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Sustainable Investing
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June 25, 2020
ESG and Trends in Reserves Management
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June 25, 2020

ESG and Trends in Reserves Management


Sustainable Investing

ESG and Trends in Reserves Management

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June 25, 2020

 
 

Globally over US$ 30 trillion of assets are managed with reference to Environmental, Social and Governance (ESG) principles. This represents over 30% growth since 20161 and is a reflection of the significant private sector demand for sustainable investments, as well as the growing public and political pressure for action on ESG. For central banks, ESG has been a focus for many years, and with the creation of the Central Bank and Supervisors Network for Greening the Financial System (NGFS) in December 2018, sustainability is becoming even more topical.

With this in mind, Morgan Stanley Investment Management and the Institute of International Finance are delighted to jointly launch a new publication on trends in reserves management. To assist central banks and reserves managers—and global investors more broadly—in understanding ESG take-up by public investors, this first edition focuses on sustainable investing in official reserves management.

The first part of this publication is the analysis of a survey of reserves managers themselves. The survey, conducted in late 2019, shows that ESG considerations are becoming increasingly important in the context of managing reserves. Although most institutions surveyed do not yet have explicit ESG strategies or goals, this looks set to change. Many reserves managers are currently considering ESG integration and show a growing interest in the use of ESG ratings and research.

Looking at wider allocation strategy, two-thirds of managers already have a proportion of their reserves in external mandates, typically in credit-, mortgage- and equities-related asset classes. At the time of the survey, respondents saw the low rates environment as the most significant future challenge – this is understandable especially as most reserves managers are restricted to highly rated, short duration assets. The scale of this challenge has only increased in light of the COVID-19 crisis, although asking the same question today would likely uncover additional pandemic-related challenges.

The analysis of the survey results is complemented by a case study of the National Bank of Belgium’s approach to ESG. This firsthand account of the integration of ESG principles by Jan De Wit, Head of Front Office at the Bank, outlines the benefits of a gradual approach, driven by diversification, the emergence of ESG products, and membership of the NGFS. The case study illustrates the questions all reserves managers now face: how to respect and reflect the push for sustainability and ESG, while maintaining their primary focus on portfolio liquidity, capital preservation and return.

The second part of the publication presents a series of essay contributions detailing the benefits of ESG integration and different tools and approaches to incorporating ESG in reserves management. This includes an essay by Jessica Alsford, Head of Global Sustainability Research at Morgan Stanley, which reviews the rapid growth in ESG products and analyses the different motivations investors have for participating in this market. Jessica makes the case that this growth is a structural trend, driven by changing investor attitudes, evolving definitions of manager fiduciary duty, and the growing evidence of the benefits of ESG integration. The essay also considers the impact of the COVID-19 crisis on ESG investment.

Navindu Katugampola, Head of Sustainable Investing for Fixed Income & Liquidity in Morgan Stanley Investment Management, provides an asset manager’s perspective on ESG integration, including discussion of different ESG strategies such as negative screening and thematic investment. The overview of Morgan Stanley Investment Management’s approach to ESG illustrates the potential role and tools of external asset managers.

Finally, we present research by the Morgan Stanley Institute for Sustainable Investing showing that, contrary to common opinion, there is no financial tradeoff in the returns of sustainable and traditional funds. The essay compares the performance of over 10,000 ESG-focused mutual and exchange-traded funds between 2004 and 2018. In addition, the research suggests sustainable funds may offer lower market risk.

 
 

1 Global Sustainable Investment Alliance 2019


 
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