Over half of the reserves managers surveyed have joined international networks for ESG or plan to increase their exposure to ESG assets, with many considering adopting formal ESG strategies or goals
NEW YORK/WASHINGTON, D.C. – A new survey by Morgan Stanley Investment Management and the Institute of International Finance (IIF) finds that there is growing interest in ESG assets amongst reserves managers.
Almost half of the 40 survey respondents are (or are considering becoming) either members of the growing Network for Greening the Financial System (NGFS) or supporters of the Task Force on Climate-related Financial Disclosures (TCFD). The most popular ESG strategies across respondents are negative screening of sectors with adverse sustainability impacts, followed by investment in green, social or sustainability bonds, with many expressing an intention to increase exposure in the next 24 months. Moreover, ESG is beginning to be considered as an additional dimension of the liquidity-return-capital preservation framework.
“The emerging interest in ESG by reserves managers is noteworthy and aligns with the trends we have been tracking over the last six years through the Institute’s Sustainable Signals survey series,” said Audrey Choi, Chief Sustainability Officer and CEO of the Institute for Sustainable Investing at Morgan Stanley. “Interest and adoption of sustainable investing continues to rise, driving asset managers to develop increasingly sophisticated sustainable investing solutions to meet their clients’ needs.”
Tim Adams, CEO of the IIF, stated that “This survey echoes the message we have received from our members across the financial industry: incorporating sustainability considerations will offer some of the biggest challenges – and opportunities – the financial sector has ever encountered. Reserves managers will face a host of new issues, new demands and new stakeholders.”
While ESG considerations are becoming increasingly important for reserves managers, the level of explicit commitment to ESG strategies into the reserves management framework remains low. However, this looks set to change: the primary reason for not having an explicit ESG strategy is that this has not yet been raised internally to the relevant decision-making body, with many institutions commenting that the issue was currently under consideration. “We are in the process of defining what role ESG will play in the management of our discretionary investment assets,” stated one respondent.
Respondents were also asked about their current asset allocation, use of external asset managers, and future challenges. Key additional findings were:
- Ratings thresholds guide investment decisions for more than 95% of reserves managers. Only one third of managers are able to invest in assets rated lower than A-.
- More than half of reserves managers’ allocations have an average duration of 2 years or less. While the duration in most cases doesn’t vary between asset classes, some reserve managers have a higher average duration for hold-to-maturity portfolios.
- USD remains the dominant reserves currency given the focus on liquidity and sovereign rating, followed by EUR, JPY and GBP. There is, however, positive momentum for CAD, AUD and CNH/CNY.
- Almost one third of reserves managers expect to increase the share of reserves that is managed externally. Fees are key to selecting external managers, but what tips the balance is experience and past performance.
- The low rate environment remains the most significant challenge facing reserves managers, while reserves managers are divided over the future impact and role of technology including AI and blockchain: some expect technology to drive innovation and efficiency improvements in reserves management, but others expect no immediate or significant impact.
“We expect to increase exposure to green, social, and sustainable assets. These would only be included if eligible - meaning from AAA or government-related issuers.”– Director of Reserve Management, Central Bank
“The potential to integrate ESG/Sustainable investment criteria within the external reserves has become more important, along with concentration risk.” – Head of Front Office, Central Bank
“Alongside negative rates, the integration of ESG considerations in the investment process will be one of the biggest challenges in the future.” – Head of Asset Management, Central Bank
The full report and survey findings can be viewed online here and here.
About Morgan Stanley Investment Management
This survey was conducted by Morgan Stanley Investment Management in partnership with the Institute of International Finance. Morgan Stanley Investment Management is wholly owned by Morgan Stanley. Morgan Stanley Investment Management provides investment and risk-management solutions to a wide range of investors and institutions including corporations, pension plans, intermediaries, sovereign wealth funds, central banks, endowments and foundations, governments and consultant partners worldwide. With over four decades of asset management experience, Morgan Stanley Investment Management’s investment strategies span the risk/return spectrum across geographies, investment styles and asset classes, including equity, fixed income, alternatives and private markets.
About Morgan Stanley
Morgan Stanley (NYSE: MS) is a leading global financial services firm providing investment banking, securities, wealth management and investment management services. With offices in more than 41 countries, the Firm's employees serve clients worldwide including corporations, governments, institutions and individuals. For more information about Morgan Stanley, please visit www.morganstanley.com.
About the Institute of International Finance
The Institute of International Finance is the global association of the financial industry, with more than 450 members from more than 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.