Stockholm (NordSIP) – The sustainability practices and concerns of sovereign investors are revealed in a new study published by US asset management firm Invesco. The 12th annual Invesco Global Sovereign Asset Management Study is based on a survey of 140 Chief Investment Officers, asset class heads, and senior portfolio strategists at 83 sovereign wealth funds (SWFs) and 57 central banks (CBs) jointly responsible for $22 trillion worth of assets.
The overall picture is one of cautious optimism, with most of the SWFs and CBs under scrutiny having experienced a positive rebound in 2023 after a general difficult 2022 in terms of performance. The majority of the peer group retains a positive economic outlook for the coming 18 months with little chance of a recession. However, much of the growth expectation rests on the United States, with European markets considered a somewhat weaker opportunity set.
Short and long-term risks to economic growth are dominated by geopolitical tensions and the resulting and protectionism. The short-term concerns expressed in the survey also include high inflation and the tightening of monetary policies, as well as the ongoing war in Ukraine. The impacts of climate change are a core risk highlighted by the SWFs and CBs for the coming decade. The report focuses on the peer group’s approach to the low-carbon transition and other environmental, social, and governance (ESG) investing matters as one of five key themes.
ESG sophistication on the rise
The proportion of CBs with an ESG policy in place has grown from 11% in 2017 to 78% in 2024. SWFs have a more established record of incorporating ESG principles within their investment strategies. However, the proportion with ESG policies in place has fallen from 79% to 69% over the past 12 months. The report’s authors do not consider this to be a sign of a diminished commitment to sustainability, but rather the result of some SWFs revisiting their policies as they deepen their understanding of ESG principles. This leads to the application of stricter definitions and sustainability criteria that require a sharper and more sophisticated approach to the drafting of ESG policies.
The four top ESG-related challenges identified by the peer group are interlinked, with greenwashing leading the pack with 84% of respondents citing it as a significant or moderate concern. The quality of ESG data and ratings and difficulty of accurately measuring impact run in second and third place, followed closely by the lack of regulatory standards. The burden of resolving or mitigating these issues rests with the SWFs’ and CBs’ external asset managers. 81% of respondents have therefore adapted their manger selection and monitoring processes to include robust ESG-related due diligence criteria.
Climate change is no longer an ancillary concern for sovereign investors, with 70% of respondents regarding climate impact and transition risks as material factors for financial performance. The management of physical climate risk remains a weaker point. Most SWFs evaluate the exposure to physical climate risks of discrete investment opportunities in real assets, but more than a third of sovereign investors do not have an overall risk management policy in this area. While some regard physical risk as already priced in by the market, many respondents pointed to the lack of reliable data and methodologies for the effective incorporation of physical risk within investment processes.
Engagement preferred to divestment
The sovereign investors surveyed in the Invesco report take a pragmatic approach to the low-carbon transition. The overriding view is that fossil fuels will remain a core part of the energy mix for the foreseeable future. This translates into a majority of SWFs and CBs enacting a policy of engagement with investee fossil fuel companies while growing their allocation to renewables and cleantech. Only 29% of respondents that have implemented a transition strategy are divesting from the fossil sector, while 11% are hedging against the risks of stranded assets.
Conversely, the low-carbon transition is seen as a solid long-term investment opportunity for these sovereign investors, which also aligns with their public standing and stated societal objectives. 57% of respondents invest in the renewables and cleantech, with many citing it as a priority allocation segment. Only 17% of respondents have significant investments in carbon removal technologies, with a significant 32% stating that they have no plans to consider the sector for investment. The reluctance to invest in carbon capture technologies is grounded in concerns over their scalability and cost effectiveness.
