2023-2024 Investor Profile

Executive Summary

Type of Asset Owner: State Pension Fund

Total Assets Under Management: $ 200 Billion
Assets Under Management for Sustainable Investment Program (“SIP”): $ 20 billion
Time Horizon: Perpetuity
Return Objective: 5-6% nominal annualized returns
Spending Policy: 5%

Background

The Hemlock State Retirement Fund("HSRF") is one of the largest public pension plans in the
United States. They act as a pension fund for Hemlock State government employees, which
include over one million beneficiaries including teachers, firefighters, police, and other state
employees. Each year the Fund is recognized for being one of the best-funded in the country,
delivering competitive returns and operating under strong asset management.

In 2019, the Governor of Hemlock State mandated that all state investment institutions transition
their portfolios to more sustainable portfolios, with the following priorities:
• Transition investment portfolios towards “Net Zero by 2050”
• Maximize other environmental, social, and governance impact

In early 2020, HSRF announced its sustainability related plans and released a Sustainable
Investing Policy (attached here in Appendix 1). 10% of the total portfolio ($20 Billion) was
carved out to more intentionally invest in assets and funds that would accelerate HSRF’s
transition towards a more sustainable portfolio. This allocation is named the “Sustainable
Investing Program” (“SIP”).

As the fiduciaries of permanent capital, the Fund is prudently governed by long-term investment
and spending policies that have been designed to balance current and future spending to
support generations of beneficiaries fairly and in perpetuity.

Investment Structure

Maintaining the HSRF’s strong investment performance is critical to ensure retirement security
to over a million beneficiaries. The Fund invests both directly (active management driven by
internal staff) and indirectly through funds managed by external managers, with an allocation of
up to 30% in direct investing and the balance invested through external managers. Here are
examples of the main types of investments per strategy:

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• Direct investments (30% maximum): Listed bonds, Exchange Traded Funds, Structured
products (like asset-backed securities, collateralized mortgage bonds, and subordinated
loans)
• Externally Managed Funds (70% minimum): Mutual funds, Separate Accounts jointly
created with external managers for bespoke strategies, Private Equity, Private Debt,
Real Estate, Venture Capital, Infrastructure

HSRF invests across various sectors and asset classes, investment management styles, and
acceptable asset allocation ranges that, in total, are designed to produce a sufficient level of
overall diversification and total investment return potential over the long-term. In both public and
private markets, the Fund’s exposure to its holdings is on to the underlying businesses in its
portfolio. Investments are evaluated based on the intrinsic value created by the asset managers
over time, and not merely by short-term performance.

Statement of Portfolio Objectives

Returns: The long-term return target for HSRF is 5-6% nominal annualized returns, the Fund
serves as a stable source of perpetual capital able to satisfy its annual spending commitment to
the state while retaining long-term institutional purchasing power in the context of inflation.
Ideally, however, the Fund increases the state’s purchasing power through even higher risk-
adjusted nominal returns.

Spending: HSRF aims for a spending rate of 5% per year. This is the trailing moving average
market value over multiple years (smoothed spending), subject to short-term adjustments
according to the state’s need.

Collectively, the Investment Tenets provide a framework to guide investment decisions in a

manner consistent with NYSIF’s nature as an institutional investor with a long-term investment
perspective to achieve the investment objectives defined above.

Prohibited Assets and Restricted Transactions

Hemlock is prohibited from directly engaging in the following, though the Fund does
hold look-through exposure because its managed partnerships may engage in the
following at their sole discretion:

1. Private Placements

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2. Options
3. Short Selling
4. Margin Transactions

Direct investments and co-investments in companies with meaningful operational

exposure to gambling, nicotine products, gun manufacturers, and private prisons are
prohibited.

ESG Reporting & Metric Systems

The field of ESG and impact investing is rapidly evolving. Accordingly, the state is open to
adopting any system of ESG and impact reporting and metrics so long as the system has been
developed by a reputable and authoritative organization. The state is also open to in-house
frameworks to supplement the external reporting systems.

Disclaimer
This is a fictional investor profile created for use in the Turner Impact Portfolio Challenge
program.

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Appendix 1: Sustainable Investment Program

In 2020, HSRF carved out $20 Billion of its portfolio to invest in sustainable assets directly or
through external managers, to meet the sustainability goals below:

HSRF Sustainability Goals:

Goal 1: Transition investment portfolio towards “Net Zero by 2050”

The Fund recognizes that the climate crisis poses a material risk to its investment portfolio. At
the same time, attractive long-term investment opportunities abound as the global economy
undergoes an energy transition. The team seeks to reduce the physical and strategic climate
risk across its portfolio by encouraging existing managers and look-through holdings to embrace
real-world emissions reduction while actively seeking investments that address, mitigate, and
adapt to the changing climate. Reducing carbon emissions in the portfolio is seen as the
immediate priority.

Hemlock state has committed to transition its investment portfolio to net-zero GHG emissions by
2050, consistent with the recent IPCC report that identified a maximum sustainable temperature
rise of 1.5°C above pre-industrial levels. This commitment entails establishing intermediate,
science-based targets every five years, in line with Paris Agreement Article 4.9. 1.

As part of its transition plan, it aims to get to 50% emissions by 2035 and to net zero by 2050.
Hemlock intends to rely on leading disclosure standards such as the TCFD 2, GRI 3, and SASB 4

1 To understand how greenhouse gas emissions are categorized, please read these articles on emissions

scopes:
https://www.carbontrust.com/resources/briefing-what-are-scope-3-emissions
https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance

See also https://www.intentionalendowments.org/net_zero_endowments

2 TCFD stands for Task Force on Climate-related Financial Disclosures, which is a group of experts from

various sectors and regions that was established by the Financial Stability Board in 2015. The TCFD
Standards consist of four core elements: governance, strategy, risk management, and metrics and
targets.
3 The Global Reporting Initiative (GRI) Standards: These are standards for sustainability reporting that
help organizations communicate their impacts on the economy, environment, and society. The GRI
Standards are based on the principle of materiality, which means that organizations should report on the
topics that reflect their significant impacts and that matter to their stakeholders. The GRI Standards cover
a range of topics, such as climate change, biodiversity, human rights, labor practices, and anti-corruption.
4The Sustainability Accounting Standards Board (SASB) Standards: These are standards for
sustainability accounting that help companies disclose financially material information to investors. The

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standards to assess progress. Hemlock may also potentially look to create its own tailored
framework which better aligns with its ESG priorities.

Goal 2: Maximize other environmental, social, and governance impact

HSRF looks to reduce ESG risk across the portfolio and uses the Sustainability Accounting
Standards Board (SASB) framework to identify financially material ESG factors.

In addition, the SIP will look to make investments which maximize the longer-term impact of
HSRF, including:
• Reducing global emissions: investing in innovative technologies which in the long term
reduce global emissions.
• Increase social impacts: investing in companies which in the long term have a positive
social impact, particularly on underserved populations. The key constituents for HSRF
are workers, and so solutions that increase quality jobs, increase productivity, increase
worker rights and wellbeing is important.

While achieving these goals, the SIP will promote:

• Just transition: HSRF recognizes that global marginalized populations are
disproportionately impacted by the climate crisis. Thus, climate change mitigation,
adaptation, and reversal efforts should not unduly burden the most disadvantaged. The
Fund is interested in learning how managers are incorporating social factors into their
assessment of climate risk and climate risk mitigation to ensure a “just transition”.
• Engagement: When investing in the energy sector, the Fund favors companies with
credible transition approaches from “brown” to “green,” demonstrating long-term
commitment to systems-change as opposed to those solely practicing divestment.

SIP Investments

For the Sustainable Investment Program, the Fund seeks to immediately invest directly and
indirectly (through external managers and funds) in investments that would reduce their carbon
footprint by 50% by 2032, to achieve the goal of net zero by 2050. Here are some examples of
assets that HSRF may consider investing in:
o Direct investments: This involves having your investment team invest directly in
securities

SASB Standards are industry-specific and focus on the environmental, social, and governance (ESG)
issues that are most likely to affect the financial performance and value creation of companies in each
sector. The SASB Standards cover topics such as greenhouse gas emissions, water management,
employee health and safety, data security, and product quality.

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 Investment Grade and High Yield Public Debt (Credit): Green bonds and
Social bonds
 Structured products (Credit): Mortgage Backed Securities, Collateralized
Debt Oblligations, bank loans
 Listed Equity (Equity): ETFs that immediately reduce HRSF’s carbon
footprint,
o Externally managed funds: This involves your investment team investing through
another fund manager
 Public Debt (Credit); Debt Mutual funds or hedge funds with a
sustainability lens, bespoke fund created to invest in Russell 1000
companies meeting the financial and ESG goals
 Public Equity (Credit): Equity Mutual funds or hedge funds with a
sustainability lens, bespoke fund created to invest in Russell 1000
companies meeting the financial and ESG goals
 Alternative Strategies: Private Equity / Private Debt / VC funds investing
in companies leading the way in innovative approaches to value-chain
decarbonization, such as climate technology or other industries such as
transportation, shipping, and construction.

Asset Allocation

While the broader $20 bn HRS portfolio is primarily investment in listed assets such as domestic
equity and domestic bonds, the SIP has a more flexible asset allocation and includes a higher
potential allocation towards alternatives. The SIP asset allocation is shown below.

Asset Class Representative benchmark Minimum Maximum

Weight % Weight %

Domestic S&P 500 30 50

Equities

Domestic Credit Bloomberg Barclays 10 15

Aggregate

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Non-U.S. MSCI All Country World Index 10 25

Equities

Alternative HFRI Fund of Funds 25 60

Strategies* Index/Bloomberg Commodity
Total Return Index/Hybrid

Cash and Cash 90 Day US T-Bill 2 8

Alternatives

*Alternative strategies are categorized as follows: private equity (LBOs); private debt; venture
capital; hedge funds; private equity real estate; and natural resources (oil, gas, timber,
commodities, and managed futures).

Other priorities for the Fund:

• Diversity in asset management: Since investment manager diversity is crucial to
producing outstanding returns in a competitive environment, the Fund seeks to partner
with managers (we recommend at least 15%) from a broad range of backgrounds,
especially those underrepresented in the asset management industry 5.
• Transparency and disclosure: The SEC is planning to finalize several rules related to
ESG investing in 2023, which will affect how firms disclose and market their ESG
products and services. The rules aim to provide more transparency and clarity for
investors, as well as to prevent greenwashing and misleading claims.

5For more information: https://knightfoundation.org/reports/knight-diversity-of-asset-managers-research-

series-industry/

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