Global Public Investor 2021, published last month by OMFIF, surveyed over 100 central banks, sovereign funds and pension funds to discover how investors’ priorities changed over the past year. Part of the survey focused on GPIs’ approaches to active ownership and incorporating environmental, social and governance strategies in their decision-making.
In contrast with 2018, investors in this year’s cohort were much more informed and specific. They revealed how they are actively looking to overcome barriers. A central bank from Europe citing ‘lack of liquidity in the secondary market’ explained that ‘We are running portfolios with short modified duration and most ESG bonds have longer maturities dates.’ It revealed that it is studying ‘the best way for further integration of ESG, like hedging the interest rate exposure.’
To establish how much strategies have changed, we first asked participants if and how they implement ESG criteria. For the first time, the majority in all three categories of GPIs stated that they implement ESG in some way. This differed widely between types of institution, with all pension funds implementing ESG criteria, compared with around two-thirds of sovereign funds and just over half of central banks.
ESG integration, exclusions and active ownership were the most popular strategies among sovereign funds and pension funds, with over a third of the former and over 70% of the latter implementing them. For central banks, sustainable investments such as green bonds are the most popular strategy, practised by over a third of institutions.
Several funds observed that implementing ESG is not seen as an intentional, mission-orientated strategy, but happens almost naturally within existing frameworks. A central bank from Europe said that ‘While we continue to work on developing a more explicitly defined ESG framework, there are already some exclusions taking place in our externally managed equity portfolio; in addition, we have some limited investments in green bonds.’
Others explained that ESG integration is related purely to returns and does not exist as a stand-alone strategy. A central bank from Africa stated that ‘We do have some ESG bonds within our portfolio. But its allocation is related to returns and not to ESG criteria.’
Implementing ESG through the choice of external managers was another popular option for GPIs. A common first step for asset owners who want to build up their capabilities in ESG is to partner with managers who can provide competence and expertise. Central banks across Asia Pacific, Europe, Africa and Latin America answered that while they do not undertake corporate engagement strategies directly, they often do so through external managers. Meanwhile, a pension fund from Europe stated that ‘ESG integration takes place directly when we invest at the asset level, as well as part of external manager due diligence.’
This is an extract from the August Sustainable Policy Institute Journal. Visit here to download your copy.