BOSTON (SHNS) – The Massachusetts state pension fund is teaming up with the MIT Sloan Sustainability Initiative to try to improve the data available to investors who want to make decisions based on things like the way a company treats its workers, its carbon emissions or its product safety record.
As socially responsible investing expands rapidly across the globe, the Aggregate Confusion Project with the Pension Reserves Investment Management Board aims to cut through the noise around Environmental, Social, and Governance (ESG) data, which many investors looking to achieve financial and social returns use to screen potential investments.
“How can we eliminate discrimination in the labor force if we always measure too late? How can industries produce safer goods and services for consumers and the environment if we can’t agree on how to size their impact? If businesses, consumers, governments, and investors want to make decisions based on ESG, we need to provide them with unified guidance,” Roberto Rigobon, professor of applied economics at the MIT Sloan School of Management, said. “This is the purpose of the Aggregate Confusion Project.”
The PRIM board, which manages the $75 billion Pension Reserves Investment Trust Fund, is the founding member of the project. Jason Jay, director of the MIT Sloan Sustainability Initiative, said pension funds like PRIM have “a unique vantage point on the challenges of integrating ESG into the investment process, and the importance of solving the measurement problem.” He said PRIM could “help inform our research questions and methodology and be a testbed for innovative approaches.”
More than $30 trillion of assets worldwide rely on ESG data, up 34 percent from 2016, according to MIT and PRIM. But ESG ratings “diverge substantially” from rating agency to rating agency, the organizations said, leading to “significant, realworld consequences.”
“As an investor, the discrepancies in ratings from agency to agency makes evaluating a company’s ESG impact extremely challenging,” PRIM Executive Director Michael Trotsky said. “We hope that this project will reinvigorate the debate on how to improve those ratings, and we’re looking forward to being a part of the membership council, which will collaborate on implementation strategies.”
The Aggregate Confusion Project wants to measure specific ESG categories like labor treatment, carbon emissions, and product safety, to come up with better ways to aggregate ESG factors into composite indices, to better understand the effect of ESG-driven investments on stock prices and firm behavior, and to assess investor preferences to more finely tune ESG indices to investors’ values, the groups said.
“We believe companies that operate with consideration to ESG issues are higher quality investments that make a positive impact in the community and yield better performance over the long term,” Treasurer Deborah Goldberg, who chairs the PRIM board, said. “This partnership will improve Mass PRIM’s ability to rate a company’s ESG impact by providing us with the most current research and enhanced methods for measuring ESG factors when evaluating investments.”
The announcement of the partnership between PRIM and MIT came during a quarterly meeting of the PRIM board. During the meeting, Trotsky said the state fund that invests the retirement assets of state employees, teachers and many municipal employees in Massachusetts has performed well through recent turbulence.
“In the context of a very difficult, volatile and uncertain investment environment, we were very, very pleased to report that we actually made money during fiscal 2020. The PRIT fund net asset value grew $1.5 billion. It was up 2.4 percent gross, 2.0 percent net of all fees, to $75 billion while we also paid out $1.3 billion in benefits to retirees,” he said. “Notably, the PRIT fund continues to have no liquidity issues; we are fully able to meet all benefit obligations, even in March during the depths of the correction.”
During that March correction, equities fell faster than any time since the Great Depression — 34 percent in 20 days, Trotsky said. But March’s correction wasn’t nearly as deep as during the Great Depression when stocks fell 86 percent over 34 months, he said.
“The March correction was unusually sharp and steep and the rebound, the bounce off the bottom was also unusually fast and steep; you can see that it looks like a perfect V,” Trotsky said, referring to a chart as part of his update.
Since its low of 2,237.40 on March 23, the S&P 500 is up more than 50 percent to 3,406.69 as of midday Wednesday.
“We have seen a complete reversal in just five months, a near 85 percent swing. Down 34 percent from mid-February to mid-March, and up more than 50 percent since lows,” Trotsky said Wednesday. “An 85 percent swing in a very short time period, and extreme market volatility is difficult to navigate.”