Arab pension funds begin integrating ESG and SDGs into investment decisions

Pension funds in Arab countries have started integrating environmental, social, governance (ESG) and sustainable development issues into their investment decisions, according to a report by the Arab Monetary Fund (AMF) and UN Development Programme.

However, more progress needs to be made if pension funds are to achieve their potential to support the attainment of the sustainable development goals, the AMF and UNDP said on Tuesday.

The SDGs were adopted by the UN in 2015 as a universal call to action to end poverty, tackle climate change and ensure that all people enjoy peace and prosperity by 2030.

“Despite important progress by some funds, if Arab pension funds are to fully play their part in achieving the SDGs while delivering their core mission to members, there is a need to move beyond the current initial focus on ESG issues and towards a stronger alignment with ESG across a breadth of investment decisions,” said Khalida Bouzar, director of the UNDP regional bureau for Arab states.

Assets managed by the world’s sovereign wealth funds and public pension funds reached a record high of $31.9 trillion in 2021, boosted by a rally in the US stock market and rising oil prices, said a report last month by industry tracker Global SWF. Assets managed by public pension funds climbed 8.7 per cent to $21.4tn, the annual report showed.

Meanwhile, investments by sovereign wealth funds in the ESG space surged to $22.7 billion at the end of last year, from $7.2bn in 2020, according to Finbold.com and data from Global SWF.

While many Arab pension funds have taken important steps to align their investments with ESG principles, others are only at the start of the journey, the report said.

Most funds surveyed cited familiarity with ESG factors and SDGs, while fewer funds had advanced towards deeper levels of ESG alignment.

The report recommended a number of steps that can be taken by governments and regulators, pension funds, global and regional organisations and pension fund advisers to deepen the integration of ESG factors in investment decisions and link them more closely to SDGs in the Arab region.

These include the adoption of internationally recognised reporting standards, development of internal capacities to enhance impact management systems and improving transparency and disclosure.

“Given rising interests from policymakers, [the] Arab pension funds industry will see more development of ESG/sustainable labels in the coming future to channel investments into assets with high ESG value,” said Abdulrahman Al Hamidy, director general chairman of the AMF board.