interconnections, Elsevier. h  ITF Transport Outlook, 2017. i  McKinsey. (2016). Bridging Global Infrastructure Gaps. New York: McKinsey Global Institute. There are three main sets of reasons cited High transation costs are associated with for the gap between the desire to invest and the the specificities inherent in individual infrastruc- ability to invest, and the comfort in doing so. ture projects, a lack of standardization, and high First, investing in infrastructure entails high trans- coordination costs. action costs, uncertainty, and additional risk. Sec- ond, the pipeline of bankable projects is low, with • Every infrastructure investment is unique, the further aggravating fact that in some cases pub- with highly technical and bespoke projects lic investment crowds out the private sector. Third, and financing structures. As a result, infra- there are constraints from existing financial and pru- structure investment involves complex legal and dential regulations. Finally, additional complications financial arrangements, leading to lengthy nego- exist for investing in emerging markets, due to the tiation processes and costly project preparations higher business, political, and currency risks, insuf- (e.g., responding to a request for proposals, due fisient information about existing opportunities, and diligence, and negotiating the contract). Inves- and the lack of institutional capacity. tors reluctantly absorb project preparation costs, Infrastructure Investing 27 TABLE 1:  EXAMPLES OF SDG GOALS AND TARGETS RELATED TO INFRASTRUCTURE GOALS AND TARGETS INDICATORS Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture 2.a Increase investment, including through enhanced 2.a.1 The agriculture orien- international cooperation, in rural infrastructure […]. tation index for government expenditures 2.a.2 Total official flows (offi- cial development assistance plus other official flows) to the agriculture sector Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. 4.a Build and upgrade education facilities that are child-, 4.a.1 Proportion of schools disability- and gender sensitive and provide safe, non-vi- with access to (a)  electricity; olent, inclusive and effective learning environments for (b)  the Internet for pedagog- all ical purposes; (c)  computers for pedagogical purposes; and (d) adapted infrastructure and materials for students with disabilities; […] Goal 5. Achieve gender equality and empower all women and girls 5.4 Recognize and value unpaid care and domestic work 5.4.1 Proportion of time spent through the provision of public services, infrastructure on unpaid domestic and care and social protection policies […] work, by sex, age and location Goal 6. Ensure availability and sustainable management of water and sanitation for all 6.3 By 2030, improve water quality by reducing pollution, 6.3.1 Proportion of wastewater eliminating dumping and minimizing release of hazard- safely treated ous chemicals and materials, halving the proportion of 6.3.2 Proportion of bodies untreated wastewater and substantially increasing recy- of water with good ambient cling and safe reuse globally water quality 6.4 By 2030, substantially increase water-use efficiency 6.4.1 Change in water-use effi- across all sectors and ensure sustainable withdraw- ciency over time als and supply of freshwater to address water scarcity 6.4.2 Level of water stress: and substantially reduce the number of people suffering freshwater withdrawal as a from water scarcity proportion of available fresh- water resources Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all 7.a By 2030, enhance international cooperation to facil- 7.a.1 Mobilized amount of itate access to clean energy research and technol- United States dollars per year ogy, including renewable energy, energy efficiency and starting in 2020 accountable advanced and cleaner fossil-fuel technology, and pro- towards the US$100 billion mote investment in energy infrastructure and clean commitment energy technology (continued on next page) 28 The Landscape for Institutional Investing in 2018 TABLE 1:  EXAMPLES OF SDG GOALS AND TARGETS RELATED TO INFRASTRUCTURE (continued) GOALS AND TARGETS INDICATORS 7.b By 2030, expand infrastructure and upgrade technol- 7.b.1 Investments in energy ogy for supplying modern and sustainable energy ser- efficiency as a percentage of vices for all in developing countries, in particular least GDP and the amount of foreign developed countries, small island developing States and direct investment in finan- landlocked developing countries, in accordance with cial transfer for infrastructure their respective programmes of support and technology to sustainable development services Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation 9.1 Develop quality, reliable, sustainable and resilient 9.1.1 Proportion of the rural infrastructure, including regional and trans-border population who live within 2 infrastructure, to support economic development and km of an all-season road human well-being, with a focus on affordable and equi- 9.1.2 Passenger and freight vol- table access for all umes, by mode of transport 9.4 By 2030, upgrade infrastructure and retrofit indus- 9.4.1 CO2 emission per unit of tries to make them sustainable, with increased resource- value added use efficiency and greater adoption of clean and environ- 9.a.1 Total official international mentally sound technologies and industrial processes, support (official development with all countries taking action in accordance with their assistance plus other official respective capabilities flows) to infrastructure 9.a Facilitate sustainable and resilient infrastructure development in developing countries through enhanced financial, technological and technical support to African countries, least developed countries, landlocked devel- oping countries and small island developing States Source: Developed by the authors based on the UN resolution. See http://www.un.org/en/development/desa/population/ migration/generalassembly/docs/globalcompact/A_RES_70_1_E.pdf. because the inherent risk of failure in the proj- politically sensitive, require inputs from many dif- ect preparation phase—estimated to be close ferent stakeholders, and often require careful coor- to 50 percent in public-private partnerships dination between the public and private sectors. (Kortekaas, 2015)—is high. • The lack of standardized documentation, A lack of bankable projects is also viewed as benchmarking, and performance data for the a binding constraint: sector contributes to these transaction costs, and to the overall market “ambiguity” on how to • There is a seriously insufficient pipeline of treat investments in infrastructure. (There was deals of sufficient size and quality. Size is significant disagreement among respondents important because large investors need to invest on whether infrastructure can be considered in large increments. Detailed feasibility studies an asset class; it was often contrasted with real and robust business cases are important to attract estate, which was considered to be a better devel- investors, who often require high-quality informa- oped asset class.) tion on which to base their investment decisions. • Also contributing to transaction costs, and cre- It was noted that development banks and devel- ating uncertainty about whether the investment opment partners had formed several infrastruc- can actually be made, is that many projects are ture project preparation facilities to address this Infrastructure Investing 29 problem; however, these facilities have limited and regulatory environment to encourage foreign capacity because of funding shortfalls. direct investment. • In some cases, state actors were seen as At the same time, infrastructure investing pricing the private market out of transac- in emerging markets was regarded as especially tions. It was felt that public intervention should problematic, with regulatory and political uncer- focus on developing adequate instruments to tainty and a lack of institutional capacity (which can mobilize the private sector in a transparent and vary even within a single institution) resulting in sig- competitive manner to address externalities, nificant difficulties in sourcing projects and negotiat- information asymmetries, and/or institutional ing their funding with sponsors. Respondents felt that and market failures. Public intervention is also transparency and predictability in the legal and insti- justified for projects with high development tutional framework were key to estimating risks and impact, but for which a commercial solution can returns on investment, while they saw political and be realized only over the medium to long term. business risks—including corruption, regime change, But in some cases—even when the structuring breach of contract, and the inability to enforce policy is in the short to medium term and is fully com- changes—and foreign exchange/currency risk as the mercially viable—public investments crowd out most significant risks for infrastructure investment private investment. in emerging markets.56 A number of respondents shared their own A number of respondents also felt that exist- experiences of investing in emerging markets ing financial and prudential regulations failed to (primarily in infrastructure). accommodate the needs of infrastructure invest- ing by institutional investors. They ignore the par- • Some of the institutional investors that were inter- ticularly long-term nature of the liabilities of certain ested in investing in emerging markets stated institutional investors (e.g., pension funds, which that they lacked information about opportuni- need the capacity to sustain their positions for long ties, as well as the necessary in-house skills and durations) and the needs of infrastructure financing, time to gather it. A few referred to unsuccessful and they significantly limit the possible exposure to past experiences, but most were still interested certain types of investments and asset classes. in these types of investments. Doing so required finding the right partnerships and financial solu- Infrastructure Investments in 6.3  tions to mitigate risks. A few of the respondents Emerging Markets were successfully working with IFC’s Managed Co-lending Portfolio Program.57 Many of the respondents viewed infrastruc- ture investments in emerging markets as a key source of future opportunities. 55 There was a gen- 55  UBS Longer Term Investments; Emerging market infrastruc- eral consensus that most future economic growth ture – update (2017), expects that growth in infrastructure investments will outpace broader GDP growth in emerging will come from the developing economies, and sig- markets over the next decade. It forecasts emerging markets’ nificant infrastructure investments will be required infrastructure spending to increase from US$3 trillion in 2015 to sustain its pace. There was also a general senti- to around US$5.5 trillion by 2025, bringing their share of total ment that infrastructure spending is gradually shift- global spending on the sector to around two-thirds, up from ing from “West to East.” While infrastructure spend- one-half currently. 56  Political risk has been identified as the second most import- ing in emerging markets was still often seen as ant constraint to FDI in developing countries (MIGA, 2014) with largely government-driven, there was a consensus adverse regulatory changes and breaches of contract being that private participation has increased significantly the top concerns to investors. in recent years, with the rate of increase often linked 57  This program provides investors a platform for participation to government reforms promoting a stable business in a diversified global portfolio of emerging market projects 30 The Landscape for Institutional Investing in 2018 • Some investors had successfully developed the externalities to help further ESG integration. It was in-house capacity to directly engage with emerg- hoped that this would ultimately lead to the develop- ing markets, cutting out intermediaries. Key suc- ment of a standardized and harmonized infrastruc- cess factors included finding reliable local partners ture capital market. Related suggestions included (including local institutional investors); establish- the need to maintain stable policy, regulatory, and tax ing “relationships” with government authorities; regimes for the infrastructure asset class; the imple- performing thorough up-front due diligence; and mentation of tax policies that encourage investment using risk-mitigating mechanisms, including those in infrastructure; and the development of criteria for focused on currency and political risks. what is truly “sustainable infrastructure” to prevent • Respondents almost universally suggested that “infrastructure green-washing.” international development institutions, including In the legislative and policy areas, there were the WBG, could and should play a greater role in repeated suggestions to review the unintended facilitating access to opportunities for investing consequences of regulatory and tax policies, such in emerging markets’ infrastructure. These insti- as the risk-weighting of infrastructure investments in tutions could share knowledge, develop innova- the Solvency II standard formula and other regulatory tive financial instruments, provide guarantees to charges that disincentivize institutional investment. mitigate political and business risks, and promote Finally, to address the capacity problem, it policy reforms to improve the business climate in was recommended that a group of institutional emerging markets. investors work with selected multilateral organi- zations and possibly some governments to pro- Facilitating Investments in 6.4  vide education, tools, and processes that those Infrastructure in emerging markets could use. Recognizing that the extra complexity of infrastructure investing in Respondents made a number of suggestions for emerging markets will be a reality for the foreseeable addressing the challenges to infrastructure invest- future, many emphasized the importance of finding ing, most of which involved some type of collab- local partners who know how to navigate and man- oration between the public and private sectors. age the local political environment. One suggestion was to develop a Global Infrastructure Information Platform that would make it easier for sponsors to advertise their projects and for investors across multiple sectors. It leverages IFC’s origination capacity and deep market knowledge to source opportunities for third- to know about them.58 Such a platform could also be party investors to co-lend alongside IFC. All investments are the basis for sharing knowledge and establishing best commercially structured and designed to address develop- practices.59 Another suggestion focused on fostering ment needs. the complementarities of the different sources of cap- 58  The European Investment Project Portal (EIPP) represents a ital, such as combining concessional and nonconces- regional attempt to create such a platform. The EIPP (https:/ / sional financing, and identifying support measures to ec.europa.eu/eipp/desktop/en/index.html) is a multilingual online platform providing greater visibility and transparency improve accessibility for infrastructure financing (e.g., about EU investment projects and opportunities. The EIPP is through credit enhancement, guarantee programs, a key instrument of the Investment Plan for Europe, designed and other instruments provided by governments and to support the financing of investment projects in all sectors of MDBs) to cover risks that the private sector is not will- the economy across the EU. 59  The Global Infrastructure Hub established by the G20 ini- ing to cover. Many executives also noted that it would be tiative aims to address some of these objectives. It works with public and private sectors globally to increase the flow and good if some type of framework were developed quality of infrastructure projects around the world. It shares that standardized contracts, reporting, and per- data, knowledge, and leading practices, and helps the public formance benchmarking. This includes, among and private sectors work more closely to deliver crucial public other things, the measurement and reporting of infrastructure projects. Infrastructure Investing 31 7 Expectations for Dialogue with the Public Sector S enior investment executives agreed that Forum as the opportunity to start a dialogue that the public sector has an important role to could be maintained in various ways, and they hoped play in facilitating the spread of sustain- that suggestions for how to do so would be one out- able investing in its many forms. They also noted put of the Forum. Several said that it was important that well-functioning capital markets and prosperity for government representatives attending the Forum need to be anchored in healthy economic fundamen- to really listen to the private sector, and to hear what tals, which obviously depends on both the public and it needed from the public sector to advance sustain- private sectors. able investing—including for infrastructure. Thus, admittedly to varying degrees, they These executives emphasized that this concurred that the proposed engagement plat- “grand vision” needed to be tempered by prac- form, a high-levl Investor Forum to be held peri- tical reality; a gathering that featured only lofty odically on the margins of G20 Leaders Sum- rhetoric from both sides would accomplish very mits, would help bridge the gap between public little. There was a consensus that the Forum should and private actors, at the highest level. Because focus on a few key themes in which actions could be nothing of that scope has ever been done before and identified. To avoid having nothing happen after the because, as many noted, the public and private sec- conference—an all-too-frequent phenomenon cited tors “speak different languages,” this was seen as by many—it was suggested that a short policy decla- a good opportunity to develop a shared world view ration of intention be published, and ideally followed on how to create a sustainable financial system for up within a year on how well these voluntary commit- financing a sustainable economy. They saw the ments were being fulfilled. 8 Role of the World Bank Group T he WBG, like other IFIs and MDBs, was seen in almost all the IFIs and MDBs. At the same time, the as having an important role to play in the G20 does not have universal membership and, unlike advancement of sustainable, long-term treaty-based organizations, it is not legally consti- investing, including investing in infrastructure and tuted to deliver on decisions. Thus the G20 needs emerging markets. In discussing such investments, to work in coordination with the IFIs and its coun- respondents suggested three crucial functions for the tries’ own governance bodies to advance many of its WBG and other IFIs and MDBs: facilitate dialogue with aims. Combining the inner determination and energy institutional investors; mitigate risks, including political, of the private sector, the global governance mandate foreign exchange, and credit risks; and have a catalytic and balance sheet strength of the WBG and other and multiplier role for development and financing. The IFIs/MDBs, and the convening power of the G20-like international governance structure of IFIs and MDBs, forums could enable the achievement of results that their close engagement with member countries on pol- neither side would be capable of individually. Those icy frameworks, and their strict due diligence standards suggestions match rather closely some of the recom- for originating new investment projects were seen mendations of the Eminent Persons Group on Global as key factors that give them a special market niche. Financial Governance, mandated by G20 Finance There is both an immense need and untapped potential Ministers and Central Bank Governors. for developing countries to access private capital mar- In addition, respondents offered a number of kets. Respondents said that going forward the WBG’s examples in which the WBG’s collaboration with principal orientation should be to provide policy advice, other similar organizations would help to signifi- assist in capacity building, mitigate risks to catalyze cantly amplify impacts. For example, the WBG could private investment wherever possible, enable a sus- collaborate with the OECD to establish standard defini- tainable cost of funding for borrowers, and achieve the tions of fiduciary duty and with the International Orga- much greater scale of development financing that will nization of Securities Comissions to develop standards be required in the next two decades. and reporting requirements for nonfinancial informa- There were also suggestions for a much larger tion by listed companies. It could work with the Finan- role that the WBG could play, given its prominence cial Stability Board on solvency and prudential require- as a global multilateral institution. It was generally ments. Finally, it could support the Task Force for agreed that the IFIs and MDBs, including the WBG, Climate-Related Financial Disclosures on the imple- have a unique position in the global community, with mentation of its recommendations, using that frame- G20 members forming the majority of shareholders work as a pilot for other types of nonfinancial reporting. 9 Conclusion T he interviews summarized in this report were Sustainable, long-term investing conducted to stimulate and provide struc- • Lack of a common definition of sustainable and ture to the Investor Forum discussions, which impact investing, as well as the need for consis- will explore areas of potential collaboration between tent product labeling and taxonomy; global institutional investors, governments, and reg- • Long-standing lack of uniformity on how the con- ulatory institutions for increasing the flow of sustain- cept of fiduciary duty is defined and applied by able, long-term investments where they are needed regulators; most to support sustainable economic growth. A key • Lack of high-quality, harmonized ESG data and finding from the interviews is the significant degree performance benchmarks; of consensus across global investors on the principal • Lack of reporting and measurement frameworks concerns, opportunities, and actions needed. Given to price long-term value creation; the geographic diversity, number, and level of senior- • Excessive short-term-oriented contracts and fee ity of the interviewed executives, it is reasonable to structures between asset owners and asset man- assume that their collective views are a good approx- agers that are incentivizing suboptimal global imation of views that are widely held by the global allocations of investments; investment community. • Post-2008 financial and prudential regulations Interviewees agreed that the advancement of blocking capital allocation to certain types of sustainable, long-term investing, and investing in assets and investments; and infrastructure, are important areas of interest and • Inadequate pricing of externalities and tax opportunity that can be enabled by collective and regimes that favor short-termism. coordinated action of the global investment com- munity, multilateral institutions, and governments, Infrastructure investing through channels like the G20. They also identified a • Insufficient information-sharing and inadequate set of high-level challenges, summarized below, that access to information about existing opportunities; need to be addressed under each of these themes • Transaction-intensive nature of infrastructure to achieve measurable and sustained progress, and investments due to project uniqueness and insuf- that could be discussed at the Forum and placed at ficient standardization; the center of subsequent efforts. • Lack of a pipeline of projects of sufficient size; • Political, foreign exchange, and credit risks in be made. This report, along with the report sum- emerging markets; and marizing outcomes of the Forum, will be placed in • Insufficient capacity of governments to work with the public domain. Its readers will be encouraged institutional investors, especially in emerging to provide input and use it for reference and future markets. actions, in line with the Forum’s objective to act as a catalyst for a much-needed public/private sec- While definitive answers to these challenges tor collaboration to shape the capital markets to will not emerge from the Forum, given the level and help support the development of a sustainable commitment of those attending, real progress can society. 38 The Landscape for Institutional Investing in 2018 References Borio, C., and A. Zabai (2016). Unconventional Mon- Financial Stability, Financial Services and Capi- etary Policies: A Re-appraisal. Working paper no. tal Markets Union (2018a). Final Report of the 570. Basel, Switzerland: Bank for International High-Level Expert Group on Sustainable Finance. Settlements. Accessed July 13, 2018. https:// Focusing Capital on the Long Term (2018). Summary www.bis.org/publ/work570.pdf. 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Summary of Interviewed Institutions # TITLE TYPE COUNTRY 1 Alecta Pension Fund Sweden 2 Allianz SE Insurance Germany 3 Amundi Asset Management Asset Manager France 4 APG Asset Manager Netherlands 5 Australian Superannuation Fund (Aus- Pension Fund Australia tralian Super) 6 Aviva Insurance U.K. 7 AXA Investment Managers Insurance/Asset Manager France 8 BlackRock Asset Manager U.S.A. 9 CDPQ Pension and Insurance Fund Canada 10 CalPERS Pension Fund U.S.A. 11 CalSTRS Pension Fund U.S.A. 12 CPPIB Pension Fund Canada 13 ERAFP Pension Fund France 14 F.B. Heron Foundation Endowments U.S.A. 15 FRR Pension Reserve Fund France 16 Global Infrastructure Partners Asset Manager U.S.A. 17 GEPF Pension fund South Africa 18 GPIF Pension Fund Japan 19 Hong Kong Monetary Authority Reserves Fund Hong Kong 20 Macquarie Group Asset Manager Australia 21 New York State Common Retirement Pension Fund U.S.A. Fund (NYS Common) 22 New Zealand Super Pension Fund New Zealand (continued on next page) (continued) # TITLE TYPE COUNTRY 23 Ontario Teacher’s Pension Plan Pension Fund Canada 24 Prudential Insurance/Asset Manager U.K. 25 Public Investment Fund of the Govern- Sovereign Wealth Fund Saudi Arabia ment of Saudi Arabia 26 State Street Corporation Asset Manager U.S.A. 27 PGGM Pension fund Netherlands 28 Swiss Re Insurance Switzerland 29 AP 2 Pension Fund Sweden 30 AP 4 Pension Fund Sweden 31 The Vanguard Group Asset Manager U.S.A. 32 UBS Asset Management Asset Manager Switzerland 33 UNJSPF Pension Fund U.N. 34 USS Pension Fund U.K. 42 The Landscape for Institutional Investing in 2018 Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Investors A4S – THE PRINCE’S ACCOUNTING FOR SUSTAINABILITY PROJECT – HTTPS://WWW.ACCOUNTINGFORSUSTAINABILITY.ORG/ The Prince’s Accounting for Sustainability Project was established by HRH The Prince of Wales in 2004 “to help ensure that we are not battling to meet 21st century challenges with, at best, 20th century decision making and reporting systems”. A4S aims to inspire action by finance leaders to drive a fundamental shift towards resilient business models and a sustainable economy. To do this, A4S has three core aims that underpin everything they do: (i) Inspire finance leaders to adopt sustainable and resilient business models, (ii) Transform financial deci- sion making to enable an integrated approach, reflective of the opportunities and risks posed by environmental and social issues, (iii) Scale up action across the global finance and accounting community. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite and general Multi-stakeholder NOTEWORTHY ACTIVITIES • A4S provides a unique space for inspiration and action. A4S’s work is led by A4S Network Members - engaging cutting edge organizations and finance leaders for practical action. A4S has a truly global network where its members can share from best practice, peer support and collaboration. Their CFO Leadership Network oper- ates in 190 countries, and the Accounting Bodies Network (ABN) represents two thirds of the world’s accoun- tants. A4S and Network members have a series of ongoing projects which aim to inspire action and trans- form decision making. Their projects are split into four main themes: (i) Lead the way (Developing a strategic response to macro with sustainability trends): Finance Culture, Managing Future Uncertainty, Incentivizing Action, Engaging the Board and Senior Management; (ii) Measure what matters (Developing measurement and valuation tools): Natural and Social Capital Accounting, Social and Human Capital Accounting; (iii) Transform your decisions (Integrating material sustainability factors into decision making): Strategic Planning, Budgeting and Forecasting, Integrated Management Reporting, Capex; (iv) Access finance (Engaging with finance provid- ers on the drivers of sustainable value): Enhancing Investor Engagement, Debt Finance. A4S hosts implemen- tation workshops that are focused on working to implement the tools and guidance developed by the A4S CFO Leadership Network to enable sustainability to be integrated into decision making. They also organized the A4S Summit 2018. A4S works closely with a number of partners, a number of which A4S has founded. It includes the Commonwealth Climate & Law Initiative (CCLI), Natural Capital Coalition, Measure What Matters, Interna- tional Integrated Reporting Council (IIRC), and Finance for the Future Awards. • A4S supports the recommendations of the FSB Task Force on climate-related financial disclosures. A4S launched the A4S International Case Competition (A4SICC) in 2018, in partnership with the Rotman School of Management, University of Toronto (sponsored by Brookfield Asset Management, CPA Canada and Ontario Teachers’ Pension Plan). CAMBRIDGE INSTITUTE FOR SUSTAINABILITY LEADERSHIP (CISL) – HTTPS://WWW.CISL.CAM.AC.UK The CISL leverages Cambridge University’s research and networks to help business leaders address the critical global challenges of today. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Multi-stakeholder NOTEWORTHY ACTIVITIES • The Investment Leaders Group (ILG) is a global network of pension funds, insurers and asset managers com- mitted to advancing the practice of responsible investment. It is a voluntary initiative, driven by its members, facilitated by CISL, and supported by academics in the University of Cambridge. • The ILG´s vision is an investment chain in which economic, social and environmental sustainability are deliv- ered as an outcome of the investment process as investors go about generating robust, long-term returns. CECP – HTTP://CECP.CO CECP is a network of approximately 200 of the world’s largest companies that represent US$7 trillion in reve- nues and US$15 trillion in assets under management. CECP helps companies achieve impact via providing cus- tomized connections and networking, counsel and support, benchmarking and trends, and awareness building and recognition. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite Business-led NOTEWORTHY ACTIVITIES CECP’s Strategic Investor Initiative (SII) is creating a forum where CEOs can present long-term plans to long-term investors, and demonstrate the greater sustained earnings power proven to come from longer-term thinking. The Strategic Investor Initiative is developing a new platform for leading companies to develop, convey and deliver their long-term plans to long-term investors. CERES – HTTP://WWW.CERES.ORG Ceres is a nonprofit organization that works with investors and companies to build leadership and drive sustain- ability solutions throughout the economy. Ceres tackles the world’s biggest sustainability challenges, including climate change, water scarcity and pollution, and human rights abuses through networks and advocacy. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Multi-stakeholder NOTEWORTHY ACTIVITIES • The Investor Network on Climate Risk and Sustainability is comprised of more than 150 institutional investors, collectively managing more than US$24 trillion in assets, that advance leading investment practices, corpo- rate engagement strategies and policy solutions to build an equitable, sustainable global economy and planet. • Ceres launched the Global Reporting Initiative (GRI), which is now an international standard used by more than 1,800 companies for corporate reporting on environmental, social and economic performance. • Ceres has served as a model for other climate risk coalitions of investors in Europe in Asia. 44 The Landscape for Institutional Investing in 2018 CHINA SIF – HTTP://WWW.CHINASIF.ORG/INDEX China SIF is a non-profit organization that aims to develop a platform in China for investors and other stake- holders to discuss SRI and ESG issues.China SIF invites guest speakers, including professionals from SRI organi- zations, and representatives from financial market home and abroad, to join online and/or offline discussions about SRI in China. In partnership with industrial leaders, China SIF continuously develops and introduces guide- lines, toolkits, books and reports to the Chinese Financial market. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • China SIF facilitates individual members’ practice and exploration in the field of green finance, helping mem- bers to access cutting-edge knowledge and information, and promoting communication and collaboration. • Provides opportunities to participate in conferences, forums, workshops and other events, and access to research. • Provides access to training opportunities and career development information on responsible investment. CHINA SOCIAL ENTERPRISE AND INVESTMENT FORUM (CSEIF) – HTTP://CSEIF-2018-EN.EVENTDOVE.COM/ The CSEIF Annual Conference, the primary function of the CSEIF, promotes cross-border exchanges, consensus for cooperation, foster international links and exchanges.CSEIF was jointly initiated by a group of 17 Chinese top foundations and venture philanthropy organizations in 2014, with the vision of supporting the development of social enterprises and investment in China. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Multi-stakeholder NOTEWORTHY ACTIVITIES CSEIF 2018 Annual Conference is organized by the CSEIF with China Foundation for Poverty Alleviation as CSEIF Rotating Presidency, under the support of UNDP China. The theme of the conference is Poverty Alleviation through Impact Investment. COALITION FOR INCLUSIVE CAPITALISM – HTTPS://WWW.INC-CAP.COM The Coalition for Inclusive Capitalism is a not-for-profit organization dedicated to promoting inclusive capi- talism. It encourages businesses to make changes and expand their investment and management practices to “regain public trust”. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite Multi-stakeholder NOTEWORTHY ACTIVITIES • Brings together asset owners, managers and creators of the top global companies at annual flagship conference. • Develops thought leadership and maintains working group of leading institutional investors, asset managers, business leaders, academics, policy makers and labor representatives. Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Inves COALITION FOR INCLUSIVE CAPITALISM – HTTPS://WWW.INC-CAP.COM The Coalition for Inclusive Capitalism is a not-for-profit organization dedicated to promoting inclusive capi- talism. It encourages businesses to make changes and expand their investment and management practices to “regain public trust”. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite Multi-stakeholder NOTEWORTHY ACTIVITIES • Brings together asset owners, managers and creators of the top global companies at annual flagship conference. • Develops thought leadership and maintains working group of leading institutional investors, asset managers, business leaders, academics, policy makers and labor representatives. COUNCIL FOR INSTITUTIONAL INVESTORS (CII) – HTTPS://WWW.CII.ORG The CII is a nonprofit, nonpartisan association of pension funds, other employee benefit funds, endowments and foundations, with combined assets that exceed US$3.5 trillion. CII’s non-voting members include asset man- agement firms with more than US$25 trillion under management. CII promotes effective corporate governance, strong shareowner rights and vibrant, transparent and fair capital markets; it encourages policies that enhance long-term value for U.S. institutional asset owners and their beneficiaries. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES Notable activities include various committees that provide CII members with opportunities to get involved and engage with other members on a variety of issues: • The Shareholder Advocacy Committee. The purpose of this committee is to encourage members to discuss and recommend current and future member initiatives and CII activities that promote effective corporate gover- nance and increase the participation of CII members in advocating good corporate governance. • The International Governance Committee. The purpose of the committee is to educate members on topical international governance issues and identifies and recommends potential areas for CII involvement in the non-U.S. corporate governance arena. It also works to expand coordination and communication between CII and various international governance organizations. • The Policies Committee. This committee is comprised of the non-officer members of CII’s Board of Directors and reviews, maintains and updates CII policies on corporate governance and other issues. CII corporate gov- ernance policies set standards or recommend practices that members believe companies and boards of direc- tors should adopt to promote accountability, independence, integrity, rigor and transparency. Landscape for Institutional Investing in 2018 EUROPEAN LONG-TERM INVESTORS (ELTI) ASSOCIATION – HTTP://WWW.ELTIA.EU The ELTI is the European Association of National Promotional Banks and Institutions (NPBIs) and other Promo- tional Banks from 19 EU Member States and accession countries based in Brussels. The mission of ELTI is to fos- ter long-term investment and to support the cooperation between EU Institutions and NPBIs. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES The Association has no commercial purpose and pursues the following non-profit-making objectives at inter- national level: represent, promote and defend the shared interests of its Members; strengthen cooperation, including at an operational level, between European financial institutions as well as with other Institutions of the European Union (EU) acting as long-term financiers; develop the concept of long-term investment within the eco- nomic and financial sector; promote academic research on long-term investments inform the EU and its institu- tions on the role and potential of the Members as institutions and agencies for long-term financing; strengthen the access of the Members to information on matters related to the EU; exchange information and experiences among Members and with national and international organizations sharing the Association’s interest in the pro- motion of long-term investment. EUROPEAN SUSTAINABLE INVESTMENT FORUM (EUROSIF) – HTTP://WWW.EUROSIF.ORG Eurosif is a leading European association for the promotion and advancement of sustainable and responsible investment across Europe, for the benefit of its members. Eurosif Member Affiliates include a range of organiza- tions covering the value chain of the sustainable investment industry, from institutional investors, asset man- agers to financial services providers, ESG analysis firms, academic institutes and NGOs, together representing assets totalling about €1 trillion. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • Promotion of best practice in SRI on behalf of its members. • Lobbying for European regulation and legislation that supports the development of SRI. • Support its members in developing their SRI business. • Promote the development of, and collaboration between SIFs across Europe. • Provide research and analysis on the development of, and trends within the SRI market across Europe. • Raise awareness of, and increase demand for, SRI throughout the European capital markets. FCLTGLOBAL – HTTPS://WWW.FCLTGLOBAL.ORG FCLTGlobal is a not-for-profit organization that works to encourage a longer-term focus in business and invest- ment decision-making by developing practical tools and approaches to support long-term behaviors across the investment value chain. The organization was founded by the Canada Pension Plan Investment Board and McK- insey & Company, as well as BlackRock, The Dow Chemical Company, and Tata Sons. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite and senior staff Multi-stakeholder NOTEWORTHY ACTIVITIES • Conducts research and develops practical recommendations. • Engages the world’s top asset owners, asset managers, and corporations to problem-solve and test capital allocation approaches that create long-term value. • Develops educational resources and actionable approaches that are available and applicable globally. Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Inves GLOBAL IMPACT INVESTING NETWORK (GIIN) – HTTPS://THEGIIN.ORG The GIIN is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing around the world. Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • The GIIN Investors’ Council is a leadership group of active large-scale impact investors. • GIIN Fund Manager Training Program is an education service for fund managers whose funds invest in sub-Saharan Africa and South Asia. • ImpactBase is an online global directory of impact investment vehicles. • Developed the Impact Reporting and Investment Standards (IRIS) are a set of metrics to measure and describe an organization’s social, environmental and financial performance. • The GIIN Initiative for Institutional Impact Investment supports institutional asset owners seeking to enter, or deepen their engagement with, the impact investing market, by providing educational resources, performance research, and a vibrant community of practice. GLOBAL INFRASTRUCTURE FACILITY (GIF) – HTTPS://WWW.GLOBALINFRAFACILITY.ORG/ The Global Infrastructure Facility is a multi-stakeholder partnership comprised of governments, multilateral development banks, private sector investors, financiers, commercial banks and institutional investors working to eliminate barriers to preparing, structuring and implementing complicated infrastructure projects. Through the diverse expertise of its members, GIF provides support to governments across the entire lifecycle of the proj- ect and addresses any outstanding needs given other available resources in order to bring sound infrastructure to the market. The World Bank Group co-chairs GIF’s Governing Council which oversees the GIF programming, fund management and policies. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Multi-stakeholder NOTEWORTHY ACTIVITIES The GIF Advisory Council offers its members an opportunity to discuss relevant infrastructure finance devel- opments and share expertise and knowledge about various cross-cutting issues that relate to GIF-supported endeavours, and inform GIF engagement. It is comprised of all GIF Advisory Partners—inclusive of institutional investors, commercial banks, development finance institutions, regional development banks and state devel- opment banks, and associations and “infrastructure quality” organizations—and is co-chaired by the Managing Director and CFO of the World Bank Group and a GIF Advisory Partner. Landscape for Institutional Investing in 2018 IMPACT INVEST SCANDINAVIA – HTTP://WWW.IMPACTINVEST.SE Founded in 2012, Impact Invest Scandinavia is the first impact investor membership network in Scandinavia. The organization’s mission is to promote the growth of social and sustainable enterprises in Scandinavia and around the world by supporting investments in companies that deliver measurable social as well as financial returns. It offers a community of practice to facilitate and support impact investing. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • Learning environment. Members get a peer-to-peer learning environment in the area of social and ecological impact in a Scandinavian context. Impact Invest offers a pipeline of pre-vetted entrepreneurs and businesses that have potential for social and economic returns in all sectors. • Global network and deals. Connects members and clients to international impact investors and funds for access to learning and to investment opportunities at scale. INSTITUTIONAL INVESTORS GROUP ON CLIMATE CHANGE (IIGCC) – HTTP://WWW.IIGCC.ORG The IIGCC is a European network of 155 pension funds and asset managers (including nine of the 10 largest pen- sion funds and asset managers) representing €21 trillion in assets under management. Its mission “is to mobil- ise capital for the low carbon future by amplifying the investor voice and collaborating with business, policy- makers and investors.” LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • The IIGCC provides investors with a collaborative platform to encourage public policies, investment practices and corporate behavior that address long-term risks and opportunities associated with climate change. • The IIGCC operates a number of programmes that commission research, produce reports and engage with var- ious stakeholders. INTERFAITH CENTER ON CORPORATE RESPONSIBILITY (ICCR) – HTTPS://WWW.ICCR.ORG The ICCR is a coalition of over 300 global institutional investors that currently represents more thanUS$400 bil- lion in managed assets. The ICCR pioneered the use of shareholder advocacy to press companies on environmen- tal, social, and governance issues. Leveraging their equity ownership in some of the world’s largest and most powerful companies, ICCR members regularly engage management to identify and mitigate social and environ- mental risks resulting from corporate operations and policies. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • Dialogue. In-person meetings or telephone dialogues are the most common way ICCR members conduct their corporate engagements. In some cases, these discussions follow a regular calendar, in others, meetings are requested either by investors or management to address a specific issue or concern. • Roundtables. Once or twice a year ICCR convenes roundtable discussions bringing together relevant stakehold- ers to advance a specific industry-wide issue of mutual concern. • Resolutions/Shareholder Proposals (ballot). Proxy resolutions (or shareholder proposals) are generally used as a last resort when investor concerns aren’t adequately addressed by management. Resolutions appear on the company’s proxy statement and are voted on by all shareholders at the company’s annual shareholder meeting. Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Inves INTERNATIONAL CENTRE FOR PENSION MANAGEMENT (ICPM) – HTTPS://ICPMNETWORK.COM/ABOUT-ICPM/ The ICPM is a global, research-based network of pension organizations that stimulate leading-edge thinking and practice about pension design and management. Founded in 2005, ICPM has grown to become a network of 42 world-leading pension delivery organizations. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • The ICPM organizes two Discussion Forums each year that bring together ICPM’s Research Partners with lead- ing authorities from academia and policy-making circles to network and build knowledge about critical issues facing the pension system. Related, it has formed a “Climate Change Working Group” which is developing a 10-step practical guide for asset owners to integrate climate change in the investment process. • The ICPM provides funding for objective and transformative research that supports effective pension and investment management. ICPM interacts with researchers and collaborates with top international pension research institutes, think tanks and like-minded organizations on applicable pension and investment research opportunities. INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN) – HTTPS://WWW.ICGN.ORG Established in 1995 as an investor-led organization, ICGN’s mission is to promote effective standards of corpo- rate governance and investor stewardship to advance efficient markets and sustainable economies world-wide. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES Notable activities include two networks the ICGN operates: • Global Network of Investor Associations (GNIA). In 2013, the ICGN established the GNIA as an international col- laboration of investor-led organizations with a common interest in promoting shareholder rights and respon- sibilities. The network enhances the capacity of national associations to share governance related priori- ties beyond local jurisdictions to an international audience thereby contributing to global governance reform efforts. Members are drawn from Australia, Brazil, Canada, Hong Kong, Italy, Malaysia, Netherlands, UK and the USA. • Global Stewardship Codes Network (GSCN). The GSCN is an informal network that enables members to share information and views on the development and implementation of codes. Participation in the Network is open to all organizations responsible for developing stewardship codes, principles or best practice and/or monitor- ing their implementation (where this is undertaken). Landscape for Institutional Investing in 2018 JAPAN SUSTAINABLE INVESTMENT FORUM (JSIF) – HTTP://WWW.JSIF.JP.NET/ENGLISH Japan Sustainable Investment Forum (JSIF)  is a non-profit organization established in early 2001 to promote socially responsible investing in Japan. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • JSIF offers an interactive space to exchange opinions and learning opportunities for people and institutions interested in SRI • It also encourages companies to disclose more non-financial information and aims at developing the SRI mar- ket in Japan. MILKEN INSTITUTE – HTTPS://WWW.MILKENINSTITUTE.ORG/ The Milken Institute is an independent economic think tank based in Santa Monica, California. It publishes research and hosts conferences that apply market-based principles and financial innovations to social issues in the US and internationally. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite Multi-stakeholder NOTEWORTHY ACTIVITIES • Centers. The organization has eight centers that explore the convergence of finance, business, health, philan- thropy and policy to advance collaborative solutions that will drive progress. • Events. Milken Institute runs a flagship event, the Milken Institute Global Conference, as well as roundtables and workshops, and Capitol Hill briefings. • Research. Milken Institute publishes reports that informs policy with research and data. • Representing over US$20 trillion in assets under management, the Global Capital Markets Advisory Council a range of investors from pension plans, endowments and foundations, sovereign funds, insurance companies, and single-family offices.CIOs and CEOs from around the world meet to consider the most compelling ways to navigate the changing macroeconomic landscape. PRINCIPLES FOR RESPONSIBLE INVESTMENT (PRI) – HTTPS://WWW.UNPRI.ORG The PRI is a network of 1800 investment institutions that work together to put ESG principles into practice and contribute to the debate about the role of the investor in the creation of a sustainable financial system that rewards long-term, responsible investment and benefits the environment and society as a whole. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • The PRI hosts convenings several times each year to discuss regulatory reform initiatives that are relevant to the work of its members. • It is not a lobbying organization and does not engage directly with policy-makers but will propose any neces- sary changes to public policy, which signatories can then take forward in a process that may be facilitated by the PRI. Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Inves RESPONSIBLE INVESTMENT ASSOCIATION AUSTRALASIA (RIAA) – HTTPS://RESPONSIBLEINVESTMENT.ORG/ RIAA represents responsible, ethical and impact investors across Australia and New Zealand. RIAA has a network of over 220 members who manage more than US$9 trillion in assets globally, including super funds, fund man- agers, consultants, researchers, brokers, impact investors, property managers, community banks, community trusts, faith-based groups, financial advisers and individuals. RIAA’s goal is to see more capital being invested more responsibly; shifting more capital into sustainable assets and enterprises and shaping responsible finan- cial markets to underpin strong investment returns and deliver a healthier economy, society and environment. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES • RIAA acts as the member hub of timely and relevant ESG, ethical and impact investing information to strengthen the capacity of the finance and investment industries – through regular events, webinars, conference calls and working groups, as well as industry research. • It increases the awareness and demand for responsible investments through communications and marketing work, media activity, as well as by operating a certification program and the consumer online tool Responsi- ble Returns. SUSTAINABLE INSURANCE FORUM (SIF) – HTTPS://WWW.SUSTAINABLEINSURANCEFORUM.ORG The SIF is a network of insurance supervisors and regulators from around the world who are working together on sustainability challenges facing the insurance sector. It serves as a global platform for knowledge sharing, research and collective action. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER C-suite Investor-led NOTEWORTHY ACTIVITIES Notable activities includes advancing a four-track work programme the SIF is advancing in 2018: • Climate Risks. The SIF is working with the IAIS to deliver joint outputs and engagement for supervisors inter- ested in addressing climate change risks. • Supporting TCFD Implementation – Risk Signaling & Scenario Analysis. The SIF will continue to support its members in their efforts to encourage uptake of the recommendations of the FSB TCFD. • Promoting Sustainable Insurance. The SIF is working with several members to develop a short stock-taking paper and action framework, which will be finalized in H2 2018. • Capacity Building for Supervisors. Drawing on its research outputs and member expertise, the SIF will work to develop training materials and tools for supervisors to use in their jurisdictions. Landscape for Institutional Investing in 2018 THE ASPEN INSTITUTE – HTTPS://WWW.ASPENINSTITUTE.ORG The Aspen Institute is an educational and policy studies organization based in Washington, DC. Its mission is to foster leadership based on enduring values and to provide a nonpartisan venue for dealing with critical issues. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Multi-stakeholder NOTEWORTHY ACTIVITIES • The Aspen Institute Business and Society Program works with business executives and scholars to align busi- ness decisions and investments with the long-term health of society—and the planet. Through networks, working groups and focused dialogue, the Program identifies and encourages thought leaders and “intrapre- neurs” to challenge conventional ideas about capitalism and markets, to test new measures of business suc- cess and to connect classroom theory and business practice. • The Business and Society Program is most known for the First Movers Fellowship Program, for dialogue on curb- ing short-termism in business and capital markets, and for new thinking about the purpose of the corporation. UNITED NATIONS GLOBAL COMPACT (UN GC – HTTPS://WWW.UNGLOBALCOMPACT.ORG The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning with ten uni- versally accepted principles for human rights, labor, environment and anti-corruption. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Business-led NOTEWORTHY ACTIVITIES Notable activities include support services, events, and that the UN GC provides companies to help them: • Set in motion changes to business operations so that the UN Global Compact and its principles become part of strategy, culture and day-to-day operations. • Publicly advocate the UN GC and its principles via communications vehicles such as press releases, speeches, etc. • Communicate with their stakeholders on an annual basis about progress in: implementing the ten principles and efforts to support societal priorities. Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Inves US SIF – HTTPS://WWW.USSIF.ORG The mission of US SIF is to shift investment practices towards sustainability, focusing on long-term investment and the generation of positive social and environmental impacts. US SIF members include investment manage- ment and advisory firms, mutual fund companies, asset owners, research firms, financial planners and advisors, broker-dealers, community investing organizations and nonprofit organizations. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Investor-led NOTEWORTHY ACTIVITIES Notable activities include a wide range of programs and activities the US SIF engages in to support members and to expand sustainable, responsible and impact investing. These include: • Events. US SIF’s annual conference offers an opportunity for members and non-members to network with leaders of sustainable, responsible, and impact investing. • Policy and Advocacy. US SIF interacts with Capitol Hill and the executive branch in order to expand the general understanding of SRI and to advance the policy priorities of sustainable and responsible investors. • US SIF Foundation. The US SIF Foundation is a non-profit organization which also carries out certain educa- tional and research programs that advance the mission of US SIF. • The Center for Sustainable Investment Education. This houses US SIF’s research and education efforts, includ- ing answers to frequently asked questions about sustainable, responsible, and impact investing, online edu- cation courses, resources about community investing, and research and publications, including a biennial Report on Sustainable and Responsible Investing Trends in the United States. • The US SIF is a part of the Global Sustainable Investment Alliance. • The organization has served as a model for other social investment forums of investors in Europe in Asia. WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT (WBCSD) – HTTPS://WWW.WBCSD.ORG The WBCSD is a network of companies that works to create a sustainable future for business, society and the environment. The Council provides a platform for companies to share experiences and best practices on sustain- able development issues and advocate for their implementation, working with governments, non-governmental and intergovernmental organizations. WBCSD’s member firms have annual revenues ofUS$7 trillion, spans more than 35 countries and represents 20 major industrial sectors. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Business-led NOTEWORTHY ACTIVITIES • The WBCSD’s Global Network is an alliance of more than 60 CEO-led business organizations worldwide. The Network, encompassing some 5,000 companies, is united by a shared commitment to provide business leader- ship for sustainable development in their respective countries and regions. • Although the WBCSD works at the global level toward accelerating the transition to a sustainable world by mak- ing more sustainable business more successful, the members of the Global Network, through their local and regional initiatives and activities, help to promote sustainable development at the local and regional levels Landscape for Institutional Investing in 2018 WORLD ECONOMIC FORUM (WEF) – HTTPS://WWW.WEFORUM.ORG The WEF is an International Institution committed to improving the state of the world through public-private cooperation. It engages political, business, academic and other leaders of society in collaborative efforts to shape global, regional and industry agendas. Together with other stakeholders, it works to define challenges, solutions and actions. Activities include convening meetings and task forces, building research networks, and collaborating. LEVEL OF MEMBER PARTICIPATION SECTOR-LED OR MULTI-STAKEHOLDER General Business-led NOTEWORTHY ACTIVITIES • The WEF maintains the System Initiative, which aims to close a global US$1 trillion annual infrastructure financ- ing shortfall, help companies and their investors adopt a longer-term outlook, scale impact investing strate- gies that combine financial and social returns, and improve the efficiency of long-term social contracts such as retirement systems. Annex 2. Selective List of Initiatives Involving and/or Targeting Institutional Inves 1818 H Street, NW Washington, DC 20433