Principal Financial Group 2023 Sustainability Report: Our Approach to Sustainable Asset Management
Integrating sustainable investing practices
Originally published in Principal Financial Group 2023 Sustainability Report
Our approach to sustainable asset ownership
As an asset owner through the general account of Principal Life Insurance Company, sustainability considerations form an important cornerstone of our investments.
Our approach
We have incorporated sustainability factors into our investment process without a selection or rejection bias stemming purely from sustainability factors. Considerations of sustainability factors also feed into the analytical frameworks used by our investment teams.
Our fixed income analysts score investments on ESG metrics while our real estate analysts include climate change and emission considerations in their analysis when evaluating deals. Not only do we analyze these scores before underwriting new investments, we also target continuous improvement in our portfolio’s sustainability metrics, measured by both internal and external scores, as applicable. With better data availability and quality, we are convinced that these can improve over time.
Our portfolio management teams engage with the companies we invest in to encourage responsible ESG practices aligned with our investment thesis for the company. We also encourage companies to disclose relevant and material ESG metrics through public reporting and describe how these considerations inform the company’s overall business activities. This includes consideration and management of ESG risks. These types of engagement, we believe, help encourage greater transparency around ESG practices and improve the overall sustainability metrics of our portfolio.
Our actions and performance in 2023
During 2023, we established specific sustainability guidelines applicable to our holdings in corporate bonds, commercial mortgage loans, and private real estate equity.
These guidelines lay out targets on a variety of metrics, including internal scoring and scores from external sources where applicable, which reaffirms our commitment to sustainable investing as an important component of optimizing returns relative to risks. These guidelines cover approximately 66% of our portfolio, which indicates substantial progress in formalizing our approach to sustainable investing.
We are happy to report that we met the goals laid out in our fixed income sustainability guidelines in its first full year of operation.
Additionally, 66% of assets under management of the general account had ESG integration at the end of 2023.
We invested about $215 million in assets likely to meet the criteria for inclusion in the sustainable bond issuance portfolio of collateral, based on our Sustainable Financing Framework. Our team to date has identified around $1.14 billion of investments that are likely to meet the criteria.
Portfolio emissions
Assessing our portfolio emissions —the scope 3 emissions of our assets under management—helps our investment teams and other stakeholders understand the climate risk and exposure of the funds.
Our approach
We believe understanding the emissions exposure within our portfolios, investing in companies that outperform their peers on emissions reduction, and engaging to understand the drivers of climate goals, such as net zero commitments, help add a layer of risk reduction and potential alpha generation to our funds.
Our actions and performance in 2023
In 2023, we measured and tracked the emissions of underlying holdings and analyzed the impact at a portfolio level for the assets on our Dublin platform. There are still significant gaps in emissions reporting industry wide.
However, Article 8/9 UCITS products that consider principal adverse impacts are required to report GHG emissions annually, acting as an exemplary case study for emissions disclosure and how this could impact portfolio composition over time.
The latest regulation for SFDR went into place on January 1, 2023. The 2023 GHG emissions of our Article 8/9 UCITS equity products totaled 36 million MTCO2e and over $782 million assets under management—which covers 98.9% of equity funds that are Article 8/9 on Dublin SFDR platform. In 2023, we added an additional equity fund to this calculation which represented 2% of reported emissions. The scope of coverage should increase as companies are required to publicly disclose emissions data via the Corporate Sustainability Reporting Directive (CSRD). This will enable our investment teams to better engage with underlying companies on their emissions performance and make the appropriate investment decisions based on this material input.
Of the 15 categories included in scope 3 emissions, portfolio emissions are just one of these categories. We annually report all 15 categories in our CDP Climate Change Questionnaire.
Read more about our Sustainability Bond and Sustainable Financing Framework
To learn more, read the Principal Financial Group 2023 Sustainability Report.
Integration of sustainability considerations and/or environmental, social and governance (ESG) factors is qualitative and subjective by nature. There is no guarantee that the criteria used, or judgment exercised, will reflect the beliefs or values of any particular investor. There is no assurance that any strategy or integration of sustainability considerations and/or ESG factors will be successful or profitable.
Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Company®. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., member SIPC and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.
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