OCIO managers expand ESG, DEI prowess to meet requests

Executives of OCIO managers said their existing and prospective clients are pushing them to include more diverse money managers in their portfolios as well as firms that are managing strategies based on environmental, social and governance, and diversity, equity and inclusion principles.

"These topics are relevant across the board. Organizations are wondering how they can incorporate both ESG and DEI into their investment portfolios. Investment committees need to figure out how to do ESG and DEI," said Daniel Farley, executive vice president and chief investment officer of the investment solution group of Boston-based State Street Global Advisors, in an interview.

SSGA assists clients in incorporating both areas using internally and externally managed strategies, Mr. Farley said.

SSGA managed $15.9 billion in ESG strategies and invested $3.1 billion with women-, minority-, or disabled-owned managers within OCIO approaches as of March 31, Pensions & Investments survey data showed.

SSGA's worldwide institutional OCIO assets managed with full/partial discretion totaled $181.7 billion as of March 31, an increase of 0.3% compared to the same date a year earlier.

For asset owners, DEI and ESG "both are risk factors that they need to pay more attention to" given climate change and the need for diversity within money management companies, said Suzanne Bernard, OCIO not-for-profit lead at Northern Trust Asset Management, Chicago.

Rating asset management firms on both issues is a big part of Northern Trust's manager assessment, especially when it comes to looking beyond diversity of company ownership to gauge diversity throughout the company, she stressed.

Northern Trust Asset Management had $3.1 billion in ESG strategies managed for worldwide institutional investors and $5.5 billion with diverse managers in OCIO mandates as of March 31. The unit's worldwide OCIO institutional assets under management with full/partial discretion totaled $98.7 billion, down 1.7% compared to March 31 a year earlier, according to P&I survey data.

Boston-based NEPC LLC had high demand in 2021 for OCIO investment strategies, which continued in the first quarter of 2022, said Steven F. Charlton, partner and director of consulting services, in an interview. NEPC experienced a very strong increase in worldwide institutional assets managed with full/partial discretion using ESG principles, up 336.6% to $23.4 billion as of March 31 from the year before.

Mr. Charlton explained that the big increase in ESG AUM is due to a change in its reporting to include managers that have material ESG integration in their strategies. In the past, Mr. Charlton said NEPC included only AUM from managers that were expressly ESG-oriented.

NEPC's assets managed by diverse managers dropped by 8.7% to $3.3 billion as of March 31 compared with the previous year. Mr. Charlton stressed that "NEPC's commitment to DEI is firmwide. We want to target women- and other diverse-led or owned money management firms to invest with. We are seeing growth in this area."

NEPC has set target exposures to diverse managers of 10% by the end of 2022 and 15% by 2024, Mr. Charlton said.

NEPC's worldwide institutional OCIO assets under management with full/partial discretion totaled $61.7 billion as of March 31, up 15% from the same date a year earlier, according to P&I's survey data.

Regarding ESG, NEPC has committed to rating every investment manager the firm works with on five levels of ESG investment, depending on a firm's effort to include ESG principles and the level of ESG integration maintained.

P&I's aggregate survey data showed that worldwide institutional OCIO assets under management with full/partial discretion in ESG funds were down 8.4% to $392.2 billion as of March 31.

The decline was due in part because the three largest OCIO ESG managers had an aggregate decline of $10.5 billion in ESG AUM and two of the 10 largest ESG firms from last year did not provide data in this category for the 2022 survey.

Within the same category of worldwide institutional assets managed with full/partial discretion as of March 31, AUM managed by women-, minority-, disabled and veteran-owned firms totaled $34.7 billion, a decline of 28.2% compared with the a year earlier. One large OCIO manager declined to provide data about its WMDV assets under management worldwide with full/partial discretion.

Greg Calnon, New York-based partner global head of the multiasset solutions group at Goldman Sachs Asset Management, said he is seeing a growing demand for ESG and sustainable investing — across the broad spectrum of global asset owners, but particularly from endowments and non-profits. According to P&I data, Goldman had about $239.9 billion in worldwide outsourced institutional AUM with full or partial discretion as of March 31, ranking it the second such largest manager, up 15.5% from the year-ago figure.

Michael Cagnina, Oaks, Pa.-based vice president and managing director of the institutional group at SEI Investments Co., noted that sustainability is a very broad concept. "It encompasses different topics," he said. "There is no one-size-fits-all sustainable investing policy. Some of the clients I have dealt with are more concerned about ESG while others are focused on impact investing, for example."

ESG concerns are important to her clients, said Stephanie Lynch, Charlotte, N.C.-based co-founder and partner of Global Endowment Management, especially endowments and foundations whose boards want their investments to align more with their personal values. "They want to know how these investments are impacting the planet and the future," she noted.

Global Endowment Management had $10.2 billion of its $10.9 billion in OCIO assets managed under ESG principles, ranking it eighth among firms reporting.