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Can advanced GCC investors lead the way in ESG investment?

Can advanced GCC investors lead the way in ESG investment?

The world is transforming at an unprecedented rate, and to an unparalleled extent. Institutional investors need to address evolving global systemic trends, such as climate change, within both their own organisations and their portfolios. The necessity of a coordinated approach in order to mitigate risks, and to meet an increasing demand for robust environmental, social

The world is transforming at an unprecedented rate, and to an unparalleled extent. Institutional investors need to address evolving global systemic trends, such as climate change, within both their own organisations and their portfolios. The necessity of a coordinated approach in order to mitigate risks, and to meet an increasing demand for robust environmental, social and governance standards, has never been more evident.

The ongoing Covid-19 pandemic serves as a reminder of the critical importance of understanding complex and interconnected systemic risks and having processes in place to adequately address them.

The investment community is experiencing a period of great risk and great opportunity, which is why Mercer’s report in partnership with the World Economic Forum: Transformational Investment Practices of Advanced Investors, details the systemic trends that matter most to investors as well as the risks and opportunities associated with them.

Greenwashing not an issue in Middle East ESG investment scene

Recent research from Quilter revealed investments not being what they claim to be was identified by 44 percent of investors as being their biggest worry when it came to ESG investing

These trends are climate change, low and negative real long-term interest rates, technological evolution, demographic shifts, geopolitics, and water security.

To mitigate the major risks posed by these systemic trends, institutional investors need to scrutinise, adapt and protect their portfolios, as well as capture opportunities to pursue attractive risk-adjusted returns. Yet, our research shows that many institutional investors have made limited progress in effectively addressing most of these systemic trends.

However, there are signs of change, particularly on a regional level. Take climate change, it is inspiring to see that four out of the six founding members of the One Planet Sovereign Wealth Fund (SWF) Working Group are from the GCC; namely Abu Dhabi Investment Authority, Kuwait Investment Authority, Qatar Investment Authority and Saudi Arabic’s Public Investment Fund.

Moreover, within the Middle East and Africa, more than 100 asset owners and investment managers are signatories of the United Nations Principles for Responsible Investment (UNPRI). However, these investors now need to continue to embed the ESG factors in their investment analysis and decision-making processes, and report their progress towards implementing these principles.

Many asset owners are not aware of how they compare to peers with respect to integrating ESG considerations into their investment decisions

Advanced asset owners have put in the effort required to integrate the need to address global systemic trends into their strategic decision-making processes, adapting their vision, governance and implementation practices. From a top-down perspective, senior leaders at advanced asset owners have generally evolved their investment and governance policies to successfully integrate key systemic trends.

Bottom-up, advanced asset owners have investment teams that understand the systemic trends and possess the appropriate guidance, incentives and resources to identify and invest into relevant opportunities. The GCC asset owners have high aspirations in this respect and it is encouraging to see that many of them seek professional assistance to align with best practice. Some developing investors only need a responsible investing policy for the time being.

Some advanced investors have already embedded the systemic trends in their tools, processes and templates, practice positive and negative screening and/or have allocated capital to trend-linked investment solutions, such as energy transition funds, water funds and robotics to name a few.

Many asset owners are not aware of how they compare to peers with respect to integrating environmental, social and governance (ESG) considerations into their investment decisions. The lack of consistent reporting standards and benchmarks, and publicly available information results in entities being unable to assess their practices relative to industry-leading approaches.

However, our research shows that when advanced asset owners do not find investment products in the market that address these trends, they innovate and explore new investment approaches.

Our economy, society and planet are facing many long-term systemic risks, and institutional investors must respond to these challenges

Advanced asset owners commit to engaging with investee companies and to sharing with the broader community so that the industry evolves and business practices improve.

Having systematic plans in place to address these complex trends will enable investors to position themselves to capture opportunities as well as mitigate major risks. Accurate self-assessment and peer collaboration are crucial components of the journey.

Our economy, society and planet are facing many long-term systemic risks, and institutional investors must respond to these challenges while, remaining agile and taking a long-term view to plan for the unexpected. Rather than wait for these trends to become emergencies, investors who begin to tackle them now can mitigate the risks they pose to their portfolios and explore ways to capture opportunities that deliver long-term returns.

Additionally, for both their beneficiaries and portfolios – adopting these investment practices should in turn, help build a more resilient economy, which considers the future needs of the environment and society in tandem.

Tarek Lotfy, Mercer CEO, UAE | IMETA
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