Sovereign wealth funds increase ESG adoption

Invesco Asset Management says sovereign investors have dramatically increased ESG adoption and integration over the past five years.

The latest Invesco Global Sovereign Asset Management Study shows that in 2017 11% of central banks and 46% of sovereign wealth funds had an ESG policy in place. This year that number stands at 47% and 75% respectively. Invesco’s survey includes the views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 81 sovereign wealth funds and 58 central banks, who together manage $23 trillion USD in assets.

41% of sovereign investors believe impact investing will increasingly become part of their overall mandate and, of the investors that have already invested in in impact strategies, around three-quarters plan to increase allocations. 43% of respondents report that they are increasingly incorporating impact investing metrics into their portfolio. Notably, impact investing is not seen as hampering returns as investments that make a direct contribution to positive social or environmental impact are increasingly seen as being aligned with return objectives.

Sovereign funds are also increasingly implementing carbon targets for their overall portfolio with 30% having now implemented a carbon target, up from 23% last year. In contrast, only 16% of central banks have formal carbon targets, with little change year-on-year.

Russia’s invasion of Ukraine has prompted some challenging questions for sovereign investors regarding the robustness of their ESG implementation at a country level. For many, this added to concerns over the role of passive investing within an ESG framework. 40% of sovereign wealth funds said that ESG issues were prompting them to increase their active allocations. An active risk-based approach was seen as conferring advantages over a screening-based passive approach; companies or governments that might not meet thresholds for screening can instead be down-weighted.

Rod Ringrow, Head of Official Institutions at Invesco, commented: “Sovereign wealth funds are increasingly putting ESG at the heart of their investment strategy. 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. 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.”