Globally over US$ 30 trillion of assets are managed with reference to Environmental, Social and Governance (ESG) principles. This represents over 50% growth since 2014 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, the Institute of International Finance and Morgan Stanley 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. The essay by Sonja Gibbs from the Institute of International Finance presents a framework for understanding the sustainable finance ecosystem. While giving an overview of the different initiatives at each level of the ‘Sustainable Finance Pyramid’, the essay also makes evident the need for international alignment, from data to disclosure, in order to drive investment.