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.
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 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.
And I'm Eric Kane, director of ESG Research, and we are.
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, the bad, and the ugly.
Right, Regie, Yes, glad to be here and great to be with both of you.
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.
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. 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 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.
And just a little more around the scope of this net zero goal.
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, 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.
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 of broad sectors specifically.
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 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, 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, 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.
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.
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 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 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 these ears to your sustainable investing or impact factors into investments.
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.
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 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 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 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.
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 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 a lot of noise in the space with respect to you know, decarbonization targets and pathways.
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 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 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 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 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 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 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 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.
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?
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.
They'll say, yes, right, they have I mean, yeah.
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 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 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 on the noise or the flashy pitch decks that that you know, we were seeing, I guess prior to some of this controversy.
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.
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, 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.
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 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?
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 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 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, 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, 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 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 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 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 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 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.
That's interesting.
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 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.
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 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 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.
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, being integrated. And I'm confident. We'll not confident, but I think we're on the right right.
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 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.
And there are a few.
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 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.
Right when you guys are not zero.
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 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 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 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 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 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 or the lived experience of certain managers.
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 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 maybe it's a couple different issues.
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, 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, 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, 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, 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 financial long term financial returns for US.
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 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?
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 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 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 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 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.
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.
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 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 very loosely worded in their marketing documentation, and digging down showed us that their sustainability was not what they had claimed.
The beast, so there would be some exceptions to what they're saying or something like.
That, Yeah, we had a new thresholds or something correct.
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 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.
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 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