Sovereign Funds Target Sustainable Investments

More than half of all sovereign fund managers are now targeting socially and environmentally friendly investments.

That’s the take-away from a recent study conducted by investment management firm Invesco.

Invesco found that environmental, social, and governance investments are being adopted at a rapidly increasing rate by sovereign investors and central banks. The survey found that 60% of sovereign investors incorporate top-down ESG policy, compared to 46% in 2017. Responsible investing goals at central banks rose from 11% to 20% in the same period.

“Our authoritative annual study of global sovereign asset managers shows that ESG policies continue to gain traction among sovereign investors and central banks,” said Alex Millar, head of EMEA institutional distribution sales at Invesco. “The fact that over half of all sovereign managers now incorporate official ESG policies reflects advancements in investors’ understanding of how to derive value from their application. As the adoption of such policies in the construction of portfolios continues to develop, we expect to see application spread across asset classes. This year’s study shows this process is already beginning to take place, with sophisticated adopters moving beyond equities into fixed income, and even, in some cases, real estate and infrastructure.”

Sovereign investors in the Middle East have taken the lead in integrating ESG into their investment processes, with 67% of sovereign wealth funds establishing ESG policies. This is a 37% since Invesco last surveyed investors in 2017. It indicates a regional shift toward sustainability and long-term planning.

Middle Eastern governments are setting up national sustainability goals, revamping water security programs, adopting diversity initiatives, publishing ESG financial disclosure standards, and more. The most prominent ESG investments have been One Planet and other oil-diversification initiatives.

Environmental investments like these are now a global trend as asset managers shift away from governance factors such as board composition. There is an increased level of sophistication to approaching environmental factors compared to 2017, as climate risks that include hurricanes, earthquakes, wildfires, and heat waves are now considered important factors for assets located in emerging markets.

"Over the past two years we have seen an uptick among sovereign investors towards adopting and integrating ESG factors into their overall investment policies,” said Josette Rizk, client director for Invesco. “The initial focus was on the improvement of governance practices such as better disclosure and transparency. Our latest study reveals that investors are broadening their ESG focus to environmental considerations in response to an increased awareness to climate change and its impact on the environment.”