Investment company BNY Mellon and The Official Monetary and Financial Institutions Forum (OMFIF) have released results of surveys the organizations conducted over the past year, highlighting the adoption of ESG investment strategies among major global public investors.
The results include responses from 2 surveys, the first conducted between March and June of this year, and covering 50 central banks, 11 sovereign funds and 17 pension funds with combined assets under management of $7.2 trillion, and the second carried out between August-November 2019, covering 27 sovereign and pension funds with a combined AUM of $4.7 trillion.
The surveys found that over 90% of global public investors either have specific ESG investment policies in place, or are in the process of developing them. Despite the clear and widespread interest in sustainable investing, however, many cited barriers to ESG integration, including a lack of clear and consistent data, as well as difficulty aligning ESG investing with organizational mandates. In terms of methodology, negative screening is the most popular ESG investing strategy employed, in use by more than 40% of respondents.
Over three quarters of respondents cited green bonds as their preferred sustainable asset class, with nearly half anticipating increasing green bond allocations.
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.”
Some of the specific findings from the surveys include:
- 77% of respondents 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. 65% of these respondents are keen to develop these capabilities in future
- 51% of respondents cite insufficient data as a barrier to ESG adoption or further integration within their organisation
- 30% of respondents say that their existing investment mandates are incompatible with deepened sustainable investments; 38% of central banks cite this as a specific issue
- 20% of respondents highlight the inherent complexity of assessing sustainable assets as a constraint to their ESG activities
- 42% of respondents say they employ negative screening, the most popular method, as part of their ESG investment process
- 76% of respondents 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
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.”