ESG gains momentum among SWFs

Three-quarters of sovereign wealth funds (SWFs) now have an ESG policy in place, according to Invesco’s Global Sovereign Asset Management Study 2022.

The figure has been steadily rising over previous years, with only 46% of SWFs integrating ESG in 2017.

Invesco canvassed 139 chief investment officers, heads of asset classes and senior portfolio strategists from 81 SWFs and 58 central banks, managing €22.6 trillion in assets.

The study also showed that 27% of central banks have adopted a formal ESG policy, up from only 11% in 2017.

Just under half or 44% of central banks stated that the pandemic has led to an increased focus on ESG.

However, the majority of central banks still have no organisation-wide ESG policy in place.

Slow pace of change within organisations and lack of government leading the initiative were found to be significant contributing reasons to a lack of ESG policy.

Those with a formal ESG policy though cited a range of difficulties in implementing it properly. Chief among them was a lack of clear regulatory standards around ESG investing, which 37% of those surveyed called a “significant challenge”.

Other concerns included the quality of data and ESG ratings as well as greenwashing, where the environmental benefits of an investment might be misleading.

“There is a lack of transparency, which presents reputational risks,” the report said, citing a development-focused sovereign wealth fund in the Middle East.

In an effort to avoid such situations, more sovereign funds were looking to invest in so-called ‘impact’ projects, where results are determined by measurable outcomes that can be verified and tracked over time.

Two-fifths said that impact investing will increase as part of their overall mandate and, of the investors that have already invested in in impact strategies, three quarters of them plan to increase allocations.

Not surprisingly, ESG-policy adoption varies by region with the West leading the way with 77% of SWFs and central banks having an ESG policy, followed by Asia at 68% and the Middle East, 55%.

Emerging markets came last with only 30% of SWFs and central banks having an ESG policy embedded within the organisation.

 “Sovereign wealth funds and central banks are increasingly putting ESG at the heart of their investment strategy,” said Rod Ringrow, head of official institutions at Invesco. “While challenges remain, including concerns about data quality and greenwashing, it is clear that sovereign investors believe that they can develop strategies to overcome these issues.

He added, “This includes greater use of active management, impact investing, measurable carbon targets and coordinated voting/engagement.

As these strategies prove their worth, in particular with regards to measurable outcomes that are verifiable and can be tracked over time, they are likely to be adopted by more investors and steadily permeate across sovereign portfolios.”

©Markets Media Europe 2022

 

 

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