How Responsible Asset Owners affect us all
Oonagh McQuillan July 2018
The push for responsible investment and the need to diversify
Alternative assets for Large Asset owners have become an increasingly important part of the institutional investor landscape in recent years. This is largely due to newly established SWFs and an increasing tendency for large funds owners to derive their wealth from non fossil sources. This rise in alternatives can provide portfolio diversification to traditional assets such as equity and bonds, support economic development, and be used as a hedge against crises, which are aligned with the long term investment prospects of SWFs. By incorporating alternatives into their portfolios Funds can better manage external shocks and fulfill their directives more effectively.
Assets managed by SWFs globally in 2018 were up by 13% due to a recovery in oil prices and strong gains for equity markets. A growing number of countries are looking to launch funds. The Egyptian government has recently approved a draft law to establish a sovereign wealth fund with the majority of the world’s funds being launched after 2000. Some predictions are estimating that SWF assets alone could reach $15 trillion by 2020. However, more funds than ever before have come under scrutiny as there are calls for greater transparency. For long term investors the biggest challenge to contend with is climate change complicated by the fact that many Sovereign Wealth Funds are funded by oil production. As oil prices have fallen and the fixed income market such as government bonds have shown poor returns, SWFs have been forced to diversify. For example Norway’s government pension fund is allocating nearly a quarter of assets under management to private equity, real estate, gold and infrastructure.
Though the global economy is improving post financial crisis there remains colossal government debt. Some market participants are calling for the issuance of GDP Linked Bonds which act as an insurance against economic distress. Once again the issue of transparency is at the forefront of any new strategy or financial innovation. Some worry that governments could manipulate their GDP figures, though this is less likely as lower GDP rates would indicate government failure. It is argued by some industry players that now is the best time to launch such an initiative when countries are not in crisis and when governments can effectively manage risk and maintain economic stability.
There is currently a global momentum around responsible investment. This is driven by the financial community’s recognition that investing should incorporate environmental, social and governance factors to better manage risk and generate sustainable long term returns. There is much competition among investors as they seek to differentiate themselves by offering responsible investment services as a competitive advantage. Responsible investment is being encouraged as it does not require specialised products, it is fundamentally about data application and the analysis of existing approaches, such as green or social impact bonds and socially and environmentally themed funds.
This RAO Global event next year seems very timely doesn’t it?