When investing in alternative assets, State Street integrates environmental, social and governance (ESG) considerations in order to mitigate risk and to seek outperformance benefits. Consistent with our firm’s overall commitment to ESG, our Alternatives team has instituted a formal process for evaluating ESG risks and opportunities, both pre- and post-investment. We actively leverage UN PRI questionnaires and guidance, SASB ESG relevant criteria, other external sources, and our own proprietary ESG considerations. Moreover, our program is not static. We continue to improve it as industry standards and techniques to extract and evaluate ESG data evolve.
We tailor our ESG process depending on the type of investment. The State Street Alternatives team invests across different asset types, from private equity to hedge funds and real estate, and across structures, from funds and co-investments to direct deals sourced by our team.
For funds, we assess the ESG policies and practices of our partners as a regular component of our investment teams’ research. In addition to investigating fund managers’ ESG policies, training and reporting standards, we will often go into depth on how managers incorporate ESG factors into individual investment decisions. In addition, we have a separate Operational Due Diligence team that provides additional evaluation of key governance factors.
For our direct real estate assets, ESG evaluations contribute to our goal of acquiring and managing diverse real estate properties that can achieve clients’ return objectives while minimizing risk. Before committing to assets, we undertake detailed due diligence that includes ESG considerations. Factors we regularly analyze include environmental condition, energy efficiency (e.g., LEED designation), walkability and transit orientation, on-site and local area amenities, tenant interviews, and operating partner background checks and anti-money laundering policies, among others. Once we own an asset, we will work with our partners and property managers to identify and implement cost-effective renovations that can both improve the quality of our assets and maximize returns for our clients.
Within our direct company stakes (private equity co-investments and direct deals), ESG analysis is an important contributor to our strategy of building diversified portfolios that achieve our clients’ return and risk objectives. Since we invest across industries, we tailor our ESG analysis to the most relevant considerations for each investment’s sector. For instance, we would focus on water management when looking at an energy investment, and on consumer privacy protections when analyzing an online media company.
By tailoring our ESG analysis to the specifics of each investment type, structure and industry, we are able to strengthen our overall investment analysis. Consideration of ESG factors helps us to both mitigate risk exposure and to enhance returns, and we will continue to improve our analysis in service of our clients’ investment goals.