To Maximize Growth, Sovereign Wealth Funds Should Invest Through and Beyond the Disruption

Posted on 09/09/2019


Amid the dual demands of rising ESG compliance pressure and no foreseeable end in sight to the U.S.-China trade conflict, sovereign investors around the world are having to dexterously calibrate their investment practices to meet their long-term objectives. Of course there is also the ongoing melodrama that makes up Brexit, and while it is not necessarily a worldwide influencer, it adds to the growing list of complexities playing out on the global stage that sovereign investors must deal with. Then there is the transparency issue. Until now sovereign investors were low profile under the radar investors, but now their names are familiar.

To drill into his firm’s recent survey across 30 central banks from all regions globally, SWFI recently met with UBS Asset Management’s Benno Klingenberg-Timm, Managing Director, Head of Global Sovereign Markets APAC, in Singapore.

Klingenberg-Timm sees sovereign investors addressing the climate change issue as an urgent matter and one that has been gaining huge traction in just a few years. “Clearly climate change is one thing that we’ve really seen coming up that wasn’t there a couple years back, even as recently as two years ago,” he says.

However the lack of a clear definite global benchmark on ESG investing may be holding some more constrained investors like central banks back. “They need sufficient data, clear guidance, clear rules, and they may need a broadened mandate too,” Klingenberg-Timm adds.

Across Asia, major asset owners are adapting to become ESG complaint, moves that should encourage sovereign investors to engage and invest. The financial regulators in both Hong Kong and Singapore are embracing ESG and sustainability practices too and both are rolling out initiatives. This year’s Singapore Fintech Festival, the world’s largest financial technology event, has as one of its core themes sustainability and climate finance. While in Hong Kong, the Hong Kong Monetary Authority is very publicly endorsing a move towards sustainability.

Klingenberg-Timm believes some sovereign investors will become increasingly concerned about the impact of climate change on their assets and are ready to take action. Sovereign wealth funds (SWFs) in particular are closely monitoring the mega trends that are going to shape tomorrow’s landscape, businesses, and as such financial markets. And that includes everything that has to do with climate, climate awareness, climate risks, and also urbanization.

“I think some will be worrying, how is this going to impact my assets that I’m already holding and how can we protect ourselves from whatever impact climate risk is going to have,” he says. What about green bonds? “Sovereign wealth funds won’t buy green bonds, usually. This would be a central bank investment, and more likely a pension fund investment,” Klingenberg-Timm says. “SWFs will go straight for the equity piece, for the direct piece that they can actually hold, often together with other sovereign wealth funds or like-minded long-term investors,” he adds.

Klingenberg-Timm however is encouraging the SWFs to step back from a too narrow perspective towards benchmarks and take a more rounded look at how they allocate their assets. He recommends them to look at it holistically, and take in the potential growth that is being offered, to play through the disruption that could well likely happen, including climate risk. Emerging markets, and particularly those in Asia, are also seen as the most attractive regions in which to lock into the convergence of mega trends around climate and urbanization themes. Against the backdrop of the growing trend of populism, a coming issue or long-term threat for many SWFs is likely to be the demand for more transparency and or political sensitivity when acquiring assets.

Klingenberg-Timm is concerned that we might see an increase in regulation from some countries against particular rival states, or sovereign investors from countries where relations are challenged being kept out. According to Klingenberg-Timm in the past, before SWFs really became center stage and well-known investors, there was rarely a stop sign anywhere for them.

But even quite generally, regardless of the region, as the SWFs become more recognized the trend is definitely towards more disclosure, more transparency. As a result, UBS Asset Management observes that sovereign wealth funds are increasingly publishing reports on their investments and providing updates on performance.