Monday, August 17, 2020

Sustainability Meaning Making In Global Finance: OMFIF Survey on Sustainable Investment (Chapter 9 of the OMFIF Report; Global Public Investor 2020)

As has become something of a commonplace, the general consensus among those who manage the narrative of the global economy (such as "it" is and to the extent that one can describe "it" in the singular) that the pandemic can serve as an accelerator of a trend they have been nudging along to more deeply embed ESG (environmental, social, and governance) in their operations (at least in the way they identify and incorporate cost and value in their operations). 

Again, one must understand this movement as initially focused on narrative.  Narrative building, in turn, consists of two broad approaches.  

The first involves meaning making through stories and understandings of right and wrong (social, economic, and political morals), that are consistently delivered and curated by the vanguard cohort of meaning makers vested (by virtue of their position, authority, or power) with legitimacy.  Storytelling through norm making has now been deeply embedded into the culture of international organizations and within the operations of the largest transnational economic and civil society organs (in the West--Marxist Leninist meaning making takes a different route)).  

The second involves meaning making through institutional and operative reorganizations. These changes, at least in their initial stages take on a set of uniform forms. They include the development of policy (from the top down; from the bottom up, etc.--it differences in the end except to the extent that either complies with the procedural expectations of a particular culture). They also include the development of forms of "response" built into (mostly) narrative or qualitative institutional measures meant to highlight (or signal) the greater centering of emerging values into the operational equations that constitute the way that values are applied (and factors added to core analytics) of the process of producing value. In less abstract English--it produces the tendency toward the construction of "National Action Plans," of reporting and compliance (risk mitigating) measures; of systems of internal surveillance--in short of variations of human rights due diligence systems that by their operation effectively inject policy (normative narrative) into patterns of institutional behavior (operational narrative).

One of the great vanguard organizations in this process is OMFIF, the Official Monetary and Financial Institutions Forum, an independent think tank for central banking, economic policy and public investment. It is an important vanguard if only because it serves as an important window on the way in which institutions that control financial markets that power global production chains are reshaping the normative (values) universe within which they and their clients operate. See OMFIF's Report, Global Public Investor 2020.

Chapter 9 of that Global Public Investor 2020 Report, Sustainable Investment, presents the findings and analysis of two surveys.  It is used to support the idea that conclusion that "GPIs have gradually incorporated environmental, social and governance factors in their portfolio management and wider activities. Most of them now have specific ESG investment policies in place or are in the process of developing one, according to a study of sovereign funds and public pension funds conducted by OMFIF and BNY Mellon." (Ibid., p. 3).

The two surveys that are the basis of the study are worth careful study.  The Press Release announcing the distribution of the survey results (reproduced below) notes that OMFIF GPI Survey 2020 was "conducted between March-June, and reflects the responses of 50 central banks, 11 sovereign funds and 17 pension funds with combined assets under management of $7.2tn. Five questions from the survey focus explicitly on sustainable investment issues." It also explains that the OMFIF ESG integration survey "included 25 questions on ESG investment and was conducted in association with BNY Mellon between August-November 2019. . . [reflecting] responses of 27 sovereign and pension funds with a combined AUM of $4.7tn." The surveys were anonymous and permitted opt out.

The survey results and their analysis, the process of constructing both normative and operational narrative, are bound up in the animating motivation expressed in Chapter 9 (pp 3-4).
Within the GPI community, investors are realising that adopting ESG criteria can protect portfolios from non-financial sources of risk. They are opting to integrate ESG considerations to mitigate the risk of reputational damage, and to better align their values and investments. The expectation of superior risk-adjusted returns was a predominant motivation for ESG criteria integration among GPIs, according to the OMFIF-BNY Mellon survey. Generally, GPIs are aware that ESG factors can present underlying investment risk. For example, non-sustainable investments might become ‘stranded’ or lose value over time, or a company’s operations could become compromised if subject to a climate-related disaster. Survey respondents also cited the need to align investment strategies with organisational values or minimise reputational risks as a driver of ESG implementation.
Both Chapter 9 (Sustainable Investment) and the larger OMFIF report (Global Public Investor 2020) are well worth reading, if not for the "truths" of what is provided then certainly for the power of its meaning making through narrative and the techniques of social science. For those committed to the continuing transformation of the values universe applicable to economic activities, the reports provide some good news; though for those who are less patient, the slow progress in the "right" direction may be maddening slow.

Press Release follows.

Over 90% of global public investors have specific environmental, social and governance investment policies in place or are in the process of developing them, according to a new survey from BNY Mellon and OMFIF.

In supporting the post-pandemic recovery, global public investors will have a chance to build on the momentum of the sustainability agenda of recent years. They are also motivated to adopt ESG criteria by the potential for superior risk-adjusted returns.

However, they still face significant barriers in scaling up these efforts, including insufficient data and the difficulty of measuring the impact and non-financial performance of their ESG investment strategies.

The findings, also published in OMFIF’s latest Global Public Investor Report, are based on responses from two surveys conducted over the past year, the OMFIF GPI Survey 2020 and the OMFIF ESG integration survey. The first was conducted between March and June of this year, and reflects the responses of 50 central banks, 11 sovereign funds and 17 pension funds with combined assets under management of $7.2tn. The second, more in depth survey included 25 questions on ESG investment and was conducted jointly with BNY Mellon between August-November 2019. It reflects the responses of 27 sovereign and pension funds with combined assets under management of $4.72tn.

Highlights from the two surveys include:

Data, complexity and existing mandates are top ESG barriers 

  • 51% of global public investors cite insufficient data as a barrier to ESG adoption or further integration within their organisation
  • 30% of global public investors say that their existing investment mandates are incompatible with deepened sustainable investments; 38% of central banks cite this as a specific issue, illustrating the ongoing debate on how to blend central bank mandates with sustainability
  • 20% of global public investors highlight the inherent complexity of assessing sustainable assets as a constraint to their ESG activities

Appetite for ESG precision growing

  • 77% of global public investors implement ESG in their investment process
  • 27% use existing ESG benchmarks or ratings indexes, with a further 12% opting to use their own internal evaluation frameworks as investors struggle with data inconsistencies
  • 63% of sovereign and pension funds struggle to formally measure non-financial impact, yet 65% of them are keen to develop these capabilities in future

ESG methods and sustainable asset allocations

  • 42% of global public investors say they employ negative screening, the most popular method, as part of their ESG investment process
  • 76% of global public investors incorporate green bonds as their preferred sustainable asset class
  • 45% anticipate moderate to significant increases in allocation to green bonds over the next 12-24 months; only 3% see significant reductions in green bond holdings
Frances Barney, head of global risk solutions at BNY Mellon Asset Services, said: 'ESG remains high on the agenda for the majority of global public investors. As some of the world’s largest investors, their approach to sustainability has a significant influence across the global investment industry and beyond that into the wider economy and society. Conversations we are having with clients suggest that the Covid-19 pandemic has sharpened their attention on the non-financial sources of risk. The pandemic is also shifting the focus of ESG risks to concerns such as biodiversity, environmental loss, health and social issues.'

'Accessing and analysing complex data from multiple sources continues to be a barrier to investors in further integrating their ESG strategies. Technology is the solution – with technologies being developed that enable investors to measure the non-financial performance of investments and help perform investment manager due diligence and inform conversations with stakeholders.'

'Our survey suggests that strong interest from global public investors in green bonds will continue, highlighting the need to solve current bottlenecks in the market. The solution is most likely to come via advanced technology-based ecosystems to deal with information asymmetry and trust issues, thereby helping investors and issuers make informed ‘green’ investment choices, and efficiently raise capital for credible green projects.'

Danae Kyriakopoulou, chief economist and director of research at OMFIF, said: 'The pandemic has exposed the vulnerability of financial systems to non-financial global risks. Sustainability will be a key guiding theme as policy moves from ‘life support’ to ‘designing the recovery’. With assets of $39.5tn, global public investors have an active role to play in ensuring the recovery is sustainable. But as this report illustrates, they still face barriers related to data, measurement and resources to scale up their sustainable investment practices.'

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