U.S.-based public and private pension funds have been making Economically Targeted Investments (ETIs)—investments that generate societal benefits in addition to the investment return—since the 1960s. Over this time, pension funds have sought risk-adjusted returns for their plan’s participants and beneficiaries through investments in worker-friendly affordable housing, in-state businesses, infrastructure, and other projects. The practice of pension funds making ETIs has continued amidst challenges, such as the politicization of some ETIs in the 1980s and 1990s and economic downturns that significantly impacted the U.S. economy. More recently, new types of investments such as those that incorporate environmental social governance (ESG) factors and impact investments have emerged for consideration by pension funds, and the United Nations 17 Sustainable Development Goals are being utilized by some as a guide to investment.
To be sure, amidst these developments pension funds must continue to invest prudently and carry out their fundamental obligation of paying their promised benefits to plan participants and beneficiaries. However, increasingly the needs of society and finance are converging and pension funds have an opportunity to consider investments that integrate ESG factors or intentionally seek to achieve social or environmental impact as these investments and the opportunities they represent become a larger segment of the investable universe.
Since late 2015, Pacific Community Ventures, as part of the Accelerating Impact Investing Initiative (AI3), has conducted research to explore how public and private defined-benefit pension funds — who collectively manage $6.5 trillion — have approached generating appropriate risk-adjusted financial returns and social and environmental benefits through ETIs.
Today, following extensive research we are pleased to share The Pursuit of Financial Return and Societal Benefit: An Examination of Pension Fund Economically Targeted Investments.
This report builds on our prior research and publication of an online catalog of U.S. pension fund ETIs that was released in October of 2016. The catalog is a first-of-its-kind dedicated online resource that documents over 100 past and current pension fund ETIs, and includes information on their investment strategy, objectives, asset class, investment size, participating investors, and publicly reported outcomes on financial and social performance.
Read the ETI Report
Building from our work on the AI3 catalog, this report examines the current state of practice of pension fund ETIs and how pension funds are looking beyond ETIs to explore impact investments and ESG incorporation as part of their investment strategies.
Specifically, the report includes:
- An examination of the characteristics of ETIs in the U.S. derived from an analysis of the ETIs documented in the online ETI catalog, and examines which investment strategies and asset classes are most prevalent, median size of ETIs, the frequency of ETIs over time, and other areas.
- An exploration of prevailing themes affecting pension funds consideration of ETIs including fiduciary duty, long-termism, and ESG incorporation. The report also includes a discussion of how each theme plays a role in portfolio management, diversification, risk, and opportunity.
- Discussion of future considerations for pension funds exploring the pursuit of financial return and societal benefit, presenting challenges and opportunities for pension funds as they consider new types of investments such as impact investments and ESG incorporation that support societal goals.
- Five case studies featuring current examples of pension fund investments which extensively document individual investment programs and strategies pursued by pension funds and feature investments made in a variety of geographies, with unique social and environmental objectives, and across asset classes showcasing a variety of approaches. They also offer insights and reflections from pension fund staff and investment managers as well as key lessons. The case studies include:
- The Wisconsin Private Debt Program
- AFL-CIO Housing Investment Trust
- In-state Private Equity Investments
- CalSTRS Fixed Income Green Bond Program
- Dutch Pension Funds Pursuit of Social Benefit
We would like to thank the many pension fund managers, researchers, ETI experts, and investors who have shared their knowledge and ideas with us in interviews and subsequent conversations. This report is a direct result of their insights, feedback, and thoughtful direction.
It is our hope that the five case studies and other reflections in The Pursuit of Financial Return and Societal Benefit, alongside the online ETI catalog, can facilitate informed conversations and serve as a resource for pension funds, particularly as they assess the growing set of investment opportunities that seek appropriate risk-adjusted returns and social and environmental benefit and how these investments might fit within their respective investment strategies and missions.
Only some impact investments, ETIs, and investments that incorporate ESG factors will be appropriate for pension funds to consider, but in the future, we fully expect these investments to become a greater share of pension funds’ portfolios as some of society’s most pressing challenges generate financially-attractive market-based solutions. In turn, pension funds will be able to provide for current and future retirees, all while helping to ensure that pension holders enjoy their retirement in thriving economies, a clean environment, and safe and healthy communities.