April 24, 2024 • 32 mins
The New York State Insurance Fund (NYSIF) is working to reach net-zero carbon emissions in its investment portfolio by 2040. To achieve this goal, NYSIF focuses on four tenants: internal and external engagement, investment and divestment. In this episode of ESG Currents, Bloomberg Intelligence’s Eric Kane and Shaheen Contractor talk with Rajith Sebastian, Head of ESG and Sustainable Investing for NYSIF about the fund’s approach to net zero, minimizing risk and maximizing impact, the need for more intentionally impactful and evidence-based investment products and more.This episode was recorded on April 3.
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Episode Transcript
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Speaker 1 (00:09):
ESG has become established is a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trens, mounting regulatory attention and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzword
and lingo, and we aim to break these down with
(00:30):
industry experts. Welcome to ESG Currents, brought to you by
Bloomberg Intelligence, your guide to navigating the evolving ESG space,
one topic at a time. I am Shahine, Contractor, senior
ESG analyst.
Speaker 2 (00:44):
And I'm Eric Kane, director of ESG Research, and we are.
Speaker 1 (00:47):
Your hosts for today's episode. So today we'll be speaking
with Rajitt Sebastian, the head of ESG and sustainable Investing
at the New York State Insurance Fund as a net
zero goal for its investment portfolio. And Regiet is going
to tell us all about the journey, the challenges, the good,
(01:08):
the bad, and the ugly.
Speaker 3 (01:09):
Right, Regie, Yes, glad to be here and great to
be with both of you.
Speaker 1 (01:14):
Yes, thank you, thank you for joining us. So, Regie,
my first question is can you give us a little
bit of a background into NICEF, right, nice, and maybe
a little bit of scope around this NAT zero goes
so that our listeners, you know what they're sure.
Speaker 3 (01:33):
So the New York State Insurance Fund, or NICEF, was
founded in nineteen fourteen right after one of the largest
man made industrial disasters in the US, the Triangle shirt
Waiste factory fire, basically right here in downtown New York City.
(01:55):
Close to one hundred and fifty people died as a result,
and it was written into law to form an agency
which would protect worker rights and workers compensation in particular,
and act not just as a state agency, but also
as a private institution or on private terms. I like
(02:15):
to think of ourselves as almost the first or one
of the early private public partnerships. So as part of
our workers Compensation mission, we manage about twenty billion dollars
of assets under management, most of which is in fixed income.
And I'm happy to go into the asset allocation later.
But yeah, that's what nice It is wonderful.
Speaker 1 (02:37):
And just a little more around the scope of this
net zero goal.
Speaker 3 (02:41):
Yeah, so we have a net zero goal by twenty forty.
This is in alignment with the Governor's mandate for US
for New York State agencies, which she announced back in
twenty twenty two. As part of that, we published a
climate action plan outlining that goal and how we would
get to that. Yeah, and you know, within that goal,
(03:04):
we're specifically focused on our exposure into sectors the power
sector and the energy sector, and we outline ways in
which are our different strategies to achieve this goal by
twenty forty excellent.
Speaker 2 (03:19):
So maybe in keeping with that, you mentioned, of course,
Retrieth that you have specific goals for power and energy.
Curious if you could go into a little bit more
detail in terms of the goals for those industries and
ultimately how you're kind of aligning your investments with you know,
net zero in the transition for those those two kind
(03:41):
of broad sectors specifically.
Speaker 3 (03:43):
Yeah, I think it's a good question, Eric. So the
reason we're focused on those two sectors is they account
for over seventy five percent of our emissions, and so
it just made sense for us to start off with
low hanging fruit. Now, the strategies that we have I
should have mentioned it's not just for those two two sectors,
it's across the board. But what we're trying. It's basically
(04:04):
a four prong strategy. The strategies include internal engagement, which
includes an education portion to ensure our portfolio managers are
steering the majority of our portfolio in the right direction.
The second tenet is external engagement to ensure our managers
our external managers are doing the same and also where needed,
(04:26):
engaging directly with companies. The third is our investment tenet,
where we're working on a sleeve of the portfolio close
to five percent of the portfolio, which will more intentionally
and aggressively seek market competitive sustainable investments. And so that
would be the sleeve where we're looking at more renewable
energy investments ETFs that might be more sustainable, et cetera,
(04:50):
et cetera. And then the fourth tenet, which is sometimes controversial,
is divestment, which we think is a necessary toolkit to
have within the actions that we're looking.
Speaker 1 (05:00):
To take andretie. I want to get into the first
tenant you mentioned, seet internal education. I'm just curious as
to the challenges you face in doing this, and tell
me a little more about whether the backlash has changed
the perception I guess internally of es.
Speaker 3 (05:22):
Right, Yeah, I mean you know, the backlash is interesting,
and I would say the backlash has certainly helped the naysays,
both internally and externally. But if I took a step back, internally,
we have a very capable and experienced staff across each
of the different product groups. I should have mentioned in
terms of our asset allocation, around sixty five percent is
(05:44):
corporate fixed Incup corporate and sovereign fixed income. Around twenty
twenty five percent is structured product also fixed income, and
the balance is equity, and that's between listed equity and alternatives.
So just in terms of our team, you know, the
(06:05):
teams that were more entrenched and had more experience, it
was it's been a tougher lift to kind of get
them to engage on the topic of sustainable investments. And
I think rightly so, because you know, the evidence has
been mixed around this space. Our team is very evidence
driven and so that's been a challenge to kind of
help them or steer them to incorporate a lot of
(06:27):
these ears to your sustainable investing or impact factors into investments.
Speaker 1 (06:32):
Okay, and if I may just follow up, so Regie,
if you have these challenges, how do you know measure
success or convince people, given you you do have this goal.
Speaker 3 (06:43):
Right, So I think it's it's challenging to convince people
because these are all well performing professionals with a lot
of years of experience in the space, so hard to
kind of come in with a new thesis and say,
by the way, incorporating or impact factors into investments is
definitely going to lead to a better financial outcomes. So
(07:06):
that's and that is also what I believe. I don't believe,
or we don't believe on the sustainable investing side, that
these factors all will have that financial kind of outcome.
And so in the beginning it was all about educating
our staff sharing that some of these factors can be
financially financially relevant and so it's worth thinking about this
(07:29):
because in fact, all of this is just additional data
and there is no downside by considering additional data. Early on,
we didn't get much take up for that. As much
as we thought that was the right way to go
and the evidence would be persuasive, it wasn't. And so
in the end, you know, a top a more top
(07:50):
down approach of management stepping in and saying we really
do need to follow these factors that did help move
the needle with our internals team.
Speaker 2 (08:01):
That's good learning, and I imagine some of the initial
skepticism surrounds the kind of quality of the information that
you're adding to the picture. Right, So I'm curious to hear.
You know, we talked about energy and power as being
the focus areas, and obviously, if you're going to transition
(08:22):
your portfolio focusing on those industries, you need to be
able to identify investments that have credible transition plans. So
I'm curious to hear ultimately how you kind of assess credibility,
how you instruct the investment teams to ultimately think through
these new concepts and ultimately really I think decipher what's
(08:44):
a lot of noise in the space with respect to
you know, decarbonization targets and pathways.
Speaker 3 (08:51):
Yeah, it's a really good question, and it's it's I
think the biggest challenge that we've found is the data
that we're getting to make these decisions. As you know,
it's pretty prevalent in the industry. Everybody's complaining data, data, data.
In terms of assessing credibility, it's tough, you know, if
somebody comes in, let's say it's one of our external
(09:13):
managers or one of the portfolio companies in the energy
space says that they have this very credible plan to
twenty forty. It's more likely that these are the larger,
more well resourced companies or external managers. That's what we
found in our experience. So just being able to say
that we've got this plan doesn't necessarily mean that they're
(09:34):
acting on this plan. So we've had to kind of
dig behind that and look for evidence that people are
actually acting on these plans. And so that includes you know,
being in meetings where you get a glossy pitch deck
and saying, actually, you know, let's forget about this pitch
(09:54):
deck and talk about the plan and let's get to
the details. That includes how having the teams that we're
speaking would say, oh at actually answer that question. Let
me bring in my ESG person and us thinking, you
know what, that actually doesn't align with how we're thinking
about investing. We believe that the investment decision makers need
(10:15):
to have this data, understand this data at their fingertips.
So you know, that may not be a manager that
or a company that we align with. So it's really
trying to dig deep behind what sometimes is the facade
of good data to try and get the real information.
You know, and I can talk a little bit about
(10:35):
you know, we've talked about or we're all familiar with
greenwashing in this space. We've you know, not only do
we think there there's been a substantial amount of greenwashing
in this space, but we think a big part of
the entire investing space has been, you know, has been
using what we call green believing, so believing that what
(10:57):
they're doing and really being committed to what they're doing
and leaving that that is actually achieving some impact, but
not actually having the data to substantiate this, or doing
things that have no evidence that they will end up
in the outcomes that they're hoping to have. And so
you know, in fact, some of the backlasher he and
you asked about that a little bit earlier, I think
(11:18):
has been beneficial in getting managers and companies a little
bit more detail oriented around what they're proposing to do
to get to net zero and intertid.
Speaker 1 (11:32):
You touched on this a little bit, but you spoke
about external managers, right, so I'm curious as to whether
working with external managers in meeting these goals is easier
than trying to convince your internal right team. And at
the same time, you know, similarly, what are the challenges
you face with external managers? What are some learnings there?
Speaker 3 (11:53):
Yeah, so, as I mean, we're a I guess a
medium sized asset owner. So external managers their main incentive
with us is frankly, to get our capital. And so
when we say, oh, we think you need to factor
in these ESG factors.
Speaker 1 (12:10):
They'll say, yes, right, they have I mean, yeah.
Speaker 3 (12:13):
Right right, And that's in some ways that's great. We
feel good after those meetings, but you know, I think
it'll take us time to see what the end outcomes
of that process is with these external managers. You know,
I've been in meetings where we get a pitch deck,
for example, that says something around you know, a ton
(12:35):
of stuff around ESG and net zero and all of that,
and the next week, when there's some controversies, all those
slides are taken out. I've been in meetings where companies
or funds agree to sign a side letter with us
that they will provide better disclosure around some of these
climate factors, but they also are candid enough and honest
enough to tell us by the way. Just last week
(12:57):
I signed another side letter with another state that I
wouldn't do this, and so, you know, it's a tough
it's a it's a tough time, but but yeah, overall,
I think we're following similar engagement strategies with external managers,
where we're trying to get right to the data, try
and focus on the action and not not be focused
(13:18):
on the noise or the flashy pitch decks that that
you know, we were seeing, I guess prior to some
of this controversy.
Speaker 2 (13:25):
So I think one area that has become maybe controversial
that we've seen kind of removed from pitch decks, removed
from you know, corporate goals certainly is the idea of offsets, right,
So I'm curious to hear your thoughts on offsets and
if they play any role in nicsif's net zero target.
Speaker 3 (13:48):
We're very skeptical of offsets just because some of the
definitions have been a little bit all over the place.
And also, I mean, I think Time had a piece
on this back and back last year where a lot
of the impact claims cannot be substantiated. So just in general,
we're waiting for the market to be a little bit
more developed. We do think offsets could have a huge benefit,
(14:14):
but I would say that, you know, the way we're
thinking about it is it would need to be governed
by probably a few credible institutions for us to have
faith in those offsets energy.
Speaker 1 (14:26):
I want to get back to you know, those four
tenants you mentioned the divestment face right right. I'm curious
as to your thoughts on divestment versus engagement, And then
at the same time, I'm more so curious as to
whether you think divestment is what most asset owners will
(14:47):
end up employing to meet these goals if there's you know,
I'm just thinking, what is the biggest bank fail back?
Like if I have to reduce one hundred percent by
a certain date, where am I going to get a
majority of emission reductions from what strategy?
Speaker 3 (15:02):
Yeah, I do think that we're at the point. I mean,
it's twenty twenty four right now. You know, we have
a goal of twenty forty. Most other asset owners, I think,
you know, have twenty fifty. It's pretty clear that this
is coming fast at US, and progress in general has
been pretty limited because the data has been limited. It's
hard to reduce emissions. I think others of people are
(15:23):
finding that it's not that easy to reduce emissions. So
I do think strategies like divestment will come more into play,
probably over the next decade, and we're seeing it with
some of our other counterparts, actually very recently. I would
name them specifically, but you can just check check the
news on that. You know, engagement has been the favorable
(15:45):
strategy from an evidence perspective. The research suggests, at least
from some of the top universities, that engagement is a
much better tool for long lasting change, including you know,
the university that I work part time for at the
Wharton School, Harvard, Stanford and others have all come to
a similar conclusion. But I think that's a little bit limited,
(16:07):
and this is my personal view. I do think devestment
is should or needs to be part of every toolkit
for a couple of reasons. You know. The first is
that the engagement approach assumes that companies will engage with
you and will actually make those changes. And I think
Exon Mobile is a great case study of how you know,
(16:31):
they're probably one of the most engaged companies in the
world right now. But you know, last year we saw,
for example, how just some small changes in the market
completely they became one of the biggest polluters in a
very very short period of time. And so the question
mark there is, you know, how did that engagement actually work?
They even change their boards as a result of some
(16:52):
of the engagement, So that's it raises the question does
that actually create that change over the long term or
our company is just happy to engage with you. The
second is, you know what I call what I'm thinking
of as the immediacy of the problem. I mean, this
(17:13):
is in our faces. I mean, we are in the
midst of climate change. I won't go through any of
the stats because I don't remember them right now, but
I think we know that this is here and now
we are. Our goals in terms of getting to net
zero by any timeframe are probably too optimistic, and we're
probably dealing with a scenario where we have to manage
(17:36):
the effects or the negative effects of climate change as
opposed to stop it from happening, and so we don't
have time. And in that instance, you know, we should
be brave enough to make to look at what could
make a big bang for buck and I you know,
and as part of that, it Actually I have a
(17:57):
personal story related to this, and that is I grew
up in South Africa during apartheid. And if international donors,
or the tobacco companies and the mining companies, if the
international community had not stepped in and divested from South
Africa from supporting the apartheid regime at that time, I
(18:17):
don't think we would have had the end of apartheid
and Nelson Mandela being released from prison, et cetera, et cetera.
And so I do think there is a space for divestment.
Do I think it should be the main tool used. No,
but I do think that, you know, unfortunately we don't
talk about it as a tool enough and we should
be considering divestment when needed.
Speaker 1 (18:39):
That's interesting.
Speaker 2 (18:41):
I like it, yeah, really really interesting. And the personal
connection that is certainly quite poignant. So I appreciate that
as well. So you mentioned, of course, the idea that
climate change is upon us, these risks are happening. I
think that that raises the other side of the you know,
climate assessment with an investment portfolio, which is really looking
(19:05):
at the potential you know, risk and physical risk associated
with you know, given investment. So curious obviously that doesn't
fit directly into you know, the net zero by twenty
forty goal, but curious as to whether that's something that
you're also looking at in your investment decisions.
Speaker 3 (19:25):
One hundred percent, and maybe it's worth me talking through
the framework that we're looking at investments. So I would
say there are three aspects. One is you know, minimizing
climate risk, the second is reducing other ESG risks, and
the third is having an impact. So in terms of
how we look at sustainable investing, we almost look at
(19:48):
the overlap between ESG as a risk factor and actually
having a positive impact on the world. Within looking at
climate risk, we look at reducing our emissions and that's
what's going to get us to net zero by twenty forty,
but we also have to minimize our physical risk and
our transition risk. And our physical risk is relevant to
(20:09):
you know, us having exposure to for example, and this
is not you know, for example, properties in flood zones
or in earthquake zones. So it's very very relevant, especially
across our structured product portfolio, and when we're looking to
increase our alternatives exposure for example in areas like infrastructure
and read estate and at I want to.
Speaker 1 (20:31):
Get back to the external manager piece. So you mentioned,
you know, you ask them to integrate ESG, and of
course they say they do because you're their clients and
you can dictate that. I guess what ultimately would you
look at as an evidence of I guess success, Like,
what change would you like to see in the portfolio?
What behavior would you say that yes, this is, you know,
(20:55):
being integrated. And I'm confident. We'll not confident, but I
think we're on the right right.
Speaker 3 (21:01):
So a few things. The first is the whole sustainable
investing discussion shouldn't sit within some bespoke ESG team or
ESG factor, I mean separate. Yeah, it shouldn't sit with separately.
It should be that information, at least the basic information
the investment manager that is managing our money. We think
(21:25):
they should have a great understanding of that. And so
when we have teams that pitch how great their investment
is and says when we ask a basic sustainability questions, oh,
you know, how does this look from an emissions perspective,
and they say, oh, we'll bring in our EESG team,
that gives us a little bit of pause.
Speaker 1 (21:45):
And there are a few.
Speaker 3 (21:46):
Managers out there that you know most of them, I
will I will be I will say they've been doing
this for a little bit longer. They do have a
separate EESG team, but the investment team themselves are able
to speak to this credibly. So that's something that I
think over over time, you know, I believe, and this
is how we've we've I've said this as nice if
(22:07):
over time, I hope to work myself out of a
job and my team out of a job where our
fixed income team and our alternative teams they're the one
making sustainable investing decisions because it is part of investing.
It is just investing. You know, we don't even have
to call it ears. You're sustainable.
Speaker 1 (22:24):
Right when you guys are not zero.
Speaker 3 (22:26):
When yeah, yeah, maybe, But you know that's so we
look at our managers to see are they thinking the
same way. The second is intentionality. Are they do they
actually want to have an impact? And this is kind
of hard to tell, but when I get what or
when we get very flashy pitch decks and they talk
(22:47):
for most of the meaning about how great their company is,
and they don't refer to examples of the impact that
they're having or the challenges with achieving their climate goal.
Then you start to wonder is this do they actually
want to do this? So intentionality is another factor. I
(23:09):
will say, one other factor that gives us, or I
think managers could improve on is making sure that they're
evidence based around some of these claims. So, you know,
it's great if they can say here's what sustain Analytics
or MSCI or whoever it is says, but is there
(23:31):
evidence that those numbers in terms of a reduction on
your missions or let's say it's an increase in labor numbers,
is there evidence that that actually leads to the end
outcome that you're telling us that you're going to get.
And a lot of managers don't connect that piece, you know,
they're more focused on here is the extra home report
that we got from this great provider. One thing I
(23:51):
do want to flag is, you know, we should all
be aware that and this is part of the challenge
in this in the whole space, you know, is the
best presenters of this information, the ones with the most
the best access to this data too, are likely to
be the funds that can afford it. And so in
some ways are we is ESG or sustainable investing and
(24:15):
all the kind of hurdles we're putting in front of managers,
Is that going to be the next way we're going
to discriminate from, you know, underserved managers. So that's something
that we keep in mind and we try and think through,
you know, how can we improve the space by not
focusing only on the data but more sometimes the intentionality
(24:36):
or the lived experience of certain managers.
Speaker 2 (24:40):
That's really interesting. The idea of kind of underserved managers
maybe leads to my next question, which is you mentioned
of course there are you know, three elements to approach
minimizing climate risk, reducing ESG risk, and then having an impact.
So with the second reducing ESG risk, obviously could be
(25:00):
a whole host of issues related to that outside of climate,
including things perhaps embedded in that concept of underserved managers
like you know, diversity, things like that. So, right, curious
to hear your thoughts on ultimately where you think the
biggest risks outside of climate within ESG may reside or
(25:22):
maybe it's a couple different issues.
Speaker 3 (25:24):
Yeah, I think, and we actually deal with this fact
and not just in our ESG risk space, but in
the impact space, because we think this is an area
where we can be super impactful, but it is a
risk in the same way we think that labor rights,
(25:46):
employment quality jobs, everything related to work labor jobs is
a critical ESG risk and an impact opportunity at the
same time. And we haven't seen many managers focus in
on this area, which is interesting because there is a
whole host of data that shows the correlation between good jobs,
(26:12):
for example, and financial returns, or good quality of jobs
and financial returns, or good benefits and financial returns, and
so that's an area that is of deep interest to us.
I think it's part of our identity being a worker's
compensation fund, but it's also an area where we haven't
seen enough of a focus and so that's part of
what we call our impact on the real economy thesis,
(26:34):
which is that third tenant, the impact piece, and that's
an area where we want to focus. And you know,
even when I get whatever manager pitches to us, we
ask questions around how does this impact employment? You know,
private equity, for example, is an area which historically, you know,
to get efficiencies has had layoffs as part of the process,
(26:55):
and so we work with private equity groups so to
understand what is your net impact on workers Okay, you
know they may be layoffs. Is that blue collar? Is
that white collar? How many jobs are created in after
the fact, and what is the quality of those jobs,
what wages are being paid? Because we, you know, we
believe that that actually leads to operational performance and therefore
(27:19):
financial long term financial returns for US.
Speaker 1 (27:23):
Energy. I want to dig into this third ten and
the impact bace of it. You mentioned that you do
some of it through ETFs. My question is, I guess
you know that I covery to ask quite a bit.
I'm curious as to whether you think there aren't have
ETFs out there to meet what you're trying to do
in terms of, you know, is there enough diversity of
(27:45):
products out there? Do you think you're going to be
able to get the strategies you want with the product
street right now? And if not, what's missing?
Speaker 3 (27:54):
I think the biggest issue with the entire sustainable investing
space is the lack of product. And and you know
that's a broad, overreaching statement to make, but I guess
what I mean more than that is the lack of
product for us. And it's probably the lack of product
that is aligned to what asset owners like us or
(28:16):
maybe not like us actually want you know, we'd like
product that's out there that's evidence based, that is long
term and that shows that, you know, we can achieve
some level of sustainability but not compromise on financial return.
And this could be different for different types of asset owners.
For example, for us, our main tenant is not to
(28:37):
maximize financial return, it's to minimize our risk as an
insurance player. We just want to make sure that we
have you know, that's why we're I didn't mention this earlier,
but we're very conservative with our asset allocation, and so
there could be product that's specifically targeted to owners that
don't want to you know, have a lot of volatility
(28:59):
in the portfolio, but it's still sustainable, it's still long term.
And the focus on labor, at least in my conversations
with you know, over twenty thirty assid owners is a
huge focus for astonas I mean, most aced owners in
the world are serving policemen and firemen or women and teachers.
Labor is of course a big focus. But yeah, we're
(29:21):
not seeing nearly enough good product out there that is intentional,
data driven around this space, and we think that that's
an area that's ripe for innovation right now.
Speaker 1 (29:33):
That's interesting because over the last three years we've just
seen at least I've seen the ETF landscape explode. But
you're saying that, you know, even given the new products
launch with Germany, Yeah, it's still not meeting entirely what
you need. That's interesting.
Speaker 3 (29:52):
I mean, we did a lot of work on the
ETF space. Actually, one of our first investments was an
ETF because I wanted to have an immediate reduction on
our carbon emissions. And of all the ETFs out there,
I don't know how many they are shaking at this point,
but you know, we had a very simplistic goal, which
was what will reduce our missions and what doesn't breach
(30:14):
some of our minimum requirements. And we had a minimum
we didn't want, basically, any exposure to coal mining. And
what was interesting is we found that many of the
ETFs would claim to have no exposure to coal mining,
but when we dug down and read their prospectors, guess
what they had more They had quite a lot of
exposure to coal mining. It was kind of it was
(30:37):
very loosely worded in their marketing documentation, and digging down
showed us that their sustainability was not what they had claimed.
Speaker 1 (30:44):
The beast, so there would be some exceptions to what
they're saying or something like.
Speaker 2 (30:49):
That, Yeah, we had a new thresholds or something correct.
Speaker 3 (30:53):
Our threshold was very low. They would claim a very
low threshold with an asterix. When we dug down that
asterix actually meant it's not going to be sustainable for us.
And so in the end it was in narrated down
to two ETFs that we could take. So diverse, right,
So I do think, you know, maybe some of these
(31:15):
I think there's something to be said about the talent
that's coming into this space. You know, there are a
lot of great universities educating students around sustainable investing, I
think in a better way than there was ten years ago.
And I think that hopefully will lead to more product
managers out there innovating and developing things that are more
intentionally impactful and evidence based. So I'm pretty hopeful for that.
Speaker 1 (31:40):
Reggie, that's a great way to end this. The hopefulness
I think fingers crushed on our end. Two. Thank you
so much for being here. I think my main takeaway
was the lack of product. But I guess given that
you're hopeful and hopeful as well, And with that, thank
you everyone for listening. You can find more information on
(32:00):
climate investments and net zero goals and more by going
to br SG on the Bloomberg terminal, which opens up
Bloomberg Intelligence or Research Dashboard. If you have an ESG
quandary or burning question you'd like to ask our bi
expert analysts, please send us an email at ESG Currents
at Bloomberg dot net. Thank you
ESG has become established is a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trens, mounting regulatory attention and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzword
and lingo, and we aim to break these down with
(00:30):
industry experts. Welcome to ESG Currents, brought to you by
Bloomberg Intelligence, your guide to navigating the evolving ESG space,
one topic at a time. I am Shahine, Contractor, senior
ESG analyst.
Speaker 2 (00:44):
And I'm Eric Kane, director of ESG Research, and we are.
Speaker 1 (00:47):
Your hosts for today's episode. So today we'll be speaking
with Rajitt Sebastian, the head of ESG and sustainable Investing
at the New York State Insurance Fund as a net
zero goal for its investment portfolio. And Regiet is going
to tell us all about the journey, the challenges, the good,
(01:08):
the bad, and the ugly.
Speaker 3 (01:09):
Right, Regie, Yes, glad to be here and great to
be with both of you.
Speaker 1 (01:14):
Yes, thank you, thank you for joining us. So, Regie,
my first question is can you give us a little
bit of a background into NICEF, right, nice, and maybe
a little bit of scope around this NAT zero goes
so that our listeners, you know what they're sure.
Speaker 3 (01:33):
So the New York State Insurance Fund, or NICEF, was
founded in nineteen fourteen right after one of the largest
man made industrial disasters in the US, the Triangle shirt
Waiste factory fire, basically right here in downtown New York City.
(01:55):
Close to one hundred and fifty people died as a result,
and it was written into law to form an agency
which would protect worker rights and workers compensation in particular,
and act not just as a state agency, but also
as a private institution or on private terms. I like
(02:15):
to think of ourselves as almost the first or one
of the early private public partnerships. So as part of
our workers Compensation mission, we manage about twenty billion dollars
of assets under management, most of which is in fixed income.
And I'm happy to go into the asset allocation later.
But yeah, that's what nice It is wonderful.
Speaker 1 (02:37):
And just a little more around the scope of this
net zero goal.
Speaker 3 (02:41):
Yeah, so we have a net zero goal by twenty forty.
This is in alignment with the Governor's mandate for US
for New York State agencies, which she announced back in
twenty twenty two. As part of that, we published a
climate action plan outlining that goal and how we would
get to that. Yeah, and you know, within that goal,
(03:04):
we're specifically focused on our exposure into sectors the power
sector and the energy sector, and we outline ways in
which are our different strategies to achieve this goal by
twenty forty excellent.
Speaker 2 (03:19):
So maybe in keeping with that, you mentioned, of course,
Retrieth that you have specific goals for power and energy.
Curious if you could go into a little bit more
detail in terms of the goals for those industries and
ultimately how you're kind of aligning your investments with you know,
net zero in the transition for those those two kind
(03:41):
of broad sectors specifically.
Speaker 3 (03:43):
Yeah, I think it's a good question, Eric. So the
reason we're focused on those two sectors is they account
for over seventy five percent of our emissions, and so
it just made sense for us to start off with
low hanging fruit. Now, the strategies that we have I
should have mentioned it's not just for those two two sectors,
it's across the board. But what we're trying. It's basically
(04:04):
a four prong strategy. The strategies include internal engagement, which
includes an education portion to ensure our portfolio managers are
steering the majority of our portfolio in the right direction.
The second tenet is external engagement to ensure our managers
our external managers are doing the same and also where needed,
(04:26):
engaging directly with companies. The third is our investment tenet,
where we're working on a sleeve of the portfolio close
to five percent of the portfolio, which will more intentionally
and aggressively seek market competitive sustainable investments. And so that
would be the sleeve where we're looking at more renewable
energy investments ETFs that might be more sustainable, et cetera,
(04:50):
et cetera. And then the fourth tenet, which is sometimes controversial,
is divestment, which we think is a necessary toolkit to
have within the actions that we're looking.
Speaker 1 (05:00):
To take andretie. I want to get into the first
tenant you mentioned, seet internal education. I'm just curious as
to the challenges you face in doing this, and tell
me a little more about whether the backlash has changed
the perception I guess internally of es.
Speaker 3 (05:22):
Right, Yeah, I mean you know, the backlash is interesting,
and I would say the backlash has certainly helped the naysays,
both internally and externally. But if I took a step back, internally,
we have a very capable and experienced staff across each
of the different product groups. I should have mentioned in
terms of our asset allocation, around sixty five percent is
(05:44):
corporate fixed Incup corporate and sovereign fixed income. Around twenty
twenty five percent is structured product also fixed income, and
the balance is equity, and that's between listed equity and alternatives.
So just in terms of our team, you know, the
(06:05):
teams that were more entrenched and had more experience, it
was it's been a tougher lift to kind of get
them to engage on the topic of sustainable investments. And
I think rightly so, because you know, the evidence has
been mixed around this space. Our team is very evidence
driven and so that's been a challenge to kind of
help them or steer them to incorporate a lot of
(06:27):
these ears to your sustainable investing or impact factors into investments.
Speaker 1 (06:32):
Okay, and if I may just follow up, so Regie,
if you have these challenges, how do you know measure
success or convince people, given you you do have this goal.
Speaker 3 (06:43):
Right, So I think it's it's challenging to convince people
because these are all well performing professionals with a lot
of years of experience in the space, so hard to
kind of come in with a new thesis and say,
by the way, incorporating or impact factors into investments is
definitely going to lead to a better financial outcomes. So
(07:06):
that's and that is also what I believe. I don't believe,
or we don't believe on the sustainable investing side, that
these factors all will have that financial kind of outcome.
And so in the beginning it was all about educating
our staff sharing that some of these factors can be
financially financially relevant and so it's worth thinking about this
(07:29):
because in fact, all of this is just additional data
and there is no downside by considering additional data. Early on,
we didn't get much take up for that. As much
as we thought that was the right way to go
and the evidence would be persuasive, it wasn't. And so
in the end, you know, a top a more top
(07:50):
down approach of management stepping in and saying we really
do need to follow these factors that did help move
the needle with our internals team.
Speaker 2 (08:01):
That's good learning, and I imagine some of the initial
skepticism surrounds the kind of quality of the information that
you're adding to the picture. Right, So I'm curious to hear.
You know, we talked about energy and power as being
the focus areas, and obviously, if you're going to transition
(08:22):
your portfolio focusing on those industries, you need to be
able to identify investments that have credible transition plans. So
I'm curious to hear ultimately how you kind of assess credibility,
how you instruct the investment teams to ultimately think through
these new concepts and ultimately really I think decipher what's
(08:44):
a lot of noise in the space with respect to
you know, decarbonization targets and pathways.
Speaker 3 (08:51):
Yeah, it's a really good question, and it's it's I
think the biggest challenge that we've found is the data
that we're getting to make these decisions. As you know,
it's pretty prevalent in the industry. Everybody's complaining data, data, data.
In terms of assessing credibility, it's tough, you know, if
somebody comes in, let's say it's one of our external
(09:13):
managers or one of the portfolio companies in the energy
space says that they have this very credible plan to
twenty forty. It's more likely that these are the larger,
more well resourced companies or external managers. That's what we
found in our experience. So just being able to say
that we've got this plan doesn't necessarily mean that they're
(09:34):
acting on this plan. So we've had to kind of
dig behind that and look for evidence that people are
actually acting on these plans. And so that includes you know,
being in meetings where you get a glossy pitch deck
and saying, actually, you know, let's forget about this pitch
(09:54):
deck and talk about the plan and let's get to
the details. That includes how having the teams that we're
speaking would say, oh at actually answer that question. Let
me bring in my ESG person and us thinking, you
know what, that actually doesn't align with how we're thinking
about investing. We believe that the investment decision makers need
(10:15):
to have this data, understand this data at their fingertips.
So you know, that may not be a manager that
or a company that we align with. So it's really
trying to dig deep behind what sometimes is the facade
of good data to try and get the real information.
You know, and I can talk a little bit about
(10:35):
you know, we've talked about or we're all familiar with
greenwashing in this space. We've you know, not only do
we think there there's been a substantial amount of greenwashing
in this space, but we think a big part of
the entire investing space has been, you know, has been
using what we call green believing, so believing that what
(10:57):
they're doing and really being committed to what they're doing
and leaving that that is actually achieving some impact, but
not actually having the data to substantiate this, or doing
things that have no evidence that they will end up
in the outcomes that they're hoping to have. And so
you know, in fact, some of the backlasher he and
you asked about that a little bit earlier, I think
(11:18):
has been beneficial in getting managers and companies a little
bit more detail oriented around what they're proposing to do
to get to net zero and intertid.
Speaker 1 (11:32):
You touched on this a little bit, but you spoke
about external managers, right, so I'm curious as to whether
working with external managers in meeting these goals is easier
than trying to convince your internal right team. And at
the same time, you know, similarly, what are the challenges
you face with external managers? What are some learnings there?
Speaker 3 (11:53):
Yeah, so, as I mean, we're a I guess a
medium sized asset owner. So external managers their main incentive
with us is frankly, to get our capital. And so
when we say, oh, we think you need to factor
in these ESG factors.
Speaker 1 (12:10):
They'll say, yes, right, they have I mean, yeah.
Speaker 3 (12:13):
Right right, And that's in some ways that's great. We
feel good after those meetings, but you know, I think
it'll take us time to see what the end outcomes
of that process is with these external managers. You know,
I've been in meetings where we get a pitch deck,
for example, that says something around you know, a ton
(12:35):
of stuff around ESG and net zero and all of that,
and the next week, when there's some controversies, all those
slides are taken out. I've been in meetings where companies
or funds agree to sign a side letter with us
that they will provide better disclosure around some of these
climate factors, but they also are candid enough and honest
enough to tell us by the way. Just last week
(12:57):
I signed another side letter with another state that I
wouldn't do this, and so, you know, it's a tough
it's a it's a tough time, but but yeah, overall,
I think we're following similar engagement strategies with external managers,
where we're trying to get right to the data, try
and focus on the action and not not be focused
(13:18):
on the noise or the flashy pitch decks that that
you know, we were seeing, I guess prior to some
of this controversy.
Speaker 2 (13:25):
So I think one area that has become maybe controversial
that we've seen kind of removed from pitch decks, removed
from you know, corporate goals certainly is the idea of offsets, right,
So I'm curious to hear your thoughts on offsets and
if they play any role in nicsif's net zero target.
Speaker 3 (13:48):
We're very skeptical of offsets just because some of the
definitions have been a little bit all over the place.
And also, I mean, I think Time had a piece
on this back and back last year where a lot
of the impact claims cannot be substantiated. So just in general,
we're waiting for the market to be a little bit
more developed. We do think offsets could have a huge benefit,
(14:14):
but I would say that, you know, the way we're
thinking about it is it would need to be governed
by probably a few credible institutions for us to have
faith in those offsets energy.
Speaker 1 (14:26):
I want to get back to you know, those four
tenants you mentioned the divestment face right right. I'm curious
as to your thoughts on divestment versus engagement, And then
at the same time, I'm more so curious as to
whether you think divestment is what most asset owners will
(14:47):
end up employing to meet these goals if there's you know,
I'm just thinking, what is the biggest bank fail back?
Like if I have to reduce one hundred percent by
a certain date, where am I going to get a
majority of emission reductions from what strategy?
Speaker 3 (15:02):
Yeah, I do think that we're at the point. I mean,
it's twenty twenty four right now. You know, we have
a goal of twenty forty. Most other asset owners, I think,
you know, have twenty fifty. It's pretty clear that this
is coming fast at US, and progress in general has
been pretty limited because the data has been limited. It's
hard to reduce emissions. I think others of people are
(15:23):
finding that it's not that easy to reduce emissions. So
I do think strategies like divestment will come more into play,
probably over the next decade, and we're seeing it with
some of our other counterparts, actually very recently. I would
name them specifically, but you can just check check the
news on that. You know, engagement has been the favorable
(15:45):
strategy from an evidence perspective. The research suggests, at least
from some of the top universities, that engagement is a
much better tool for long lasting change, including you know,
the university that I work part time for at the
Wharton School, Harvard, Stanford and others have all come to
a similar conclusion. But I think that's a little bit limited,
(16:07):
and this is my personal view. I do think devestment
is should or needs to be part of every toolkit
for a couple of reasons. You know. The first is
that the engagement approach assumes that companies will engage with
you and will actually make those changes. And I think
Exon Mobile is a great case study of how you know,
(16:31):
they're probably one of the most engaged companies in the
world right now. But you know, last year we saw,
for example, how just some small changes in the market
completely they became one of the biggest polluters in a
very very short period of time. And so the question
mark there is, you know, how did that engagement actually work?
They even change their boards as a result of some
(16:52):
of the engagement, So that's it raises the question does
that actually create that change over the long term or
our company is just happy to engage with you. The
second is, you know what I call what I'm thinking
of as the immediacy of the problem. I mean, this
(17:13):
is in our faces. I mean, we are in the
midst of climate change. I won't go through any of
the stats because I don't remember them right now, but
I think we know that this is here and now
we are. Our goals in terms of getting to net
zero by any timeframe are probably too optimistic, and we're
probably dealing with a scenario where we have to manage
(17:36):
the effects or the negative effects of climate change as
opposed to stop it from happening, and so we don't
have time. And in that instance, you know, we should
be brave enough to make to look at what could
make a big bang for buck and I you know,
and as part of that, it Actually I have a
(17:57):
personal story related to this, and that is I grew
up in South Africa during apartheid. And if international donors,
or the tobacco companies and the mining companies, if the
international community had not stepped in and divested from South
Africa from supporting the apartheid regime at that time, I
(18:17):
don't think we would have had the end of apartheid
and Nelson Mandela being released from prison, et cetera, et cetera.
And so I do think there is a space for divestment.
Do I think it should be the main tool used. No,
but I do think that, you know, unfortunately we don't
talk about it as a tool enough and we should
be considering divestment when needed.
Speaker 1 (18:39):
That's interesting.
Speaker 2 (18:41):
I like it, yeah, really really interesting. And the personal
connection that is certainly quite poignant. So I appreciate that
as well. So you mentioned, of course, the idea that
climate change is upon us, these risks are happening. I
think that that raises the other side of the you know,
climate assessment with an investment portfolio, which is really looking
(19:05):
at the potential you know, risk and physical risk associated
with you know, given investment. So curious obviously that doesn't
fit directly into you know, the net zero by twenty
forty goal, but curious as to whether that's something that
you're also looking at in your investment decisions.
Speaker 3 (19:25):
One hundred percent, and maybe it's worth me talking through
the framework that we're looking at investments. So I would
say there are three aspects. One is you know, minimizing
climate risk, the second is reducing other ESG risks, and
the third is having an impact. So in terms of
how we look at sustainable investing, we almost look at
(19:48):
the overlap between ESG as a risk factor and actually
having a positive impact on the world. Within looking at
climate risk, we look at reducing our emissions and that's
what's going to get us to net zero by twenty forty,
but we also have to minimize our physical risk and
our transition risk. And our physical risk is relevant to
(20:09):
you know, us having exposure to for example, and this
is not you know, for example, properties in flood zones
or in earthquake zones. So it's very very relevant, especially
across our structured product portfolio, and when we're looking to
increase our alternatives exposure for example in areas like infrastructure
and read estate and at I want to.
Speaker 1 (20:31):
Get back to the external manager piece. So you mentioned,
you know, you ask them to integrate ESG, and of
course they say they do because you're their clients and
you can dictate that. I guess what ultimately would you
look at as an evidence of I guess success, Like,
what change would you like to see in the portfolio?
What behavior would you say that yes, this is, you know,
(20:55):
being integrated. And I'm confident. We'll not confident, but I
think we're on the right right.
Speaker 3 (21:01):
So a few things. The first is the whole sustainable
investing discussion shouldn't sit within some bespoke ESG team or
ESG factor, I mean separate. Yeah, it shouldn't sit with separately.
It should be that information, at least the basic information
the investment manager that is managing our money. We think
(21:25):
they should have a great understanding of that. And so
when we have teams that pitch how great their investment
is and says when we ask a basic sustainability questions, oh,
you know, how does this look from an emissions perspective,
and they say, oh, we'll bring in our EESG team,
that gives us a little bit of pause.
Speaker 1 (21:45):
And there are a few.
Speaker 3 (21:46):
Managers out there that you know most of them, I
will I will be I will say they've been doing
this for a little bit longer. They do have a
separate EESG team, but the investment team themselves are able
to speak to this credibly. So that's something that I
think over over time, you know, I believe, and this
is how we've we've I've said this as nice if
(22:07):
over time, I hope to work myself out of a
job and my team out of a job where our
fixed income team and our alternative teams they're the one
making sustainable investing decisions because it is part of investing.
It is just investing. You know, we don't even have
to call it ears. You're sustainable.
Speaker 1 (22:24):
Right when you guys are not zero.
Speaker 3 (22:26):
When yeah, yeah, maybe, But you know that's so we
look at our managers to see are they thinking the
same way. The second is intentionality. Are they do they
actually want to have an impact? And this is kind
of hard to tell, but when I get what or
when we get very flashy pitch decks and they talk
(22:47):
for most of the meaning about how great their company is,
and they don't refer to examples of the impact that
they're having or the challenges with achieving their climate goal.
Then you start to wonder is this do they actually
want to do this? So intentionality is another factor. I
(23:09):
will say, one other factor that gives us, or I
think managers could improve on is making sure that they're
evidence based around some of these claims. So, you know,
it's great if they can say here's what sustain Analytics
or MSCI or whoever it is says, but is there
(23:31):
evidence that those numbers in terms of a reduction on
your missions or let's say it's an increase in labor numbers,
is there evidence that that actually leads to the end
outcome that you're telling us that you're going to get.
And a lot of managers don't connect that piece, you know,
they're more focused on here is the extra home report
that we got from this great provider. One thing I
(23:51):
do want to flag is, you know, we should all
be aware that and this is part of the challenge
in this in the whole space, you know, is the
best presenters of this information, the ones with the most
the best access to this data too, are likely to
be the funds that can afford it. And so in
some ways are we is ESG or sustainable investing and
(24:15):
all the kind of hurdles we're putting in front of managers,
Is that going to be the next way we're going
to discriminate from, you know, underserved managers. So that's something
that we keep in mind and we try and think through,
you know, how can we improve the space by not
focusing only on the data but more sometimes the intentionality
(24:36):
or the lived experience of certain managers.
Speaker 2 (24:40):
That's really interesting. The idea of kind of underserved managers
maybe leads to my next question, which is you mentioned
of course there are you know, three elements to approach
minimizing climate risk, reducing ESG risk, and then having an impact.
So with the second reducing ESG risk, obviously could be
(25:00):
a whole host of issues related to that outside of climate,
including things perhaps embedded in that concept of underserved managers
like you know, diversity, things like that. So, right, curious
to hear your thoughts on ultimately where you think the
biggest risks outside of climate within ESG may reside or
(25:22):
maybe it's a couple different issues.
Speaker 3 (25:24):
Yeah, I think, and we actually deal with this fact
and not just in our ESG risk space, but in
the impact space, because we think this is an area
where we can be super impactful, but it is a
risk in the same way we think that labor rights,
(25:46):
employment quality jobs, everything related to work labor jobs is
a critical ESG risk and an impact opportunity at the
same time. And we haven't seen many managers focus in
on this area, which is interesting because there is a
whole host of data that shows the correlation between good jobs,
(26:12):
for example, and financial returns, or good quality of jobs
and financial returns, or good benefits and financial returns, and
so that's an area that is of deep interest to us.
I think it's part of our identity being a worker's
compensation fund, but it's also an area where we haven't
seen enough of a focus and so that's part of
what we call our impact on the real economy thesis,
(26:34):
which is that third tenant, the impact piece, and that's
an area where we want to focus. And you know,
even when I get whatever manager pitches to us, we
ask questions around how does this impact employment? You know,
private equity, for example, is an area which historically, you know,
to get efficiencies has had layoffs as part of the process,
(26:55):
and so we work with private equity groups so to
understand what is your net impact on workers Okay, you
know they may be layoffs. Is that blue collar? Is
that white collar? How many jobs are created in after
the fact, and what is the quality of those jobs,
what wages are being paid? Because we, you know, we
believe that that actually leads to operational performance and therefore
(27:19):
financial long term financial returns for US.
Speaker 1 (27:23):
Energy. I want to dig into this third ten and
the impact bace of it. You mentioned that you do
some of it through ETFs. My question is, I guess
you know that I covery to ask quite a bit.
I'm curious as to whether you think there aren't have
ETFs out there to meet what you're trying to do
in terms of, you know, is there enough diversity of
(27:45):
products out there? Do you think you're going to be
able to get the strategies you want with the product
street right now? And if not, what's missing?
Speaker 3 (27:54):
I think the biggest issue with the entire sustainable investing
space is the lack of product. And and you know
that's a broad, overreaching statement to make, but I guess
what I mean more than that is the lack of
product for us. And it's probably the lack of product
that is aligned to what asset owners like us or
(28:16):
maybe not like us actually want you know, we'd like
product that's out there that's evidence based, that is long
term and that shows that, you know, we can achieve
some level of sustainability but not compromise on financial return.
And this could be different for different types of asset owners.
For example, for us, our main tenant is not to
(28:37):
maximize financial return, it's to minimize our risk as an
insurance player. We just want to make sure that we
have you know, that's why we're I didn't mention this earlier,
but we're very conservative with our asset allocation, and so
there could be product that's specifically targeted to owners that
don't want to you know, have a lot of volatility
(28:59):
in the portfolio, but it's still sustainable, it's still long term.
And the focus on labor, at least in my conversations
with you know, over twenty thirty assid owners is a
huge focus for astonas I mean, most aced owners in
the world are serving policemen and firemen or women and teachers.
Labor is of course a big focus. But yeah, we're
(29:21):
not seeing nearly enough good product out there that is intentional,
data driven around this space, and we think that that's
an area that's ripe for innovation right now.
Speaker 1 (29:33):
That's interesting because over the last three years we've just
seen at least I've seen the ETF landscape explode. But
you're saying that, you know, even given the new products
launch with Germany, Yeah, it's still not meeting entirely what
you need. That's interesting.
Speaker 3 (29:52):
I mean, we did a lot of work on the
ETF space. Actually, one of our first investments was an
ETF because I wanted to have an immediate reduction on
our carbon emissions. And of all the ETFs out there,
I don't know how many they are shaking at this point,
but you know, we had a very simplistic goal, which
was what will reduce our missions and what doesn't breach
(30:14):
some of our minimum requirements. And we had a minimum
we didn't want, basically, any exposure to coal mining. And
what was interesting is we found that many of the
ETFs would claim to have no exposure to coal mining,
but when we dug down and read their prospectors, guess
what they had more They had quite a lot of
exposure to coal mining. It was kind of it was
(30:37):
very loosely worded in their marketing documentation, and digging down
showed us that their sustainability was not what they had claimed.
Speaker 1 (30:44):
The beast, so there would be some exceptions to what
they're saying or something like.
Speaker 2 (30:49):
That, Yeah, we had a new thresholds or something correct.
Speaker 3 (30:53):
Our threshold was very low. They would claim a very
low threshold with an asterix. When we dug down that
asterix actually meant it's not going to be sustainable for us.
And so in the end it was in narrated down
to two ETFs that we could take. So diverse, right,
So I do think, you know, maybe some of these
(31:15):
I think there's something to be said about the talent
that's coming into this space. You know, there are a
lot of great universities educating students around sustainable investing, I
think in a better way than there was ten years ago.
And I think that hopefully will lead to more product
managers out there innovating and developing things that are more
intentionally impactful and evidence based. So I'm pretty hopeful for that.
Speaker 1 (31:40):
Reggie, that's a great way to end this. The hopefulness
I think fingers crushed on our end. Two. Thank you
so much for being here. I think my main takeaway
was the lack of product. But I guess given that
you're hopeful and hopeful as well, And with that, thank
you everyone for listening. You can find more information on
(32:00):
climate investments and net zero goals and more by going
to br SG on the Bloomberg terminal, which opens up
Bloomberg Intelligence or Research Dashboard. If you have an ESG
quandary or burning question you'd like to ask our bi
expert analysts, please send us an email at ESG Currents
at Bloomberg dot net. Thank you
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