When we think of governments setting trends in the investing world, many might focus in on regulations or disclosure requirements. However, a more direct—and often just as potent—way for these institutions to influence the investing community is via government-linked pension and sovereign wealth funds.
These massive pools of capital represent trillions of dollars and typically must take an extremely long view in order to help ensure adequate reserves decades down the road. This combination makes government-linked funds a powerful shareholder bloc that must be considered by corporate executives who want to maintain friendly shareholder relations.
That is partially why any new developments in the pension and sovereign wealth fund (SWF) world can reverberate across the market, and why recent trends in this area may be worth watching closely. In particular, the embrace of Environmental, Social and Governance (ESG) and responsible investing strategies by these investors could potentially shake up the market, at least if you consider the wide scale and scope of the major funds involved.
Pensions in focus
If only a few small pension funds were showing interest, investors might be able to dismiss the trend. Instead, it is some of the largest and most powerful government-linked asset managers in the world. This includes Japan’s Government Pension Investment Fund, the California Public Employees’ Retirement System (CalPERS), and leading Canadian pension funds—such as CDPQ (Québec’s public pension manager) and the Ontario Teachers’ Pension Plan-- to name a few of the more asset-rich responsible investors on the pension side.
In fact, all of the plans listed above are signatories to the UN’s Principles for Responsible Investment (PRI). This pledge recognizes the importance of ESG issues for investment portfolios and is key pillar in promoting the “acceptance and implementation of the Principles within the investment industry.”1 Given the weight behind not just the funds listed above but also the over $5.7 trillion dollars in AUM of PRI signers in the public plan space, it is easy to see why ESG investing could become more mainstream thanks to this group alone.2
Sovereign wealth funds (SWFs)
While public pension funds for government employees represent a sizable bloc, there are also sovereign wealth funds to consider. On this side, a group known as the “One Planet SWF Working Group” that includes those representing New Zealand, Qatar, Norway, Abu Dhabi, Kuwait and Saudi Arabia, are also considering more climate issues in their investment portfolios. This group is notable for a couple of reasons.
First, it represents some of the world’s largest and most powerful sovereign wealth funds, stretching across three continents. More importantly, it also is focused on countries that have largely built their funds up on the basis of natural resource extraction. It shows that even countries at the heart of the climate debate are beginning to recognize the importance of ESG and sustainable investing.
This backing by some unlikely sources is a trend that should resonate with a wide range of investors across the sustainability spectrum. It also suggests that, with such broad support across a range of government-linked funds and plans, it is hard to imagine ESG and responsible investing going away any time soon.
The lists above represent trillions of dollars of investable assets and a wide range of government styles and economic focuses. Nevertheless, the diversity of even just this subset shows just how widespread belief in a more responsible investing future is among the world’s major government-linked funds.
In a way, major funds are helping to guide—if not force—a more sustainable and ESG-focused investing world. Increased ESG pressure from major investors seems likely—especially among the vast list of PRI signatories--while it isn’t unreasonable to assume that investors in peer funds will start to question why their process isn’t also using the potential risk mitigation strategy of ESG (also read our recent article: Debunking 5 ESG Myths).
Some might think that it is premature to consider government-linked pension and sovereign wealth funds as drivers of widespread ESG adoption into the future, but this fails to consider the massive size of the players already investing with sustainability in mind. Trillions are being invested according to ESG and sustainable investing principles right now, and it is clear that responsible investing practices are being taken very seriously by some of the world’s largest public fund managers. The reality is that, even though some investors may still be skeptical of ESG and responsible investing principles, several of the world’s major public pension and sovereign wealth funds are not.
Given this trend, and the ability of pension and sovereign wealth funds to represent a sizable voting bloc, corporations and investors may want to take notice. The funds’ increased push into the sustainable area—coupled with their massive influence—could mean that the implications from responsible and ESG investing may have a far-reaching impact on the market before long.
2source: PRI Association, Non-corporate pension or superannuation or retirement or provident fund or plan https://app.powerbi.com/view?r=eyJrIjoiZjA2OTA5MWUtMzc4OC00MTZhLWIyZDYtYTc3NDMzOGE1OGFjIiwidCI6ImZiYzI1NzBkLWE5OGYtNDFmMS1hOGFkLTEyYjEzMWJkOTNlOCIsImMiOjh9
3https://blogs.cfainstitute.org/investor/2018/09/17/who-cares-about-esg-wins-asset-owners-step-up/ and https://www.ifswf.org/general-news/one-planet-swf-working-group-publish-framework-climate-change