Private debt managers wanting to keep pace with the new mandate from three of the world’s biggest pensions to incorporate environmental, social and governance factors into their investment processes will have their work cut out.

Citing the “potentially catastrophic risks” of ignoring ESG criteria, the California State Teachers’ Retirement System, Japan’s Government Pension Investment Fund and USS Investment Management last week urged their partners and their portfolio companies to end their focus on short-term returns. Instead, the pensions – which together manage nearly $2 trillion in assets – called for enhanced disclosures under the framework of the Task Force on Climate-related Financial Disclosures.

The pensions cited an estimate by Moody’s Analytics that climate change could destroy $69 trillion in global economic wealth through 2100, in addition to the damage it could potentially do to the planet.

CalSTRS, which has a policy for mitigating ESG risks in its portfolio, said in a statement to Private Debt Investor: “We wanted to use this opportunity to encourage other investors to look at long-term value creation as a powerful tool for economic growth.” The statement followed a move in December by the GPIF’s chief investment officer, Hiro Mizuno, to stop lending out shares from the pension’s $370 billion overseas portfolio to short sellers.

The pension trio said managers that do not use ESG-related measures – an emerging area for private debt investors and managers – are outright unattractive. PDI’s LP Perspectives 2020 Survey found that only one-third of limited partners use ESG criteria as a major part of their due diligence, and that just 23 percent of LPs consider diversity factors to be important. However, the numbers are certain to rise as awareness of ESG and diversity issues increases.

Some managers are already ahead of the curve. “ESG has long been core to our business”, said Alison Fenton-Willock, global head of ESG at Blackstone, which has $183 billion of private equity investments as well as credit investments totalling $144 billion. She said all Blackstone’s investment and asset management teams embed ESG considerations into their decision-making and investments, and that they regularly engage with portfolio companies on a variety of ESG topics. In May 2019, Blackstone launched an impact investing platform, and last year ensured that 50% of the independent private equity board seats at its portfolio companies were taken by women.

Bruno Bertocci, head of sustainable equities at UBS Asset Management, said the firm was “encouraged that the world’s pension funds are leading the way toward ESG integration”. UBS’s core sustainable investments rose to $488 billion, or 13.5%, of invested assets at the end of 2019, thereby surpassing a three-year goal ahead of schedule. UBS chairman Axel Weber said the firm aims “to be the financial provider of choice” for clients focused on achieving the United Nations Sustainable Development Goals.

In his January letter to investors, BlackRock’s Larry Fink said finance was “on the edge of a fundamental reshaping,” and that there would be “a significant reallocation of capital to companies that can provide better risk-adjusted returns,” namely those that incorporate sustainability practices.