08.03.2020

Public Investors Implement ESG Investment Policies

Over 90% of global public investors have specific ESG (environment, social and governance) investment policies in place or are in the process of developing them, according to a new survey from BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF).

In supporting the post-pandemic recovery, global public investors will have a chance to build on the momentum of the sustainability agenda of recent years. They are also motivated to adopt ESG criteria by the potential for superior risk-adjusted returns.

However, they still face significant barriers in scaling up these efforts, including insufficient data and the difficulty of measuring the impact and non-financial performance of their ESG investment strategies.

The findings, also published in OMFIF’s latest Global Public Investor Report, are based on responses from two surveys conducted over the past year, the OMFIF GPI Survey 2020 and the OMFIF ESG integration survey. The first was conducted between March and June of this year, and reflects the responses of 50 central banks, 11 sovereign funds and 17 pension funds with combined assets under management of $7.2tn. The second, more in depth survey included 25 questions on ESG investment and was conducted jointly with BNY Mellon between August-November 2019. It reflects the responses of 27 sovereign and pension funds with a combined asset under management of $4.72tn.

Highlights from the two surveys include:

Data, complexity and existing mandates are top ESG barriers

  • 51% of global public investors cite insufficient data as a barrier to ESG adoption or further integration within their organisation
  • 30% of global public investors say that their existing investment mandates are incompatible with deepened sustainable investments; 38% of central banks cite this as a specific issue, illustrating the ongoing debate on how to blend central bank mandates with sustainability
  • 20% of global public investors highlight the inherent complexity of assessing sustainable assets as a constraint to their ESG activities

Appetite for ESG precision growing

  • 77% of global public investors implement ESG in their investment process
  • 27% use existing ESG benchmarks or ratings indexes, with a further 12% opting to use their own internal evaluation frameworks as investors struggle with data inconsistencies
  • 63% of sovereign and pension funds struggle to formally measure non-financial impact, yet 65% of them are keen to develop these capabilities in future ESG methods and sustainable asset allocations

ESG methods and sustainable asset allocations

  • 42% of global public investors say they employ negative screening, the most popular method, as part of their ESG investment process
  • 76% of global public investors incorporate green bonds as their preferred sustainable asset class
  • 45% anticipate moderate to significant increases in allocation to green bonds over the next 12-24 months; only 3% see significant reductions in green bond holdings

Frances Barney, Head of Global Risk Solutions at BNY Mellon Asset Services, said: “ESG remains high on the agenda for the majority of global public investors. As some of the world’s largest investors, their approach to sustainability has a significant influence across the global investment industry and beyond that into the wider economy and society. Conversations we are having with clients suggest that the Covid-19 pandemic has sharpened their attention on the non-financial sources of risk. The pandemic is also shifting the focus of ESG risks to concerns such as biodiversity, environmental loss, health and social issues.

“Accessing and analysing complex data from multiple sources continues to be a barrier to investors in further integrating their ESG strategies. Technology is the solution – with technologies being developed that enable investors to measure the non-financial performance of investments and help perform investment manager due diligence and inform conversations with stakeholders.

“Our survey suggests that strong interest from global public investors in green bonds will continue, highlighting the need to solve current bottlenecks in the market. The solution is most likely to come via advanced technology-based ecosystems to deal with information asymmetry and trust issues, thereby helping investors and issuers make informed ‘green’ investment choices, and efficiently raise capital for credible green projects.”

Danae Kyriakopoulou, Chief Economist and Director of Research at OMFIF, said: “The pandemic has exposed the vulnerability of financial systems to non-financial global risks. Sustainability will be a key guiding theme as policy moves from ‘life support’ to ‘designing the recovery’. With assets of $39.5tn, global public investors have an active role to play in ensuring the recovery is sustainable. But as this report illustrates, they still face barriers related to data, measurement and resources to scale up their sustainable investment practices.”

Source: BNY Mellon

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