Measurable outcomes are driving widespread adoption of ESG strategies
The fast-growing adoption of active ESG management and impact investment strategies reflects an evolution of sovereign ESG plans – and a robust response to world events
In 2017, 11 per cent of central banks and 46 per cent of sovereign wealth funds had an ESG (environmental, social and governance) policy in place. By 2022 those numbers had reached 47 per cent and 75 per cent, respectively.
Not only are we now seeing three-quarters of sovereign funds incorporating ESG principles into their wider impact investment objectives, but we see a shift towards more active implementation of ESG strategies. Analysis in the latest Invesco Global Sovereign Asset Management Study (IGSAMS) addresses some of the core reasons – including the impact of the crisis in Ukraine.
LIMITATIONS REVEALED
The crisis in Ukraine has highlighted the limitations of pure passive ESG strategies: it is difficult to be an active and responsible owner if you are investing passively. For example, sovereign investors that have passive exposure to emerging markets indices hold Russian assets in their portfolios equal to the index weight of the country. As such, these investors have been left holding Russian assets that have since declined dramatically in value or tradability due to the implementation of sanctions.
This has prompted not only challenging questions for sovereign investors regarding the robustness of their ESG implementation
at a country level, but deliberation on the advantages of an active, risk-based approach to ESG investing.
Sovereigns in the Middle East also recognise that to achieve sustainable returns, there needs to be a positive narrative – reputation matters. The regulatory environment has prompted many sovereigns to take a close look at their ESG position and get in front of their own story about implementation and making a difference.
This perspective also explains why there are growing fears of reputational problems associated with accusations of ‘greenwashing.’ IGSAMS identifies the root of these concerns.
MAIN CHALLENGES
Much of the problem comes from a lack of regulatory clarity and poor data, two factors that make it difficult for development sovereign funds to quantify the true impact of ESG strategies, leaving them open to accusations of greenwashing and subsequent reputational damage. To counter these challenges, many respondents to the IGSAMS research are moving toward a more active, critical and differentiated view of ESG strategies.
This development is not surprising; IGSAMS shows that 81 per cent of respondents consider a lack of clear regulatory standards to be either a moderate or significant challenge to their ESG success.
To counter such challenges, a fast-growing number of sovereign funds have started to consider more closely the effectiveness of their ESG strategies and are shifting resources to those that deliver the best results in terms of measurable outcomes that can be verified and tracked over time.
The good news is that data shows that sovereign investors believe that they can develop strategies to overcome these issues. This includes greater use of active management, impact investing, measurable carbon targets and creative central bank strategies – such as green and sustainable bonds.
Such measures not only make it easier for sovereigns to enhance their reputations by making the right long-term environmental, social and governance decisions, but deliver proven value within the context of todays and tomorrow’s global geopolitical tensions.
Much of the problem comes from a lack of regulatory clarity and poor data, two factors that make it difficult for development sovereigns to quantify the true impact of ESG strategies”