As the United Nations celebrates the anniversary of the ratification of the UN Charter on October 24th each year, there is typically an increased focus on UN activities and new initiatives and programs at this time of year. The United Nations Conference on Trade and Development (UNCTAD) held the 7th World Investment Forum (WIF) during the week of October 18-22. The WIF serves as the leading forum to leverage investment policy for sustainable development. The UN Sustainable Development Goals (SDGs) inspire a continuing focus on the major challenges facing the global community of nations, including Environmental, Social, and Governance (ESG) issues. Institutional investors are in a strong position to effect change towards sustainability in the context of economic recovery from the effects of the COVID-19 global pandemic. They can do so primarily through two routes: (i) asset allocation, where they choose to invest the capital at their disposal, which can have a determinative impact on companies and markets; and (ii) active ownership, by means of their influence on the policies of the companies they invest in through corporate governance mechanisms. In particular, four groups of institutional investors play an important role in driving sustainable investment and have a strong institutional interest in so doing. Pension funds and sovereign wealth funds (SWFs) reported global assets of $52 trillion and $9.2 trillion, respectively, in 2021. Insurance companies and banks manage assets and provide financial services for their clients in the form of risk management products and loans. The investable assets of insurance companies reached $33 trillion and those of banks reached $155 trillion, based on the most recent available data. The potential influence on corporate sustainability by pension funds and sovereign wealth funds is considerable. More than 40 per cent of their assets, over $60 trillion in total, is invested in publicly listed companies across a spectrum of economic sectors and markets. Given their long-term obligations, pension funds are in a good position to assess long-term risks to their portfolios. Furthermore, the intergenerational nature of their business model tends to make them more responsive to ESG and SDG-related issues. Consequently, there has been a realization on the part of these large institutional investors that ESG factors constitute material risks. However, public pension funds could do more to promote sustainability. According to a UNCTAD report, among the world’s 50 largest public pension funds and 30 largest SWFs, only16 public pension funds and four SWFs published a responsible investment report in 2019. More fundamentally, public pension funds portfolios largely bypass developing country markets, thus limiting their contribution to sustainable development. National governments need to review the mandate of funds and ensure the provision for investment abroad in productive assets and activities.
To continue growing with appropriate effectiveness over the long term and to fully unleash its potential to finance sustainable development, the sustainable investment market needs to address three challenges: (i) the niche market risk; (ii) the geographical imbalance of investments, and (iii) deceptive “greenwashing” practices. Addressing these concerns requires three fundamental transitions in the sustainable investment market: (i) growing sustainable investment from market niche to market norm, by making sustainability integration universal rather than a strategy of a subset of the larger market; (ii) transforming the sustainable investment market from a developed country phenomenon to a global market, benefiting all countries, including developing economies; and (iii) strengthening the credibility of sustainability ratings and reporting with more robust and regulated standards and taxonomies. The transition, from the market of today to the market of the future, entails concerted efforts by all stakeholders, including institutional investors, stock exchanges and regulators. More work can be done to encourage the integration of ESG factors into mainstream products and indexes. Rules and guidelines to establish industry standards and governance requirements, with an aim to bring transparency, predictability and credibility to the market, are moving beyond voluntary measures. Slowly, regulation is helping to shape the future contours of the sustainable investment market. To help address the challenges, UNCTAD, together with partners, is launching a new initiative, the UN Sustainable Finance Observatory. This initiative is built on the vision of a future global financial ecosystem, in which sustainable development, as defined in the SDGs, is fully embedded into the business model of financial markets and in investment culture. The Observatory will promote and facilitate the transition of sustainable investment to market norm, leading to 2030 and beyond. It will address the challenges of fragmentation in standards, proliferation in benchmarking, and complexities in the disclosure and self-declaration of sustainability. It will integrate the relevant instruments and outputs on its virtual platform to facilitate the assessment, transparency and integrity of sustainable finance products and services. The Observatory will work in tandem with the standards-setting processes of the financial industry and regulatory bodies to promote the full and effective integration of sustainable development into all aspects of the global financial ecosystem.
Ken Buffin, Editor
Source: United Nations Conference on Trade and Development (UNCTAD)