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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, May 24, 2018

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Temasek Preps for Astrea IV

A unit of Temasek Holdings is planning to launch Astrea IV, a private equity bond that will have three tranches. One of the tranches is targeted toward retail investors. In total, Astrea IV hopes to be US$ 500 million in size, with a retail tranche worth S$ 242 million.

CONSOLIDATION: FIS Group to Buy Piedmont Advisors

FIS Group agreed to buy Piedmont Investment Advisors. Post-deal, Piedmont will operate as a subsidiary of FIS Group. At the moment, FIS Group oversees roughly US$ 5.6 billion in assets, while Piedmont has approximately US$ 4.7 billion in assets under management.

REPORTS: Funds from Malaysian Central Bank Land Deal Used to Pay for 1MDB Debt Payment

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Norway SWF Votes Down Paris Climate Targets at Shell Shareholder Meeting

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Norges Bank Investment Management (NBIM), which oversees Norway Government Pension Fund Global, voted down a proposal put forward by some investors at Royal Dutch Shell’s annual general meeting calling on the company to set emissions targets in line with the Paris climate accords of 2015. The challenge was shot down by 94.5% of Shell shareholders at Tuesday’s proceedings. Its defeat was followed by a statement from the oil giant calling the resolution “unnecessary” in light of the firm’s plans revealed in November to halve its carbon footprint by 2050. Some investors believe Shell would be in a better position to set their own goals on addressing issues like climate change.

The US$ 1.1 trillion sovereign wealth fund – which is itself reliant on cash-streams from Norway’s hydrocarbon stores – announced last July it would be asking the banks in which it invests nearly a quarter of its equity assets to disclose how their lending contributes to greenhouse emissions, and is currently considering whether to drop its exposures in oil and gas companies constituting roughly 6% of its overall portfolio ahead of a parliamentary vote on the proposed policy change later this year.

The climate change motion was featured by 60 long-term institutional investors representing more than US$ 10 trillion in assets – including HSBC, BNP Paribas, Fidelity, Swedish buffer fund AP7, France’s ERAFP, and the United Kingdom’s National Employment Savings Trust (NEST) – in an open letter published during the week of May 16th by The Financial Times urging fossil fuel companies to “clarify how they see their future in a low-carbon world,” without going so far as to openly support its approval.

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PSP Investments Finished Deal on Equity Stakes in AEA and AELO in Portugal

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On May 11, 2018, ROADIS, which is owned by PSP Investments, finalized the purchase of equity interests in Portugal´s Auto Estradas do Atlantico (AEA) for 50% ownership and Auto Estradas do Litoral Oeste (AELO) for 60% ownership from MSF Group (Moniz da Maia, Serra & Fortunato, Empreiteiros) and Lena Group (known locally as Grupo Lena). This is ROADIS’ first investment into Portugal.

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