Recent initiatives suggest a growing sophistication amongst Africa’s sovereign wealth funds as they seek to conform to international governance practices and pledge to boost co-operation and co-investment across the continent and around the world.

African funds with a collective $12.6 billion asset under management have formed the African Sovereign Investors Forum (ASIF). The new club combines investors with shared goals and missions, focusing on the internationalisation of companies, the promotion of economic and social development and pledging to increase investment in Africa.

“ASIF is expected to be a game changer for the continent. This dimension of collaboration will catalyse Africa’s anticipated growth,” said Uche Orji, managing director and chief executive officer of the Nigeria Sovereign Investment Authority, NSIA, speaking at ASIF’s launch. “Co-investing by sovereign investors has capacity to unleash growth opportunities across the continent.”

The alliance doesn’t include Libya’s Investment Authority or Botswana’s Pula Fund. But it does include two fledging African funds from Ethiopia and Djibouti. Ethiopian Investment Holdings (EIH) was founded in January 2022 as a holding company under local law. Its primary mandate is to unlock the value of the government’s assets through commercial management and optimisation and ready them for privatisation as well as acting as a reliable local partner for foreign direct investment. EIH is modelled on Temasek and Khazanah.

Djibouti’s Fonds Souverain de Djibouti (FSD), set up in March 2020, is also in the club. Its multidimensional mandate is focused on investing locally, regionally and internationally to catalyse sustainable and inclusive economic growth for the diversification of Djibouti’s economy, the creation of jobs and building reserves for future generations. Strengthening corporate governance is a key enabler to successfully partnering with domestic and foreign private sector participants and ultimately achieving its mission.

In other developments the Gabonese fund, FGIS, founded in 2012, recently make a formal commitment to net zero. FGIS manages around $ 1.7 billion of which 78 per cent is invested in the domestic economy.

Record breaking year

Africa’s ascendancy into the world of SWFs marks a record-breaking year for investment by SWF’s.  According to a June report from the International Forum of Sovereign Wealth Funds, IFSWF, the global network of sovereign wealth funds from over 40 countries, three key themes dominate investments over the last year.

2021 broke records for the number of direct investments made by sovereign wealth funds, jumping from 316 in 2020 to 429 in 2021, a 50 per cent increase year-on-year, and a 60 per cent increase in the average number of deals in any of the previous five years. The value of those deals also climbed in 2021, reaching $71.6 billion, up from $67.8 billion in 2020. In 2021, sovereign wealth funds not only invested in digital technologies but also put more capital into hard assets.

Sovereign wealth funds have been increasing allocations to unlisted assets for the best part of a decade. But now, rather than distinguishing between listed and unlisted assets, sovereign wealth funds seek to generate real durable value by backing less mature companies instead of recycling existing wealth and boosting returns by occasionally making contrarian bets in times of market dislocation.

The report also highlighted the link investors are finding between real assets and real returns. Infrastructure assets play an important role in diversifying sovereign wealth fund portfolios. COVID-19 has had a range of effects on infrastructure. For some sub-sectors, such as passenger-linked transport assets, 2020 and 2021 were difficult years. For others, such as digital infrastructure and renewables, they were standout. Sovereign wealth funds have backed these trends, which will benefit from the energy transition and rising demand for digital services.

“The COVID-19 pandemic fundamentally changed the global economy and the investment environment. Our data reveals that sovereign wealth funds have been foresighted and looking to generate robust long-term returns by taking advantage of the effects that the pandemic has had on a range of secular megatrends,” said Duncan Bonfield, IFSWF chief executive.

 

Last June, Norway’s NOK 786 billion ($78 billion) Kommunal Landspensjonskasse (KLP), the fund for local government employees and healthcare workers, excluded 18 companies from its passive equity portfolio due to their links with Israeli settlements in the occupied West Bank. A few months later, Kiran Aziz, KLP’s new head of responsible investment took the helm, stepping into a contentious ESG debate that captures the divide between US and European shareholders over Israel and Palestine.

While KLP was pulling out of investments in the West Bank, a swathe of US pension funds ratcheted up a different campaign. When Unilever-owned Ben and Jerry’s ice cream also decided to pull out of Palestine citing the same human rights concerns as  KLP, pension funds including Arizona, Florida, New Jersey and New York called on companies to continue operating in occupied Palestinian territories – or get added to their own blacklists

Bubble

“The financial industry is often in its own bubble, disconnected from reality on the ground. I have seen for myself what human rights violations are – and also how climate change is affecting people,” insists Aziz’s, a qualified lawyer  who joined KLP with skills honed to argue and build a case following nine years at the International Commission for Jurists, the NGO that defends human rights and the rule of law. A board member of the Norwegian Refugee Council, a role that takes her to refugee camps to meet people forced to flee, she is resolute that investors have a responsibility to protect human rights.

And the legal profession has taught her about the need to stand firm and persist. “You need to have the courage to raise your voice, even if the company doesn’t engage. Many companies don’t want investors to interfere or tell them what to do, but investment is based on trust and companies should live up to certain standards.”

Facts

Aziz particularly applies her legal expertise to reflect on the purpose of regulation. It’s an approach that helps bring clarity given the frequent grey areas in law, particularly between international and local laws and if the institutions that are meant to uphold laws are weak. “You must think why is the law there, and who is it trying to protect,” she says. “Studying law, you learn about protecting rights and seeking justice. In many ways it’s the same in responsible investment because you are looking for the facts that could lead to the wrong investment.”

In the West Bank, those facts were most recently laid out in a 2020 list compiled by the UN High Commissioner for Human Rights which named 112 corporates with operations linked to the Israeli settlements in the occupied Palestinian territory. KLP was invested in 28 of the 112, and Aziz began contacting names on the list, trying to engage in a mostly fruitless process that ended up in a decision to divest from 18. “Only two or three companies where open to dialogue. We had to ask ourselves if there was a breach in human rights and if we were contributing to it.”

Divestment marks the end of the road for KLP effecting positive change via stewardship and engagement. But it can also grab attention, helps build knowledge in society around the ethical dilemmas of corporate activity and investment and puts new issues centre stage. KLP also continues to engage in dialogue with excluded companies.

Still, KLPs lack of progress engaging with corporates in the region reflects one of the key challenges of the process: the pension provider is not mandated to engage with governments. The only indirect access it has to governments is if they are also shareholders in listed companies.  “It is difficult holding companies accountable for what governments are doing,” she says, adding: “Often their behaviour is linked, especially when governments are big shareholders in a company.” It has led her to believe that political risk will become increasingly important in investment decisions. In an important new seam to strategy she is increasingly focused on screening companies up front before they enter the index.

KLP monitors and cajoles 7000 companies across 50 countries tracking MSCI and Barclays’ equity and bond indices, of which it currently excludes over 200. “As an owner of 7000 companies globally you have quite a unique opportunity to set expectations and make sure companies have underlying economic activity that is responsible and sustainable,” she says. “We rely on publicly available information, and our expectations are levelled at boards and  management.”

KLP uses data providers to access information and get an indication of the level of risk. She is less focused on  ESG ratings but takes a keen interest in how a company is doing within its sector, using monitoring tools and working with other investors, stakeholders and civil society. “It is best to try and follow a company over time to see progress and if they are willing to make an effort and listen to shareholders expectations. We have a long-term perspective on our investments.” She is in dialogue with around 300 companies annually.

ESG is applied across the whole portfolio where strategy is focused on index portfolios offering broad market exposure and low cost, efficient asset management.  Last year KLP sold €3.6 million of investments in firms involved in activities related to coal, oils sands, gambling, alcohol and environmental damage. KLP has 21.4 per cent allocation to equities, 16.5 per cent to bonds, 30.6 per cent to bonds held to maturity, 14.2 per cent to lending, 13 per cent in property  and 4.3 per cent to other

 

In a market where the number of products with an ESG or impact label are soaring, expert impact investment consultants, Ben Thornley and Jane Bieneman, outline best practice processes for due diligence and monitoring to guide investors to more precise impact labeling and stronger impact management practices.

“A fund’s name is often one of the most important pieces of information that investors use in selecting a fund,” said SEC Chairman Gary Gensler in recent remarks about a new set of proposed rules aimed at tackling misleading or deceptive fund names.

Many asset owners are well aware of the challenges of differentiating between the growing number and variety of institutional-quality products coming to market with an “ESG” or “impact”-sounding label.

According to one estimate, there are at least 800 registered funds in the US alone, with more than $3 trillion in combined assets, that claim to be committed to achieving certain ESG or impact goals. In a 2020 survey from the GIIN, two-thirds of respondents named “impact washing” as the top impact investing challenge facing the market. Regulators are increasingly concerned about the integrity and transparency of impact-labeled products, with rules currently in development to ensure that fund managers disclose their approach to ESG or impact and are able to back up their claims.

The question raised by each of these developments is how to determine which funds are authentic in their impact commitments, and which are most likely to achieve their social or environmental goals.

Asset owners with a track record of making impact investments are actively building dedicated teams and tools to answer this question. The Tideline team has worked with a number of these pioneering allocators, helping to establish industry best practices that other investors can learn from in their own journeys as impact investors.

We have found that impact funds typically undergo standard financial diligence and, in parallel, a two-fold process to: (1) determine the appropriate sustainability classification and whether the “impact” label is being properly applied; and (2) assess the robustness of a manager’s impact claims and practices.

This article explores these two processes in more detail to offer the investment community a guide for more precise impact labeling and stronger impact management practices.

What is an impact fund?

While there is no singular approach to identifying an authentic “impact investment,” it is helpful to anchor the definition in the three “pillars” of impact investing: intention, contribution, and measurement.

An “impact investment” is generally accepted as having a high degree of:

• Intentionality – Explicitly targeting social or environmental outcomes alongside financial returns, such as the UN Sustainability Development Goals (SDGs);
• Contribution – Playing a differentiated role to enhance the achievement of the targeted social or environmental outcomes; and
• Measurement – Monitoring and reporting impact performance based on measurable inputs, outputs and outcomes.

This breakdown aligns well with the SEC’s proposed labeling and disclosure system in the US, with impact strategies clearly differentiated from ESG-integrated strategies and ESG-focused strategies due to their intention to achieve a specific ESG impact. Impact funds would also be expected to disclose how the fund measures progress towards the specific impact, including the KPIs used and the relationship between the intended impact and financial return.

Experienced asset owners are looking for similar levels of transparency and disclosure.

To assess intentionality, LPs are asking questions like: “Which SDGs are the focus of the fund’s impact strategy? Does the strategy target very precise social or environmental outcomes or broad-based positive results?”

To understand contribution, investors are interested in the manager’s efforts to enhance impact performance, such as by engaging directly with investees or by providing relatively scarce capital.

Impact measurement might be assessed by asking: “Which types of KPIs will be reported? Does the approach focus on ESG factors (e.g., whether a microfinance institution follows market standards related to responsible lending), or impact outputs (e.g., the number of microfinance loans issued), or outcomes (e.g., quality of life improvements resulting from having received a microfinance loan)?”

A strategy high on intention, contribution and measurement would be appropriately labeled an impact investment. We have found that these core characteristics are also useful to identify ESG and other sustainability-related products. As described in Tideline’s recent report, “Truth in Impact: A Guide to Using the Impact Investment Label”, we have been using a labeling framework with clients for several years built on the understanding that each pillar can be independently dialed up or down for a particular strategy, providing a way to differentiate among sustainable investments more broadly.

Tideline’s Framework for Impact Labeling

For example, a renewables investor may have a clear goal of mitigating climate change by reducing carbon emissions (i.e., a high level of intention), but take a somewhat passive approach to engaging with management on the topic (i.e., a low or medium degree of contribution). Using our framework, that strategy would be labeled a “thematic” rather than an “impact” investment – a very important distinction for allocators to understand.

Tideline’s labeling framework also recognizes that, when asset owners say they are looking for investments with impact, they are often seeking a broader set of “impact-focused” opportunities encompassing of certain ESG and thematic approaches, as well as more narrowly defined “impact investments”.

While LPs may be interested in the larger universe of sustainable investments, however, they still want clarity on the impact approach they are investing in, including the specific social or environmental outcomes expected and how they will be achieved. For example, the pioneering work of PGGM is a useful model of an exacting approach to impact classification. PGGM mapped its entire portfolio to the Avoid-Benefit-Contribute (ABC) Framework developed by the Impact Management Project (IMP), which distinguishes a manager’s intentions to broadly avoid harm, to benefit the full range of a company’s stakeholders generally, and/or to contribute to specific and measurable sustainability solutions.

How are impact practices assessed?

The second step to underwriting an impact fund requires a tool akin to a scorecard.

Tideline has developed many of these impact rating mechanisms and, while each differs based on an asset owner’s unique goals and processes, they often boil down to an examination of impact strategies and practices.

Impact strategy considerations might include: the link between the investment strategy and impact objectives, the evidence supporting that connection, and the alignment of impact objectives with specific targeted outcomes.

In a recent case study co-authored with Tideline, J.P. Morgan Private Bank outlined its criteria to evaluate underlying fund investments for its $150 million Global Impact Fund (GIF). To assess a manager’s “strategic intent,” one of four impact dimensions in its rating framework, GIF scores: measurability and alignment of a fund’s impact objectives with GIF’s priority impact themes (30%); robustness of the evidence base supporting the manager’s impact objectives (40%); and differentiated impact value-add (30%).

On the question of impact practices, this is where the market has achieved greatest consensus, converging on the Operating Principles for Impact Management (Impact Principles), a framework capturing best practices for managing impact throughout the investment process, such as having a consistent approach to comparing impact results across investments, aligning incentives with impact performance, and managing ESG and impact risks.

Verifications of alignment with the Impact Principles, such as those provided by Tideline’s sister company BlueMark, are helping reveal areas of strength as well as potential areas of improvement at a market level. By aggregating findings, we now have independent benchmarks to differentiate between “Leading Practices” and “Learning Practices” among different types of impact investors, which is a game changer in enhancing the market’s institutional viability.

For example, BlueMark’s research found that specialist impact-only asset managers (i.e., those only managing impact products) generally outperform diversified asset managers (i.e., those managing both impact and traditional funds) when it comes to managing for impact in the latter stages of the investment process, with stronger practices to ensure impact beyond exit and to systematically review impact performance and incorporate any lessons learned. (See BlueMark’s 2022 ‘Making the Mark’ report)

As for assessing impact performance, tools have been slower to emerge due to the difficulty of tracking and comparing impact performance across such a broad swath of potential KPIs (i.e., emissions reduced vs. jobs created). However, there is progress here also, led by organizations like the GIIN and BlueMark, the latter of which recently published its proposed ‘Key Elements of Impact Performance Reporting’ and is currently overseeing a pilot project with Impact Frontiers to verify GP alignment with these elements.

The hallmarks of a robust institutional investment market — consensus, consistency, and discipline – provide the necessary basis for benchmarking, transparency and accountability. With the benefit of an increasingly robust taxonomy for classification and the tools for assessing impact strategies, practices, and performance, asset owners will be well placed to invest for impact with confidence.

 

Ben Thornley is managing partner and Jane Bieneman is senior advisor at Tideline the specialist impact investment consultant.

Jane Bieneman will speak at the Top1000funds.com Sustainability in Practice event at Harvard University from September 13-15. The event is only open to asset owners.

Barely touched for 60 years, under State Treasurer Dale Folwell’s watch, North Carolina Retirement Systems has lowered its assumed rate of return for the principal pension fund three times since 2018. The consequences for the $114.3 billion plan’s 87 per cent funded status weighs particularly heavily on his shoulders.

“If I cared about my funded ratio, I wouldn’t lower my rate of return,” he says, speaking from the Retirement Systems’ Raleigh headquarters. “The second you lower your assumed rate of return the funding level drops. It could be 90 per cent funded, you lower the ARR, and the next morning it will be 88 per cent.”

Now at 6.5 per cent, each assumed notch lower makes the road back to being fully funded more arduous and challenging. Particularly given North Carolina is paying out more in benefits every month because of longer life expectancy and early retirement. “Lowering the assumed rate of return at the same time as funding the pension plan is really Herculean.”

The fund, he says, is stuck between a rock and a hard place. The outlook for returns ahead is increasingly bleak. And despite, like many US public pension funds, a recent spate of healthy returns bolstering the funded status,  over the long-term North Carolina’s past returns have failed to achieve their assumed rate of return, on average, for the last 20 years.

“Lowering the ARR has been recommended for over a decade but never done. Doing right is rarely wrong,” he says, coining a phrase that helped his resolve during difficult requests for more money with North Carolina’s General Assembly, councils, and cities in the form of employer contributions to make up the shortfall, alongside reduced benefits. “Every time you lower the assumed rate of return you have to ask your funders for money.”

Conserve, liberate and set free

Investment gains make up almost two thirds of the contributions going into the pension fund and although Folwell says he’s not generally one to blame or complain, he does point the finger at Fed interventions for the challenging investment environment. “In the Spring of 2020 we were all set to take advantage of fantastic investment opportunities, but then the Fed showed up and started betting against us.”

Today, he believes Fed largesse has fuelled the inflation crisis and led to too much money chasing too few assets. “They’ve put us in a situation where there is too much money on the street, and they’ve also created an employment crisis. I’m a conservative, my priority is to conserve, liberate and set free.”

The same free market beliefs inform Folwell’s frustration with the rise of shareholders intervening in corporate governance, particularly regarding climate change. Like other funds, North Carolina is in the process of reclaiming its voting powers from proxy advisors, taking back its ability to vote on corporate climate policy in accordance with the pension fund’s best economic interests.

“We don’t want our proxy to be used to promote policies that don’t have anything to do with our fiduciary responsibility; to use these assets and vote these assets in a way that is contrary to our fiduciary responsibilities is not something we are going to do anymore.” Elsewhere, he says that the rise of ESG has deflected from the importance of energy security and provided an excuse for investment managers to charge higher fees.

“We have recently learned that even the SEC is somewhat uncertain what ESG investment actually is,” he says in response to new rules being prepared by the Securities and Exchange Commission that will set standards for funds claiming to be ESG, sustainable, or low carbon.

Cash and short duration fixed income

North Carolina currently has a high allocation to cash and the shortest duration on its fixed income allocation ever, positioned to snap up assets that bring safety and value to the plan. Folwell’s strategy is to keep investments simple, prioritising “fat crayon” deals that jump off the paper, and make much of North Carolina’s sole fiduciary model. “If we decide to do something, we can act quickly.” He also says the plan benefits from not being a forced seller, able to hold onto assets to their maturity in fixed income if they fall below investment grade.

Continuity is another characteristic of the fund that Folwell believes will lend a competitive advantage in the months ahead. It’s encapsulated in North Carolina’s two CIOs (Christopher Morris and Jeff Smith) each with decade-long careers in the Department of State Treasurer, bringing a status quo and consistency to strategy that was absent in the years before Folwell took the helm when North Carolina ploughed through seven CIOs in 14 years.

Their constant presence avoids the churn of personnel and assets that often accompanies fresh blood and new ideas, he says. “A new CIO would say I don’t want this manager I want that one; my priority has always been to focus on the stability of the plan and the people who work here.”

Fees

Low returns make fee savings even more crucial. Around $17 billion in US equities is now managed internally, and over the last six years North Carolina has saved $650 million in Wall Street fees.  Some of the fund’s most successful investments have been side car allocations in distressed debt that in some instances have not had any fees or profit sharing attached, he says. “Don’t assume managers don’t want to work with you for lower fees; take advantage of the totality of your investments.” North Carolina’s private equity portfolio generated a total return of 58.5 per cent for the last fiscal year.

Folwell is adamant that having just one person in charge of the US’s ninth-biggest pension fund in a sole fiduciary model, long seen as outdated in terms of governance, is preferable to a board-supervised structure. His belief in continuity and persistence in a changing and challenging world holds firm. “We are in the cheque delivery business. At the end of the day, somebody has got to make government work.”

For years Central Bank bond buying has supressed the volatility on which hedge funds thrive. At Finnish pension fund Ilmarinen hedge funds are back in favour, particularly volatility, momentum, and macro strategies that don’t correlate to equities.  

Ilmarinen, the €60 billion Finnish pension insurer founded in 1961, is benefiting from an increased allocation to hedge funds. In recent years, Ilmarinen has grown its allocation to externally managed hedge funds from 1 per cent to around 6-7 per cent, particularly focusing on strategies that don’t correlate with listed equities including different types of volatility, momentum, and macro strategies.

“Some of these have a reasonably low or even negative correlation with equity markets,” says Mikko Mursula, chief investment officer and deputy chief executive at Ilmarinen, explaining that as the environment turns hawkish; inflation edges higher, money policy tightens and investors weigh the risk of recession, active strategies that can navigate asset class volatility appeal.

Mursula doesn’t consider hedge funds a separate asset class, arguing that the wide variety of managers and strategies make it difficult to place the allocation in a single bucket. Alongside the external allocation, Ilmarinen also runs an internally managed hedge fund allocation, although Mursula declines to disclose its size.

Selective approach

In another approach, Ilmarinen is focused on diversification and selective investment in preparation for markedly different performances ahead across countries and sectors and impacting both credit and equity markets. He is also keenly aware of the impact of a probable recession on corporate earnings and margins: investing in companies with strong balance sheets, cashflows and transparent dividends is a priority.

“In recent years, it hasn’t really mattered what sector or equities have been in your portfolio. Going forward, this won’t be the case.”

He believes analysts’ estimates that have current corporate earnings growth at between 6-8 per cent are too high given the level of inflation and its forecast impact on global growth and corporate health.

“Average US and European corporate profit margins are near historical highs. Companies are producing very high earnings numbers and if we are heading into a recession these will obviously fall. We just don’t know how much the cut will be.”

Selection at Ilmarinen will also involve steering away from companies and sectors with high levels of leverage. “As rates go higher and credit spreads widen, corporates with high levels of leverage are going to struggle more going forward,” he says. “It is crystal clear that companies, and countries, will need to pay more for their bonds and loans; there will be pressure on margins.”

Heavily indebted European countries like Italy and Greece with vast public sector debt are most vulnerable. “Reading between the lines of the recent ECB meeting, discussions about debt in Italy have already started.”

He is also wary of countries and corporates most exposed to the grain and energy crisis triggered by Russia’s invasion of Ukraine. “The negative impacts of war in Ukraine will hit Europe more than the US,” he says, attributing the 8 per cent fall in the euro versus the dollar from the start of the year (notwithstanding the interest rate differential) as a key sign of European travails.

Positively, he believes that the energy crisis will spur Europe’s transition to green energy sources away from Russian oil and gas. “In the long run I am not worried; the transition will continue and some of these projects will be launched sooner than we thought because Europe needs to get rid of its dependence on Russian oil and gas.”

Roadmaps

Ilmarinen, which targets a net zero portfolio by 2035, has created roadmaps to net zero for its listed equity and domestic real estate portfolios already. By the end of this year, it aims to have completed roadmaps for its corporate bond and foreign real estate allocations that will also include interim targets, actions, and monitoring criteria. “The single biggest challenge decarbonizing the portfolio is how best to evolve methodologies and frameworks and ensuring enough high value data about your portfolio for all asset classes. It requires more and more resources just to follow the latest evolutions.”

Once these two new roadmaps are in place, attention will turn to other sub asset classes including the whole external manager portfolio across equity, fixed income, infrastructure, and private equity.

Thirty per cent of the portfolio is  invested in fixed-income, 50 per cent in equities, 11 per cent in Real Estate and 9 per cent in other investments. Around a quarter of Ilmarinen’s pension assets are invested in Finland. In 2021, Ilmarinen’s investments returned 15.3 per cent, equivalent to €8.1 billion.

 

In his recent bestseller, Dutch journalist Rutger Bregman presents a reading of human history centered on kindness. It is the altruism of millions of people, rather than their self-interest, that has allowed humanity to survive crises and paved the way to its long-term success.

The same philosophy now applies to the financial sector. When asked, individuals consistently express the will to have their investments make a positive impact on the world. Individual investors are increasingly searching for ways to overcome climate change and the pandemic, notwithstanding a loss of trust in the institutions that govern our world. The ‘moral bankruptcy’ of our financial system thus does not reflect the values of the people whose money is invested. Rather, it is the result of financial intermediaries insufficiently reflecting the will of people.

We must therefore adopt a people-centered approach to sustainable finance that is grounded in the protection of three rights: the right of people to know how their money is spent (“right to know”), to be asked about their sustainability preferences (“right to guide”), and to not be misled by investment products and services with overstated sustainability credentials (“right to be protected”).

A people-centered approach to sustainable finance is likely to lead to a win-win scenario where the achievement of people’s rights and sustainability goals goes in hand in hand. This approach will empower people to manage their money in accordance with their values, while they seek to benefit from the value generated through sustainability-aligned investing.
Different regulatory approaches to protecting these rights have been proposed in the 2022 Financing for Sustainable Development Report, an annual report by United Nations departments and agencies on the state of sustainable finance.

Firstly, regulation can mandate increased transparency. Institutions managing funds on behalf of others currently disclose information on how their funds have been invested, yet the way they disclose sustainability-related information is largely left up to the discretion of the fund managers and is difficult to interpret for anyone.

Regulators could require fund managers to consistently disclose the environmental and social footprint of their clients’ portfolios in a meaningful format. Doing so would expose people to the relative (un)sustainability of their investments, empowering them to demand better of their managers.

Secondly, regulation can require pension funds and financial advisors to ask their beneficiaries and clients about their sustainability preferences. These preferences should subsequently be incorporated in the financial products and investment plans offered to them.

Today this happens too little, and, when it happens, the responses are not always reflected in the investment decisions by those managing their money.

Only 59 per cent of individual investors across 24 countries said their financial advisors discussed Environmental Social and Governance (ESG) investments with them. Meanwhile, 80 per cent of pension fund members in the United Kingdom wish for their pension to do some good. If more people were able to properly guide how their money is managed, trillions more would be directed towards sustainable investing.

Thirdly, investors are too often misled by or lured into sustainable investment products that are sustainable in name only. Regulation should protect people against deceptive practices. They can strengthen market integrity by establishing common norms and criteria for investment products to be labelled as sustainable. Regulators should also embrace ambitious sustainability frameworks, for instance using the Sustainable Development Goals (SDGs) as references for market norms.

However, norms can only be established if adequate information is available about investable assets. Companies should therefore disclose adequate information on their environmental and social impact to make this possible. Again, regulation is needed as it would be naïve to only rely on voluntary disclosure by corporates.

In short, by creating, or reinforcing, these three ‘rights’, policymakers have the opportunity to put people back at the center of investment decisions and in doing so increase the likelihood of achieving their sustainability goals.

Some jurisdictions are ahead. In the European Union, regulations have been updated to ensure that wealth and portfolio managers incorporate clients’ sustainability preferences in their recommendations, and thresholds have been set for the marketing of financial products as sustainable.

If a people-centered approach is pursued in more jurisdictions, humanity’s innate sense of kindness and cooperation will prevail and sustainable finance can deliver on its true potential for sustainable development.

Mathieu Verougstraete and Sander Glas work at the United Nations Department of Economic and Social Affairs.