Sustainable assets gaining traction despite standards issue

OMFIF research highlights the progress, and issues, around ESG investing

Environmental, social and governance investing is becoming increasingly important to financial markets. Admittedly, there are questions over its definition and effectiveness – doubts which prompted investment behemoth Vanguard to withdraw from the Net Zero Asset Managers initiative (a group committed to reaching net zero carbon emissions by 2050). Nonetheless, OMFIF research shows that global public investors and policy-makers have continued to develop sustainable finance markets in 2022.

We revealed in our Global Public Investor 2022 report that, for the first time, the majority of surveyed central bank reserves managers implement some form of ESG criteria in their investment approach. Moreover, 63% of respondents reported an intention to increase their allocation to green bonds and 42% to social bonds over the coming years (Figure 1).

Figure 1: Reserves managers expect to ramp up green bond holdings

Are you planning to change your allocation to the following sustainable asset investments over the next 12-24 months? Shares of respondents, %

Source: OMFIF Global Public Investor 2022

Sustainable investing is also a central theme for other public investors. For instance, sovereign funds in Norway (Norges Bank Investment Management), Saudi Arabia (Public Investment Fund) and Singapore (Temasek) have all pledged to reach net zero across their portfolios by 2050. Moreover, in our survey of global public pension and sovereign funds, 76% of respondents reported investing in ESG assets, while 84% intend to invest in renewable industries.

Increasing their ESG investments is just one avenue through which public bodies are developing sustainable financial markets. They are also making strides to improve market standards and increase issuance of sustainable assets.

Africa has been a key source of progress on these fronts in 2022. For instance, South Africa introduced a green taxonomy, Botswana and Eswatini completed guidelines on ESG reporting for listed companies, and Tanzania saw the first social bond issuance in sub-Saharan Africa. In total, 17 of the 26 countries covered in the Absa Africa Financial Markets Index 2022 – the sixth edition of this annual publication which tracks financial market development on the continent – now have sustainability-focused financial policies, five more than in 2021 (Figure 2).

Figure 2: Several African countries implement sustainable financial policies

Climate stress testing Incentives for issuing ESG assets Incentives for ESG market standards
Egypt
Kenya
Mauritius
South Africa
Ghana
Morocco
Namibia
Nigeria
Tanzania
Uganda
Zambia
Zimbabwe
Rwanda
Angola
Botswana
Eswatini
Malawi

Source: Absa Africa Financial Markets Index 2022

More broadly, at a global level, policy-makers are developing new tools and frameworks to build a more sustainable economy. The Network for Greening the Financial System continues to support climate stress testing and its membership has extended to 121 central banks and regulators worldwide. Sovereigns are innovating with ESG issuances, such as Uruguay’s two-way sustainability-linked bond. And many jurisdictions have implemented mandatory disclosure frameworks, linked to the Task Force on Climate-related Financial Disclosures. We will continue to track these developments across 23 major economies in our Sustainable Financial Policy Tracker, which is updated quarterly.

However, there is still work to be done. Some of the biggest challenges surround data and labelling. Indeed, the majority of surveyed central banks reserves managers (60%) and public funds (75%) mentioned data as the main barrier to further ESG adoption. As we discussed in a report earlier this year, regulators and policy-makers must work to align disclosures and reporting standards for the financial sector to overcome these information issues. In turn, this will help to foster greater transparency, clarity and trust among market participants to achieving net zero targets.

Nikhil Sanghani is Managing Director, Research at OMFIF

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