Public investors are demanding holdings with a sustainability focus more than ever, with more than 90% polled in a new survey saying they either already have or are implementing policies for environmental, social and governance-related investing.
The report synthesizes two surveys that received answers from dozens of central banks, sovereign funds and public pension funds managing trillions of dollars in assets. They were conducted by the Official Monetary and Financial Institutions Forum between August 2019 and June 2020, and one was also conducted by BNY Mellon, the eighth-largest U.S. bank by assets.
The most popular strategy was to conduct negative screenings for ESG investments and exclude “sinful” sectors such as tobacco and coal, while many others integrated ESG standards throughout their portfolios or invested in green bonds.
The COVID-19 pandemic also expanded the types of nonfinancial risk the investors considered important, according to the report, adding concerns of public health, social issues and biodiversity to the previously dominant focus on climate change.
The public investors, however, also identified barriers to expanding their sustainable investing. More than 80% of pension funds and nearly two-thirds of sovereign funds said insufficient data was an obstacle to expansion, and many central banks were concerned that ESG investments would hurt their financial performance.
Improved technologies may be needed to bridge the gap between public investors’ demand and accessibility to sustainable investment, said Frances Barney, head of global risk solutions at BNY Mellon’s asset servicing division.
“The solution is most likely to come via advanced technology-based ecosystems to deal with information asymmetry and trust issues,” Barney said. That will help “investors and issuers make informed ‘green’ investment choices, and efficiently raise capital for credible green projects.”
ESG investing began in 2005 as a niche for value-driven investors but has become an increasingly mainstream practice that tends to overperform the rest of the market. They have also been sturdy throughout the pandemic and expect a 9% rise in sales in 2020, in contrast to a 29% revenue decline that will hit the fossil fuel companies in the S&P 500 Energy Index.