ESG has quickly gathered momentum among the largest government investment entities around the world, with 75% of sovereign wealth funds (SWFs) and 47% of central banks now adopting a formal ESG policy, Invesco has found.
This is up from 46% and 11%, respectively, five years ago, according to the latest Invesco Global Sovereign Asset Management Study.
The pandemic has led to greater integration overall, according to the findings of this 10th annual survey, which this year included 139 chief investment officers, heads of asset classes and senior portfolio strategists at 81 SWFs and 58 central banks; together they manage $23trn in assets.
Given that three-quarters of SWFs now incorporate ESG, many that had previously been resistant have come on board.
In particular, ESG considerations have driven 40% of SWFs to increase their active allocations, with the invasion of Ukraine highlighting the limitations of implementing ESG via passive strategies, found the report.
Further, the study found development sovereigns are leading the way in the spread of impact investing, with a focus on using impact strategies to fund the transition towards low-carbon energy.
Meanwhile, nearly half (44%) of central banks said Covid-19 had increased their focus on ESG, “shining a spotlight on the environmental impact of human activity and the role of inequality and labour standards on health outcomes,” said the report.
More convincing needed
However, more than half of central banks have no organisation-wide ESG policy in place.
In many cases, the study showed that individual investment teams or portfolio managers often take the ESG initiative, on an ad-hoc basis.
Being slow to respond to change or the lack of a formal EGS policy are relatively common drivers for this.
The study also found a correlation between central banks without ESG policies and countries that have been slower to adopt policies on issues such as climate change.
The lack of clear regulatory standards and data quality also leads to issues in quantifying the impact of ESG strategies. Further, the study said, they are regarded as fuelling concerns around greenwashing, creating reputational risk when implementing and reporting on ESG.
Yet while challenges remain, both SWFs and central banks are increasingly putting ESG at the heart of their investment strategy.
These investors believe they can develop strategies to overcome concerns about data quality and greenwashing, according to the study.
Greater use of active management, impact investing, measurable carbon targets and coordinated voting/engagement can create performance as well as measurable outcomes that are verifiable.