Sovereign wealth funds have sharply increased their adoption of ESG policies, with 75% now holding one, up from 47% five years ago, while central bank adoption of ESG policies has been even more dramatic at 47%, up from 11% in 2017.
Invesco's Global Sovereign Asset Management study of 81 sovereign wealth funds and 58 central banks, collectively managing $23trn in assets, found that many sovereign and central bank investors who were previously resistant to ESG have now begun to adopt policies on the issue.
However, while 30% of sovereign wealth funds have implemented carbon targets, up from 23% last year, only 16% of central banks have formal carbon targets, with little change since last year.
Respondents to the study attributed this to the fact that central banks generally follow the targets of their governments, restricting their ability to adopt carbon targets. 83% of central banks with a carbon target said that it was aligned with their government, compared to just over half of sovereign funds.
ESG considerations have also caused changes within portfolios, with 40% of sovereign wealth funds and 15% of central banks stating that they have increased their active allocations due to ESG issues, allowing them to better weight their portfolios.
Respondents said that, despite negative screening being one of the most widely used strategies, it is also the least effective. Active voting and engagement were seen as more effective and are being widely used by sovereign wealth funds.
Impact is also becoming a key part of ESG strategy for sovereign investors, with 43% of respondents reporting that they are increasingly incorporating impact investing metrics into their portfolio.
41% of sovereign investors said that impact investing will increase as part of their overall mandate and, of the investors that have already invested in in impact strategies, three quarters of them plan to increase allocations.
Rod Ringrow, head of official institutions at Invesco, said: "Sovereign wealth funds and central banks are increasingly putting ESG at the heart of their investment strategy. While challenges remain, including concerns about data quality and greenwashing, it is clear that sovereign investors believe that they can develop strategies to overcome these issues.
"This includes greater use of active management, impact investing, measurable carbon targets and coordinated voting/engagement. As these strategies prove their worth, in particular with regards to measurable outcomes that are verifiable and can be tracked over time, they are likely to be adopted by more investors and steadily permeate across sovereign portfolios."
