With the new year, the UNJSPF Office of Investment Management (OIM) is reflecting on its role serving hundreds of thousands of members and being a global leader in responsible investment. Among 2024’s highlights is the Fund’s ongoing growth in impact investing.
The UN General Assembly first instructed the Fund to explore this initiative in 2021, and the Fund has since developed and implemented its impact strategy across asset classes. Fixed income has played a pivotal role thus far, thanks to the range and flexibility of its financial instruments.
“Fixed income is well suited for responsible investment because you can structure debt in ways that you can’t with equity,” said Kirsten Hathaway, Senior Investment Officer on the Fund’s Fixed Income team. “That allows for linking debt financing directly to specific uses.”
For example, in 2024, OIM invested in a bond whose proceeds will be used to reforest the Amazon. Planting native tree species will provide local jobs, support biodiversity and remove carbon dioxide from the atmosphere. The project generates carbon-removal credits, which a blue-chip multinational company has agreed to purchase. Rigorous third-party oversight will verify the reforestation and carbon credit processes throughout.
A novel aspect of this arrangement is that, in addition to receiving interest payments and repayment of the principal, the Fund will be further compensated when the project is successful. This innovative structuring helps to ensure that the project not only delivers measurable environmental and social benefits but also generates competitive risk-adjusted financial returns.
The connection between the total return on the investment and the project’s real-world results explains why this type of instrument is called an “outcome bond.” Through its measured participation in this relatively new asset, the Fund is also contributing to a broader effort.
“We’re helping the market to develop,” said Ms. Hathaway.
Further into fixed income
Fixed income products that align explicitly with responsible investment are generally known as “labelled bonds,” which have increasingly featured in the Fund’s portfolio. The most established of these, known as “green bonds,” allow investors to support environmental initiatives while earning market returns. UNJSPF invested in the first green bond issued by the World Bank, in 2008. As at Q3 2024, investing in green bonds avoids the equivalent of 13% of the Fund’s fixed income carbon footprint. Overall, UNJSPF aims to eliminate its financed emissions to net-zero by 2050.
Recently, the Fund invested in a green bond whose proceeds will be used for climate-mitigation and water-preservation projects that minimize the environmental impact of the issuer’s infrastructure and operations. The Fund has also recently invested in a “social bond” that promotes socioeconomic progress by financially empowering borrowers in underserved areas who face credit-restrictive lending options.
Labelled bonds like these, along with other categories in UNJSPF’s fixed income portfolio, support progress toward the United Nations Sustainable Development Goals. The reforestation project, for instance, supports SDGs #8 (Decent Work and Economic Growth), #13 (Climate Action) and #15 (Life on Land). The Fund’s fixed income investments collectively can be linked to all SDGs, with the most heavily represented in the portfolio being SDGs #7 (Affordable and Clean Energy), #11 (Sustainable Cities and Communities) and #13 (Climate Action).
UNJSPF's fixed income investments also support SDGs via supranational and development banks. Investing in bonds from these issuers helps finance global economic and infrastructure development, carbon reduction, environmental protection and poverty alleviation.
As part of its holistic approach to risk and opportunity, the Fund integrates environmental, social and governance (ESG) considerations throughout its investment process. This starts with the use of custom benchmarks that narrow the investable universe, for example by screening out fossil fuels, weapons and tobacco.
Notably, the Fund’s high-yield fixed income custom benchmark, which incorporates ESG considerations, has outperformed the corresponding non-ESG benchmark since its inception in February 2024.
“This supports the hypothesis that a broader view toward the drivers of risk-adjusted returns can pay off,” said Ms. Hathaway.
Across its Corporate, Emerging Market and Government-Related debt portfolios, the Fund holds a greater proportion of labelled bonds than their respective benchmarks.
In line with the Fund’s Responsible Investment strategy, the Fixed Income team also incorporates ESG into its analysis, engagement with issuers and reporting.
The road ahead
Responsible investing is not without challenges. In particular, the fast-evolving nature of these relatively nascent markets and products limits consensus on standards and frameworks. Partnering with likeminded organizations such as the UN-convened Net-Zero Asset Owners Alliance and Principles for Responsible Investing helps the Fund stay at the forefront of this dynamic landscape.
Diversification within impact investing is also important, such as the Fund’s growing participation in private markets. In 2024, for example, UNJSPF invested in a private credit fund focused on achieving net-zero carbon emissions via initiatives such as renewable fuels and energy, energy storage and efficiency, recycling solutions and sustainable mobility.
“We’re proud of the work we’ve done to institutionalize impact at OIM and we are excited to further develop our approach in the years ahead, both internally and in collaboration with our peers,” said Toru Shindo, UNJSPF Chief Investment Officer.
Ultimately, the Fund’s responsible investment activity is designed to continue driving long-term financial sustainability across all asset classes, and to forge new paths that define what fiduciary duty means in the 21st century.