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What if 10% of Sovereign Fund Assets Went to ESG?

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The topic of environmental, social and governance (ESG) strategies is heating up (no pun intended), even gaining traction among investors who once conflicted with the idea. Pension giants like CalPERS are factoring ESG when hiring and monitoring external fund managers, especially the “E” part. CalPERS expects investment managers to go beyond being an ESG-signatory, desiring to check their actual investment processes when it relates to environmental analysis. For European institutional investors, regulation and portfolio company risks, particularly firms that have high exposure to carbon-stranded assets, are popular drivers for ESG adoption. The rapid development of national laws, supranational regulation and voluntary codes like the UNPRI promotes different interpretations of ESG. Undoubtedly, asset owners will be conflicted with the various nuances of each policy or code. Finally, how can ESG be effectively implemented into the portfolio management process?

If Norway adopted ESG standards for all its equities and we added the other ESG mandates from other SWFs, we could say roughly 7.5% of all SWF assets (from US$ 7.3 trillion) are dedicated or are influenced by ESG criteria.

10% Will Go a Long Way

Sovereign wealth funds are a unique institutional investor class. The relatively-opaque pool of US$ 7.3 trillion behaves in a myriad of ways. How can sovereign wealth funds affect the ESG landscape? As an investor group, could they impact markets, influencing listed companies to adopt ESG strategies? By taking the total assets of the sovereign wealth fund market, US$ 7.3 trillion and removing funds under US$ 10 billion, “central bank” SWFs and strategic development SWFs, SWFI comes up with US$ 5.099 trillion. By taking 10% of that amount, of which could be devoted to ESG strategies, that calculates about US$ 509.9 billion in capital. Interestingly enough, Norway’s Government Pension Fund Global (GPFG) has around US$ 530 billion in assets allocated to public stocks. If Norway adopted ESG standards for all its equities and we added the other ESG mandates from other SWFs, we could say roughly 7.5% of all SWF assets (from US$ 7.3 trillion) are dedicated or are influenced by ESG criteria.

A half trillion pool of sovereign wealth assets in listed markets, devoted to ESG, could significantly affect change on company management behavior. This asset amount and board impact would be amplified if European and U.S. pensions were included in the mix.

Headwinds

Major headwinds remain in the world of ESG. Currently, there are a plethora of service providers, standards and codes. Asset owners could simply “green wash” and mark compliance. In addition, pensions and SWFs have stated mandates and goals – financial returns are paramount, especially for pensioners and citizens (for SWFs). However, one can strongly argue that by not taking ESG concerns, those financial returns could diminish in the future from an event such as an oil spill, depleted forest or consumers revolting over a product (sweatshop practices), thus impacting company revenue. And last, the 800-pound gorilla in the room – the advent of cheap oil & natural gas; however, this pertains mostly toward energy infrastructure investing.

In the end, public institutional investors and policymakers rely on each other’s movements to stimulate action to drive ESG forward.

SWFI First Read, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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Japanese Government Capital Provides Initial Life for Texas Bullet Train

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Dallas-based Texas Central Partners, LLC is the developer of a proposed high-speed rail system, dubbed the Texas Bullet Train, between Dallas and Houston. Project costs are estimated between US$ 12 billion to US$ 15 billion. The developer secured US$ 300 million in project loans from Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development (JOIN) and the Japan Bank for International Cooperation (JBIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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DOJ Investing Tesla Over Musk Comments

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The U.S. Department of Justice (DOJ) is conducting a fraud investigation over Tesla as its CEO Elon Musk made public statements on twitter. This is a criminal probe. In addition, earlier, SWFI reported the U.S. Securities and Exchange Commission (SEC) is conducting a civil inquiry into Elon Musk regarding his statements.

This all surrounds Musk tweeting in August that he was thinking of taking Tesla private and had “funding secured” for the transaction. Both government authorities are seeing if Musk misled investors and violated federal securities laws with his public statements.

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