Monthly Archives: November 2019

Sovereign Investors and ESG: Appeal and Reality

Corinne Neale, Global Head of Business Applications, BNY Mellon Data and Analytics Solutions

Environmental, Social and Governance (ESG) considerations are increasingly front-of-mind for sovereign investors – including sovereign funds, central banks and public pension funds. In fact, most we have come across already consider underlying ESG issues as part of their investment decision-making processes – at least informally.

A recent discussion at BNY Mellon’s recent Sovereign Academy, however, highlighted that widespread ESG integration continues to be hindered by the ongoing confusion that stems from the lack of common industry standards and lack of consistency in ESG data. With hundreds of vendors flooding the market offering their own take at sustainability scoring, integration has become a more confusing prospect, creating a paradox of choice.

Anecdotally, most sovereign investors are in fact keen to understand and adopt ESG analysis in their investment strategies. Given their varied mandates and often longer investment horizons, ESG and impact investing can offer a compelling opportunity to put capital to work into sustainable investment strategies and markets. Singapore’s Temasek, for instance, is among those that have already established an impact fund to invest in companies supporting everything from financial inclusion and health, to smart cities and companies tackling climate change.

Still, while sovereign institutions will have a critical role in scaling up ESG investments globally, the discussions with sovereign stakeholders in recent months have surfaced no shortage of frustrations around issues that are currently hindering adoption.

Consider, for instance, the lack of consistency in ESG scores across suppliers. There are currently more than 150 vendors providing data or sustainability rankings, which lends to discrepancies and trust issues in the underlying factor data. Some vendors may reward companies for disclosure alone, whereas others focus more closely on specific metrics reflecting a corporation’s environmental and social impact. Unlike credit rating agencies, which are largely aligned in how they assess and report credit risk, the lack of a common standard to arrive at ESG scores makes it difficult for investors to contextualize the materiality of the rankings.

Another issue relates to the scale of available opportunities. While ESG as a topic continues to surge in popularity, identifying compelling opportunities remains a challenge. The latest GIIN survey, published in June, saw nearly three quarters of respondents (74%) cite the lack of high-quality investment opportunities as either a significant or moderate challenge for those seeking ESG or impact investments. This shortage of opportunities is even more pronounced for sovereign investors with assets under management that can extend to 12 figures. Read More…

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