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Invesco Global Sovereign Asset Management Study 2020 Global
Invesco Global Sovereign Asset Management Study 2020 Global
Sovereign Asset
Management Study
2020
This study is not intended for
members of the public or retail
investors. Full audience information
is available inside the front cover.
Invesco Sovereign Asset Management Study 2020 i
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ii Welcome
Home
Welcome 02
Key metrics 04
Theme 1 08 Theme 4 40
Sovereigns look through the crisis for opportunities Central banks: testing resolve in risk assets
For sovereigns with dry powder, the market collapse in Covid-19 prompted a flight to US dollar perceived
early 2020 was an unprecedented buying opportunity. safety and liquidity, reversing a long-term gradual
Most are well positioned to allocate capital due to trend towards currency diversification and away
end-of-cycle caution and longer-term investment from the USD, due to heightened concerns over
time horizons. For some, including commodity-based political and economic risks. Despite a difficult
sovereigns, valuable lessons learned from the financial market environment, central banks continue to
crisis left them with more robust portfolios that could be committed to long-term strategic plans for
contend with government withdrawals without major diversification and greater exposure to risk assets.
allocation adjustments or forced asset sales.
Theme 2 18 Theme 5 54
A battle for talent on two fronts Rising of climate change:
commitment and opportunity
Sovereigns and central banks have recognised gaps
in capabilities where talent is scarce and heavily Once seen as a distant consideration, concerns about
competed for. For sovereigns, internalising private the immediate impact of climate change are now a
market expertise is especially tough, while central real focus for sovereigns and central banks. Investors
banks struggle with ESG (Environmental, Social and are committing to carbon reduction targets, increasing
Governance) and fund manager selection. Internal utilisation of climate modelling and investing in thematic
development and retention programmes designed opportunities, particularly in clean technology. However,
to meet the challenge have delivered mixed results; an absence of coordinated regulatory action hampers
a significant minority intend to engage additional efforts with inconsistent taxonomies, definitions and
external support. regulations seen as obstacles to greater adoption.
Theme 3 32 Appendix 66
Gold: a glimmer of hope amid market turmoil
Theme 1 Theme 2
Central bank, Latin American Central bank, EMEA Investment sovereign, North America
Invesco Sovereign Asset Management Study 2020 f
Key metrics
Time horizons
Figure A
Investment time horizons among Time horizon of investment objectives (years)
sovereign investors have continued
to extend over the past year, rising
to 9.4 years from 8.5 years in 2017 2018 2019 2020
last year’s study. This has been
driven by investment and liability
sovereigns and corresponds with Total ex central bank
rising allocations to illiquid, long- 7.4
dated assets in private markets. Time
7.8
horizons for liquidity and development
sovereigns have held steady at 3.0 8.5
years and 6.8 years respectively.
9.4
Investment
6.9
6.8
8.1
9.9
Liability
9.2
9.2
10.5
11.0
Liquidity
3.2
3.9
3.0
3.0
Development
7.7
8.1
6.8
6.8
4 Key metrics
Performance
Figure B
In contrast to the difficult conditions One-year actual returns (%)
brought about by Covid-19 in 2020,
2019 proved to be a positive year
for performance. Sovereign investors 2016 2017 2018 2019
achieved an average return of 7.6%
thanks to strong equity markets and
rising bond prices. This was almost Total ex central bank
twice the average 2018 sovereign 4.1%
return of 4% that was highlighted in
9.4%
our 2018 Study.
4.0%
Liability sovereigns performed best
7.6%
in 2019 with returns of 8.3%, thanks
in part to their greater exposure to
listed markets, which also helped Investment
investment sovereigns (returns of 2.7%
8.0%) and liquidity sovereigns (returns
10.2%
of 6.1%). With their greater emphasis
on private over listed markets, 5.8%
development sovereigns delivered
slightly more muted performance. 8.0%
Liability
5.0%
9.2%
3.4%
8.3%
Liquidity
2.8%
6.6%
2.2%
6.1%
Development
4.6%
11.8%
6.3%
5.8%
What has been your fund’s actual percentage Sample size: 2016 = 49
annualised return (at 31 December 2018) 2017 = 52, 2018 = 55
over the past one year period? (%) 2019 = 71
Fixed income
33% 33%
29% 29% 29% 30%
26%
Equity
20%
17% 17% 18%
13%
9% 9%
Illiquid alternatives
3% 3% 3% 3% 4%
2% 2%
Liquid alternatives
What is your current Sample size: 2014 = 48, 2015 = 44, 2016 = 57
asset allocation? 2017 = 62, 2018 = 63, 2019 = 53, 2020 = 78
6 Key metrics
Figure D
Alternative investment asset allocation trends (% AUM)
6.9% 7.1%
6.5% 6.4%
4.5%
3.6%
3.0%
Private equity
9.0%
8.7%
8.1%
7.7%
6.5%
4.3% 4.1%
Real estate
3.6%
3.2%
2.8% 2.7%
2.1% 2.1%
1.5%
Infrastructure
3.1%
What is your current Sample size: 2014 = 48, 2015 = 44, 2016 = 57
asset allocation? 2017 = 62, 2018 = 63, 2019 = 53, 2020 = 78
Sovereigns
look through
crisis for
opportunities
For those sovereigns with dry powder,
the market collapse in early 2020 was
an unprecedented buying opportunity.
As custodians of long-term capital, most
also benefit from the lack of an imperative
to sell to meet withdrawals.
Fixed
Income
Equity
10 Theme 1
Figure 1.3
Asset allocation by year (average %, sovereigns)
2013
7% 35% 26% 7% 3%
3% 22%
2014
9% 33% 29% 9% 3%
3% 17%
2015
9% 33% 29% 9%2%2% 18%
2016
5% 29% 33% 13% 3%
3% 17%
2017
7% 29% 29% 17%2%2% 16%
2018
4% 30% 33% 3%
17% 3% 13%
2019
5% 33% 30% 3%
18% 3% 11%
2020
4% 34% 26% 20% 4% 12%
What is the current allocation Sample size: 2013 = 33, 2014 = 48, 2015 = 44, 2016 = 57
for the following assets? 2017 = 62, 2018 = 63, 2019 = 53, 2020 = 78
the same time two years ago. Over lower prices, spring’s market rebound
the same period there had been an has done little to curtail the overall
increase in fixed income allocations, trend to lower equity allocations at
up by 4 percentage points, and illiquid the time interviews were conducted.
alternatives up by 3 percentage points As one North American liability
(Figure 1.3). sovereign explained: “We thought
equity prices looked stretched before
Despite dramatic revaluations the pandemic, given the stage of the
across numerous asset classes, that cycle, and even now they are not
caution remains. While several noted that far from all-time highs, despite
that there had been opportunities a global economic shutdown and a
to purchase quality companies at massive surge in unemployment.”
Figure 1.4
Asset allocation intentions for next 12 months (% citations, sovereigns)
Equities
0% 18% 19% 41% 22%
Fixed income
3%
3% 21% 33% 36% 7%
Cash
2%2% 14% 67% 9% 8%
Private equity
3%
3% 9% 45% 34% 9%
Infrastructure
0% 3%
3% 54% 37% 6%
Commodities
0%2%2% 7% 76% 15%
For each asset class, do you intend on increasing/maintaining/decreasing your SAA over the next 12 months? Sample size: 68
12 Theme 1
Figure 1.5 Figure 1.6
Allocation to alternative credit Preferred types of alternative credit (% citations, sovereigns)
(average %, sovereigns)
Currently invested Most attractive over next three years
4.5% Emerging
EM debt market debt
2018 study
71%
50%
5.3% High yield corporate debt
2020 study
65%
41%
6.5% Real estate
Estate debt
estate debt
Three years’ time
57%
What is your current allocation to alternative 43%
credit (as a percentage of your overall
portfolio)? What do you expect it to be
in three years’ time? Direct lending
Sample size: 38
51%
37%
Sovereigns continue to express
appetite for expanding their
Infrastructure debt
alternative fixed income allocations,
the growth of which has contributed 45%
to the rising position of fixed income
20%
within portfolios. As of the end
of 2019, alternative fixed income
ABS / Structured credit
accounted for an average of 5.3% of
portfolios. This is up from 4.5% at 35%
the end of 2017 and is set to rise
24%
further to reach 6.5% over the next
three years (Figure 1.5). Emerging
Distressed debt
markets debt currently has the
widest appeal, followed by high-yield 31%
corporate debt and real estate debt
13%
(Figure 1.6).
Bank loans
With listed asset prices having
already regained ground and the 29%
global outlook still so uncertain,
17%
sovereigns emphasised that it
was in unlisted markets such as
infrastructure and real estate Which of the following types of alternative credit are you invested in? Which do Sample size: 51
where many of the most significant you see as most attractive for future investments over the next three years?
opportunities were likely to be found.
It’s here that their size and long
investment horizons can deliver
the most significant competitive
advantage. This includes taking on
assets from other large investors
who may be forced to sell to meet
redemptions, creating opportunities
in the secondary market.
Fixed income’s traditional position as a defensive
anchor was initially tested by the crisis, with even
US Government debt caught up in a broad-based
selloff as investors rushed into cash.
39% 37%
sovereign added: “We are seeking
mature assets with stable income
and are willing to trade away some
liquidity for that.” The Covid-19
pandemic had brought many of these
qualities to the fore and several
sovereigns expressed an appetite Roads and bridges Water and waste
to look towards distressed sectors.
28% 24%
Railways Airports
17%
Ports
14 Theme 1
Valuations in infrastructure have
long been considered ‘full’ due to the Figure 1.8
supply of capital chasing relatively Priority areas for real estate investments (% citations, sovereigns)
few deals. However, sovereigns
saw the current situation as an
71%
opportunity to take advantage
of selling in sub-sectors that have
exposure to economic growth and 66%
44%
could be available at attractive
valuations for the first time in
years, e.g. airports, where operators
may be looking for an injection
of capital at very favourable terms
for investors. In less affected areas,
such as toll roads, the damage to
revenues caused by the pandemic
were seen as having only a limited Commercial Industrial Residential
impact on cash flow projections over
the entire lifespan of a project. The For real estate investments, in which area are you prioritising future allocations? Sample size: 41
immediate impact on demand for
such assets, however, was seen as
much greater, particularly given the
likely prevalence of forced sellers. Figure 1.9
Deployment times (average years, sovereigns)
A similar sense of opportunism
was evident in discussions related
to real estate (Figure 1.8), with 2016 2018 2020
sovereigns expecting significant
opportunities to emerge over
the next year in areas such as 3.5
3.2 3.2
travel and leisure. These sectors, 3.0 3.0 2.9
at the epicentre of the current 2.6
crisis, were seen as eventually 2.3
returning to their previously strong 2.0
upwards trajectory in line with the
expansion of the middle classes
in emerging economies and the
rising discretionary spending on
‘experiences’ in developed economies. Real estate Infrastructure Private equity
With average deployment times of How long do you think it will take to reach your Sample size: 47
three years across private market target weights in the following categories?
asset classes (Figure 1.9), the
ability to identify and transact
on these kinds of opportunistic Sovereigns regularly highlighted advantage of well-resourced internal
investments is far from universal. that the level of competition for teams – a topic explored in greater
Since 2018, deployment times private market assets has been depth in Theme 2 – is further
have increased within real estate increasing steadily, in line with amplified by the fact that direct
(from 2.6 to 3 years), while falling average allocations among large investment is the preferred route into
slightly in infrastructure and private institutional investors. Those funds unlisted assets, which is generally
equity. This is often attributed to that have well-established internal regarded as needing considerable
real estate’s particular sensitivity teams and can generate their own in-house expertise.
to market cycles and the challenge deal flow are likely to be in the
of finding attractive opportunities best position to act, with capacity
towards the end of the cycle, when constraints around execution being
prices are peaking. a significant drag on others. The
16 Theme 1
Theme 2
A battle for
talent on
two fronts
Sovereigns are experiencing the Central banks see their
greatest capability gaps in the widest capability gaps
areas of private assets, investment within ESG, transparency
strategy and asset allocation. and fund manager selection.
20 Theme 2
Figure 2.2
Central bank capability gaps (average rating /10, central banks)
Figure 2.3
Key people and talent challenges (% citations)
High turnover
%
80
%
70
%
60
Pr
iva
te
%
50
ne
sec
No
tor
%
40
wag
es
%
30
%
20
%
10
n i t i es
Attra
o r tu
ct ta
opp
le n
t fr
e nt
om
pm
lo
ou
ve
ts i
de
de
ng
m
ke
di
ar
o
vi
t s Pr
Fin din t
g talent in local marke
Which aspects of people and development do you find most challenging? Sample size: 92
22 Theme 2
Capability gaps reflect battle
for talent on two fronts
Referral programmes
22%
16%
Incentives
41%
49%
Which, if any, of the following policies has your organisation Sample size: 88
introduced to overcome your challenges?
24 Theme 2
Increasing the talent pool is
Figure 2.5 another avenue for improving
Adoption of diversity and inclusion plans (% citations) internal capability. About half of
respondents operate diversity
and inclusion (D&I) programmes,
No, and do not intend to consider No, but considering hoping that a more diverse and
No, but have considered Yes, already have this inclusive workplace will deliver
better performance (Figures 2.5
and 2.6). Typical of this trend, one
29% 29% 35% 36% APAC sovereign said they had spent
a considerable amount of time on
this area, as “a more diverse talent
pool will optimise the organisation
to achieve our objectives. It’s a start,
and we’re realistic about what’s
15% 14% achievable and on what timeline.
5%
5% 19% Making changes will take some time
15% but we’re committed.”
12% 7%
50% 0% It was also noted that some policies
44% 45% 45%
in this area, such as those requiring
a preference for recruiting local
nationals, could make the challenge
of finding the right talent even
harder. For example, funds may have
a mandate to hire from the local
population as part of their role in
building knowledge and expertise in
West Middle East Asia Emerging
0% local markets. However, in markets
markets where talent is in short supply these
employees are often then recruited
Do you have objectives around diversity and Sample size: 97
by the private sector or other
inclusion initiatives within your organisation? government agencies, exacerbating
the challenges related to retention.
Figure 2.6
Motivation for D&I initiatives (% citations, D&I respondents)
100% 100%
85% 89% 89%
74% 78%
67% 71%
56%
43%
22%
35%
50%
Figure 2.8
Proportion of asset class managed
15% internally (average %, sovereigns)
Equities
34%
Internalisation drives demand for 54%
talent among sovereigns
Fixed income
The internalisation of investment capability was regularly 57%
cited by sovereigns as a reason for the recruitment and 58%
retention of talented teams becoming even more crucial.
Half have invested in internal investment capability Private equity
over the past three years (Figure 2.7), with a focus on
equities, private equity and infrastructure (Figure 2.8). 28%
50%
Real estate
42%
42%
Infrastructure
16%
41%
26 Theme 2
Equities is often the second asset
Figure 2.9 class internalised (after fixed
Main benefits of internalisation (% citations, sovereigns) income) and more than 50% of
equity allocations are now managed
internally, up from 34% in our 2015
study. The reasons for this vary by
organisation, but one commonly
cited factor was the dominant role
of beta in driving returns since
58%
the global financial crisis, which is
often seen as being more efficiently
targeted via internal teams due to
31%
sample between the 2015 and 2020
studies. That said, it’s an accurate
22% reflection of the direction of travel,
with sovereigns seeing benefits in
terms of both access and deal flow
Lower management costs Manage risk from bringing these asset classes
in-house and the creation of satellite
offices in important local markets
where many deals take place. In
contrast, there has been limited
19% 17% further internalisation within fixed
income, which can be part-explained
by rising allocations to alternative
Access to opportunities Maximise economies of scale credit that are often managed via
specialist external managers.
15%
19%
7%
7% 0%
Yes No
0%
[Have internalised investments in past three years] How has Sample size: 52
your total expense ratio changed over the last three years?
Figure 2.11
Proportion of asset class internalised (% citations, sovereigns)
Equities
%
70
%
60
%
50
%
ity
Fix
40
equ
ed i
%
30
Private
ncom
%
20
%
10
e
fra te
In
st r s ta
uc
tu r a le
e Re
How has your total expense ratio changed over the last three years? Sample size: 36
What proportion of the following asset classes do you manage internally?
28 Theme 2
Increased use of external Figure 2.12
management still on the Plans for externalisation vs internalisation over
next three years (% citations, sovereigns)
agenda for many
Private equity
Over the next three years how do you expect this to change for each asset class? Sample size: 50
30 Theme 2
Invesco Sovereign Asset Management Study 2020 31
Theme 3
Gold: a glimmer
of hope amid
market turmoil
80%
central banks
increasing allocations from
existing USD assets
Ongoing market turmoil has seen 80% of central banks choosing to increase
a continuation of gold’s popularity, gold allocations are doing so from existing US$
with allocations rising as Covid-19 assets, as central banks look to diversify away
reveals an asset class that may from the dollar without sacrificing liquidity
be staking a claim for a new role and convertibility. This trend was especially
within institutional portfolios. prominent among emerging market banks.
40% sovereign
investors
Investors expect the trend towards scrambled for cash in March, gold
increasing allocations to continue was a popular source of liquidity,
in 2020 – despite high prices – as resulting in a short-lived dip in price
Covid-19 reveals an asset class yet recovering quickly to previous
that might well be staking a claim levels within just a couple of weeks.
for a new role within sovereign and Importantly, the market had remained
central bank portfolios. As investors relatively liquid (Figure 3.2).
Figure 3.2
Gold price (USD)
1,800
1,600
1,400
140 160
1,200
1,000
2015 2016 2017 2018 2019 2020
Gold Price: London Price and NY Futures (Price, Rebased) as at 31st May 2020.
34 Theme 3
Central banks: uncertain Figure 3.3
times reflect well on a Average allocation to gold (average %, central banks)
traditional reserve asset
4.8%
Average allocations to gold 4.5%
increased very slightly through 4.2% 4.2%
2019, consistent with the intention 3.5%
expressed by some managers in
last year’s survey (Figure 3.3).
Furthermore, a similar proportion
(18%) expect to continue increasing
allocations, meaning that allocations
are likely to continue rising, at least
over the longer term.
2016 2017 2018 2019 2020
80% of central banks choosing
to increase allocations are doing For the total reserves portfolio, please indicate Sample size: 36
so from existing USD assets – the % allocation across asset classes.
significantly more than those from
(negatively yielding) EUR or GBP
allocations (Figure 3.4). This is an
important point, because it highlights Figure 3.4
the dilemma faced by a number of Sources of funding for banks increasing allocation to gold
central banks: how to diversify away (% citations, central banks)
from the USD without sacrificing
liquidity and convertibility – for many,
gold has been a convenient solution.
This trend was especially prominent
among EM central banks, where
almost 90% were drawing on USD
allocations to add to gold reserves.
80%
USD
50%
GBP
50%
EUR
[Central banks increasing only] Which currency would fund this increase? Sample size: 10
5.22
for sovereigns was 4.17 (Figure
3.5). Banks are particularly attracted
by gold’s potential as a replacement
for negative yielding debt (48%),
and diversification due to its low
4.17
correlations to other central bank
assets (44%). A large and robust
market structure and high trading
volumes give confidence in ongoing
liquidity (Figures 3.6 and 3.7). Sovereigns Central banks
A high proportion of central banks To what extent do you see gold as an alternative to fixed income investments? Sample size: 48
maintain a gold allocation stored
in their own vaults, which is rarely
traded due to organisational and
political difficulties (as observed Figure 3.6
last year, gold is frequently Attractions of gold (% citations, gold investors
difficult to sell without incurring increasing allocations)
some political or public attention).
In the words of one EMEA bank:
“We maintain a stable allocation as Total Central banks Sovereigns
it is a very sensitive political issue.
If we wanted to make any changes, Replaces negative yielding debt
it would be a very political process
within the bank.” 36%
48%
0%
36 Theme 3
Figure 3.7
Drivers of confidence in gold’s liquidity (% citations, gold investors)
73% 73%
64% 61% 57% 61% 63%
55%
46% 50% 46%
37%
7% 3% 18%
While central banks often approach gold with a pre-existing Target allocation No target allocation
allocation, the starting position for sovereigns is rarely the
same. For many sovereigns, the decision to make allocations 15%
to gold often entails adding both investment capability and
potential complexity to a portfolio.
Figure 3.10
Gold trading volumes
German Bunds
Dow Jones (All Stocks)
US Corporate Bonds
UK Gilts
Euro/yen
US T-Bills
Euro/sterling
Gold
S&P (All stocks)
US 1-3Y Treasuries
20 40 60 80 100 120 140 160
Trading volumes (USD Bn average / day)
38 Theme 3
Sovereigns investing in gold have
Figure 3.11 several options, reflecting the
Mode of investment in gold (% citations, gold investors) development of the asset class.
While physical gold is still used by
some, the majority tend to make
Total Central banks Sovereigns use of more flexible approaches.
For example, futures are used by
Physical gold (domestic) 40% of sovereign gold investors,
with respondents pointing to the
48% flexibility and returns that can be
50% achieved through skilful trading.
1
https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-
flows?utm_source=google&utm_medium=cpc&utm_campaign=rwm-etf-flows-
apr-20&utm_content=434584315400&utm_term=%2Bgold%20%2Band%20
clid=EAIaIQobChMIl cSmgL6r6QIVB7DtCh0fKQGIEAAYASAAEgJllvD_BwE
Central banks:
testing resolve
in risk assets
¥ 1/3
bankers are
$ increasing
allocations
to US$
元
Reserves portfolios are diversifying Despite this, the Covid-19 crisis has prompted
across currencies. Rising US debt and a flight to US dollar perceived safety: one third
political uncertainty is driving greater of bankers intend to increase dollar reserves,
consideration by bankers of alternatives reversing a longer-term trend. Reports of the
to the US dollar, with the yen and the dollar’s demise as the world reserve currency
renminbi especially favoured. may therefore have been greatly exaggerated.
?
?
Since the inclusion of central banks in 2015, the Invesco Global Sovereign
Asset Management Study has examined two major developments:
Figure 4.1
Belief that US$’s position as world reserve currency
will weaken (% citations, central banks)
1. Currency diversification
Reserves portfolios have been undergoing a gradual process of diversification,
moving away from US dollar-dominated portfolios to invest across a great
number of currencies. This process reflects not only the changing world
economy, but also fundamental beliefs held by managers.
Allocations to the US dollar have fallen gradually but steadily: in 2016 those
allocations stood at 65% of allocated reserves, but represent only 61% of
allocated reserves in 2020. Instead, the long-term move has been towards
alternative currencies, especially the yen (traditionally a defensive haven) and
the renminbi (introduced as part of the International Monetary Fund (IMF)
basket of currencies in 2016) as well as a smattering of other currencies.
42 Theme 4
Figure 4.2
Central bank allocations (average %, central banks)2
Deposits with
central banks
Deposits with
commercial
banks
11% Government
13% agencies and
11% 16% multilaterals
Gold
12%
9% 9%
10% IMF Reserve
10%
4%
4% 10% 9% position
3%
3% 5% 5%
5% Non-traditional
3% 4%
4% 4%
4% 4%
4% 3%
3% 3% 2% 2% 3%
2% 3% 2% 2% 13% asset classes
2% 11% 11%
10% 10%
For the total reserves portfolio, please indicate the % allocation across asset classes Sample size: 2020 = 36
Figure 4.4
Expected change to US$ allocations (% citations, central banks)
Significant Significant
decrease Decrease No change Increase increase
How do you expect the allocation of these reserves to change over the next year? Sample size: 52
44 Theme 4
Figure 4.5
Foreign reserve currency allocations (% total qualifying reserves)
USD
65.4%
62.7%
61.7%
60.9%
EUR
19.1%
20.2%
20.7%
20.5%
JPY
4.0%
4.9%
5.2%
5.7%
GBP
4.3%
4.5%
4.4%
4.6%
CNY
1.1%
1.2%
1.9%
2.0%
CAD CHF
1.9% 0.2%
2.0% 0.2%
1.8% 0.1%
1.9% 0.2%
AUD Other
1.7% 2.3%
1.8% 2.4%
1.6% 2.5%
1.7% 2.6%
44% 48%
40%
2018
Figure 4.8
Obstacles to renminbi adoption (% citations, central bank renminbi investors)
Total DM EM
25% 24%
18% 16% 18%
13%
46 Theme 4
Question 2: Equities – Figure 4.9
time to invest? Attitudes to equities (% citations, central banks)
Equities has been a subject of Equities are becoming a core asset class for central banks
discussion for some time. A number
of high-profile banks have introduced
sizable allocations to the asset class
within foreign reserve portfolios, with
one high-profile bank integrating
equities as early as 2012.3
3
https://www.centralbanking.com/central-banks/
reserves/4130061/bank-of-israel-increases-level-
and-risk-of-equities-investment
Unlike the GFC, which was a crisis Equities MBS Corporate debt
emanating from within the financial
system and caused some central What new asset classes have you introduced in the last five years? Sample size: 20
banks to divest entire classes of risk
assets, Covid-19 can be framed as
an exogenous shock. There was less
evidence of central bank intent to Figure 4.12
divest of risk assets or sectors as Future intentions for equity allocations
happened in 2008. (% citations, central bank equity investors)
Figure 4.13
Belief that more central banks will consider equities
(% citations, central banks)
Total
61% 32% 7%
DM
0% 80% 20%
0%
EM
55% 36% 9%
More central banks will consider investing in equities in the future Sample size: 44
48 Theme 4
Question 3: ETFs – as Figure 4.15
liquid as meets the eye? Belief that ETFs are most attractive method of equity
implementation (% citations, central banks)
69%
Use ETFs
Do not use ETFs
32%
31% 31% 31%
25%
[If yes] In which asset classes do you use ETFs? Sample size: 16
50 Theme 4
Figure 4.18
Obstacles to ETF use (% citations, central banks)
Total DM EM
80%
75%
69%
60%
54%
[If yes] Have you encountered any obstacles to ETF use? Sample size: 13
52 Theme 4
Invesco Sovereign Asset Management Study 2020 53
Theme 5
Rising of
climate change:
commitment
and opportunity
Once seen as a distant
consideration, concerns about
the immediate impact of climate
change are prompting greater
investor focus.
West East
To what extent do you agree with the following statements? Sample size: 114
56 Theme 5
Climate considerations highlight
regional institutional challenges
Western investors feel less inclined to act, with less than half believing that
they had an obligation to consider climate change in their portfolio (Figure
5.4). This result is driven by sovereigns based in North America, where many
have key investments in high-carbon sectors and experience less stakeholder
pressure to evolve their plan to be more climate friendly.
Figure 5.4
Belief that institutional investors have an obligation to
consider climate change in their portfolio (% citations)
62%
44%
40%
36%
27%
4% 7%
7% 0% 0% 0%
4%
Total West Middle
0%East Asia
0% Emerging
0%
markets
To what extent do you agree with the following statements: Institutional Sample size: 114
investors have an obligation to consider climate change in their portfolio?
88%
33%
West Asia
75% 77%
Emerging
markets Middle East
Is your region disproportionally more at risk from the threats of climate change than the rest of the world? Sample size: 103
Not only does the sector allocation sovereign. “We will be the first to
of these investors impede action, be impacted by rising sea levels.
so too can the function of their Other neighbouring markets with
allocations, as one sovereign in large agriculture sectors will suffer
North America explained: “Inflation- from droughts.”
protected assets don’t have a natural
place in a low-carbon mandate, One notable exception is the Middle
and protections from sustainable East. While roughly three-quarters
infrastructure are not equitable.” of respondents believed their region
Many investors purchase oil, energy was at high risk from climate threats,
and commodities as insulation less than 40% felt they were obligated
against inflation, and point out to act. Investors highlighted their
that if they shift to a low-carbon concerns around climate-based risks
portfolio, they may be stripped such as changes in oil demand,
of these protections. rising temperatures and water supply
constraints. Many organisations in
These differences are linked to this region stressed that they were
how likely investors feel they are beginning to give these issues more
to experience the consequences of attention through organisational-
climate change. Asian and Emerging level commitments and membership
Market (EM) investors are twice as of international bodies, such as the
likely to believe their region faces One Planet Initiative. However, many
a disproportionate risk than their noted that they were currently playing
Western peers (Figure 5.5). “70% catch-up and that these commitments
of our country is surrounded by were taking time to feed down into
water,” said one Asian development the investment process.
58 Theme 5
Rising climate risks may Figure 5.6
equal sinking portfolio Importance of different climate change risks (average rating /5)
performance
West Middle East Asia EM
Investors are beginning to consider Transition
climate risks as important investment 3.7 3.5 3.7 3.3
risks
risks. As a result, respondents have
zoned in on the ones that pose a Depleting fossil
threat to their portfolio’s health. 3.1 3.9 3.5 4.4
fuel stocks
Among the many potential impacts
linked to climate change, the leading Energy security
worry among investors is the impact 3.2 3.8 3.9 3.9
pressure
of natural disasters – not least for
Western respondents – although Geopolitical
3.4 4.0 4.4 4.0
somewhat surprisingly, less so for issues
their EM peers (Figure 5.6).
Rise of
4.1 4.3 4.5 4.0
Respondents also worried how their natural disasters
current portfolio would fare as the
Stranded
world transitions to a low-carbon 3.6 4.1 3.7 3.7
assets
economy. As one European central
bank explained: “Our sovereign funds
have exposure to metal and mining,
integrated oil and gas, as well as 3.0 3.5 4.0 4.5
oil exploration. Some of these will
be less in demand or completely
replaced by low-carbon competitors. What are the biggest risks stemming from climate
Even though they consider ethical Sample size: 83
change? Score 1-5 where 5 = very big risk
and sustainable factors, it will be a
challenge for them to generate the
performance they did ten years ago.” Asian and emerging market investors For Western investors, transition
are particularly alarmed by rising risks are the second most prominent,
Other risks feature more prominently, trade issues that they believe will following natural disasters. As noted,
however, and vary by region: stem from climate change. These many still have large exposures
regions are reliant on a healthy to local oil and gas investments.
Middle East respondents are the level of open trade to support their Diminishing valuations of these
most concerned with stranded agriculture export sectors, which energy assets have hurt these
assets, particularly in relation to may be impacted from abnormal portfolios over the past few years.
how a move away from carbon- temperatures. One EM central bank “Here, we have an obligation to
based fuels might impact future noted: “Changes in food supplies invest in assets such as minerals,
inflows. “Our rebalancing in 2019 and resources are a big risk for coal, plastics and natural gas. Our
reflects a forecast oil price of us. The US-China trade war really stakeholders and beneficiaries
$46 a barrel,” an ME development hurt. Experiencing a similar event would not approve otherwise,” a
sovereign emphasised. “A sharp [but from climate change] like that North American liability sovereign
drop in oil prices considerably would be very problematic.” One explained. Another North American
weakens our outlook for funding.” Latin American investor noted sovereign noted: “Transition risks in
that transition to a low-carbon the labour market will also have a
economy “will come with new negative impact.”
demands, and trade agreements
with those considerations may not
be beneficial to us in the short run.”
Figure 5.7
Attempt to capture carbon footprint of portfolio (% citations)
21% 30% 7%
7% 14% 9%
50% 55%
54%
38%
24%
46%
41% 43%
36%
32%
Do you attempt to capture the carbon footprint of your portfolio? Sample size: 110
The West has been more prominent in using this method, partly
because several leading consultants have built climate models
for their clients in this region. As one North American liquidity
sovereign noted: “We’ve leaned heavily on external partners to
shape our climate change policy. These models give us a sense
of where our portfolio stands today, where we’d ideally like to be,
and how we get there in a reasonable time.”
60 Theme 5
Direct investing
Figure 5.8
Focus of targeted climate change investments (% citations) An active minority of climate-
conscious investors, known to
consider environmental impacts
Total Central banks Sovereigns on investing before the rise of
ESG, are investing in thematic
Equities opportunities, particularly in clean
technology. For the small number
39% (38 respondents) who actively
25% own climate-friendly assets, most
preferred real assets (Figure 5.8).
46% “It’s the easiest asset class to funnel
your sustainability objective through.
Fixed income There’s more room for greenwashing
in the others,” said one North
24%
American sovereign investor.
25%
Their goal with these investments is
23%
to find new winners in the transition
Real assets to a low-carbon economy. One
European development sovereign
74% fund explained: “We’ve invested in
renewable energy for the past ten
83%
years. Across various sectors such as
69% energy and transport, we aim to get
a commercial return while reducing
Private equity the country’s carbon footprint.”
Another objective is purchasing
32%
companies with a high carbon
0% footprint and restructuring their
operations to be more sustainable.
46%
Central banks
Yes No
Central banks are addressing this.
A recent call to action from former
Governor of the Bank of England 40% 33% 44% 50%
Mark Carney and current ECB
President Christine Lagarde flagged
this as a major issue. Additionally,
the launch of the Network for 67%
60% 56%
Greening the Financial System has
created a body to synchronise action 50%
in the central banking community.
Launched in late 2017, membership
is gradually increasing and is highest
in emerging markets and Asia
(Figure 5.10). West Middle East Asia Emerging
markets
Are you a part of the Network for Greening the Financial Network? Sample size: 40
62 Theme 5
As one central bank in Latin America explained: “We really are
not at liberty to even discuss this issue. [Climate change] must
be examined first by those that oversee our bank’s guidelines.
There is a lot of debate over whether we can effectively mitigate
climate change risks, but we don’t have that ability right now.”
Figure 5.11
Central bank attitudes towards climate change (% citations, central banks)
Many central banks are rushing the process for properly dealing with climate change
31% 29% 40%
A central bank's balance sheet has direct responsibility for mitigating climate change
22% 43% 35%
To what extent do you agree with the following statements? Sample size: 56
Those that can address the issue can tilt the playing field
by creating a regulatory framework that advantages
certain ‘green’ instruments, such as allowing for
additional purchasing of green bonds. “We see an
opportunity with green bonds, but current restrictions
around investment options stop us from considering
these assets,” noted one EM central bank.
64 Theme 5
Conclusion
Central banks and sovereigns are continuing to build
climate concerns into their investment decisions while
developing capabilities to detect, mitigate and capitalise
on climate risks. These trends are likely to continue,
but broader buy-in will come from guidance from policy
makers and top institutional investors. Further leadership
will also be needed from leading innovators in the
investment community. Those who have focused on
climate challenges for several years will need to ramp up
their commitment. Their vocal support coupled with new
creative solutions to fighting climate change can compel
other investors to look at climate risks more closely.
66 Appendix
Figure 6.2 Figure 6.3
Sovereign investor sample, by region Sovereign investor sample,
by assets under management
68 Appendix
Development sovereigns Central banks
Development sovereigns are only partial portfolio Central banks have a range of domestic roles in their
investors. Their principle objective is to promote economy – banking to government, issuance of currency,
domestic economic growth rather than achieve an setting of short term interest rates, managing money
optimal risk/return portfolio trade-off. This is pursued supply, and oversight of the banking system. Central
by investing in strategic stakes in companies that make banks also have a range of external facing roles, including
a significant contribution to the local economy to managing foreign exchange rate policy and operations,
promote expansion and growth in employment. They including payments for imports / receipts for exports
pursue portfolio strategies with their other assets that and government overseas borrowings. Central banks
are usually influenced by the size and characteristics hold substantial reserves to support those functions
of their strategic stakes. and ensure they are seen as credible. Those reserves
have traditionally been invested with a priority on
capital preservation and liquidity.
Figure 6.5
Sovereign profile segmentation
70 Important information
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