The world feels to be on the brink of change, after years of shaking, tectonic movement within the corporate and investing worlds.
Business and finance are now seen, by the wider world within which they operate, to need not to just follow the logic of capital and the chase of profit, but to obey the wants and needs of society and consumers, too. Workers and consumers want companies to align with their desires, beliefs, and priorities.
Handily, multiple studies have shown that matching business practice with initiatives to benefit the world – such as implementing diversity, equity, and inclusion practices – can lead to a company performing better, rather than worse, much to the chagrin of those who oppose such world-and-workplace-bettering measures.
Increasingly, and on a global scale, the integration of Environmental, Social, and Governance (ESG) principles are seen as a cornerstone for sustainable business practices. When we look at ESG through the prism of what it means in the context of the workplace, ESG initiatives are not only reshaping organizational culture but are also pivotal in attracting and retaining talent. Workers are happier when their workplace prioritises what they believe in, and strives for positive environmental, social, and governance measures. Sovereign wealth funds (SWFs) and family offices can leverage their flexibility and strategic vision to pioneer innovative workplace transformations through ESG frameworks and set an example for other financial institutions going forwards.
It cannot be underestimated how significant ESG can be to the workplace. ESG initiatives contribute to the creation of workplaces that are not only environmentally responsible but also socially inclusive and well-governed. Firms with strong ESG practices see higher levels of employee satisfaction, lower turnover rates, and enhanced recruitment capabilities. A study by McKinsey & Company showed that companies scoring high on ESG metrics are 25% more likely to have above-average profitability and exhibit improved operational performance.
How can Sovereign Wealth Funds and Family Offices Lead in the ESG Space?
First of all, SWFs and family offices can be pivotal in investing in sustainable workplace technologies. They are able to strategically invest in sustainable technologies, and with their well-wielded capital, boost positive change in the world. The Norwegian Government Pension Fund Global invests in renewable energy projects that align with its sustainable investment mandate set by the ministry of finance. It also excludes many companies on ethical grounds. This fund is the largest of its kind in the world, and therefore sets a powerful example to funds and companies, including other SWFs. Such investments not only yield financial returns but also promote green practices within the organizations they invest in and push the dial in the promotion of ESG-directed business, which might just save us from climate catastrophe, bad governance, and societal breakdown caused by, say, natural disasters.
The fund states its mission font and centre, saying, “The purpose of the fund is to safeguard and build financial wealth for future generations. This requires sustainable economic, environmental and social development. As we own a small slice of most of the world’s largest companies, we have the ability to influence how they operate.”
The $1.6 trillion SWF says it will continue to advocate for investments based on ESG factors, despite the current backlash against ESG investing in some quarters (especially in northern American business, and from Republican commentators, talking heads, and lawmakers).
Secondly, SWFs can highlight diversity and inclusion at the companies they invest in, and in the wider investing market. By prioritizing investments in companies that excel in diversity, multi-culturalism, and inclusion, they can set industry benchmarks. A practical step could be the establishment of diversity quotas for C-suite positions within their portfolio companies, like the approach taken by the California State Teachers’ Retirement System (CalSTRS).
The CalSTRS fund states that:
“Diversity is crucial to companies’ long-term financial success. Along with our investment industry partners, our Sustainable Investment and Stewardship Strategies unit continued to influence global markets by steering and inspiring changes in corporate board and workforce diversity, equity and inclusion.”
Finally, funds can encourage good governance through leadership, and good governance begins with ethical governance. The Abu Dhabi Investment Authority, for example, integrates strict governance criteria into its investment decision-making processes, ensuring that their assets are managed in a way that promotes long-term sustainability.
Practical Activities and Best Practices
There are many ways in which SWFs and the intersecting and symbiotic worlds of finance and business can take practical steps and integrate best practices in order to make sure that their investing impacts the world as best it can, while providing value.
A SWF can make sure to do regular ESG audits and benchmarking. This means accountability and transparency where comprehensive ESG audits for internal operations and investments are conducted and published regularly. Such transparency efforts can be seen in the New Zealand Superannuation Fund’s approach to investment.
The New Zealand Superannuation Fund set the gold standard of ESG activity aligned with investment, setting a precedent in integrating responsible investment frameworks that emphasize sustainability and governance. Their investment strategy includes a significant allocation towards renewable energy, which not only contributes to environmental sustainability but also promotes job creation in new green sectors.
With the modest mission to “Maximise the Fund’s return over the long term, without undue risk, so as to reduce future New Zealanders’ tax burden”, the fund in actuality is a shining beacon for ESG-savvy investment. The fund manages $32bn, and posts record results, even as it aims to be an inspirational leader in ESG investment. The fund consistently beats its targets in reducing carbon dependence and climate-crisis-exacerbating emissions.
The fund has a dedicated sustainable investment team to make sure that the fund’s investment portfolio satisfies its sustainable finance goals. With these changes in ESG priorities, it would befit the managers of hedge funds and investing to align their strategies to ESG priorities.
To encourage a world-bettering investment outlook, an SWF (and, indeed, any investing entity) can aim to ensure that there is stakeholder engagement and sustainability training programs in the companies in which they invest. To ensure best results, all stakeholders must be at the decision-making table. This means regular engagement with employees, management, and the community. The goal is to create an inclusive atmosphere where all voices are heard and valued. If there also is implementation of training programs that focus on sustainability issues, from environmental conservation to social responsibility and corporate governance it benefits the organisation as it educates employees and empowers them to take initiative in their respective roles.
The modern work landscape is evolving rapidly, and SWFs and family offices equipped with ESG strategies are well-positioned to lead by example and enhance the competitive edge amongst their competitors in the market. By embedding ESG principles into their investment and management practices, these entities can shape and modernise the future of the workplace, creating a sustainable, inclusive, and effective model for the future generations.
Dr Ana Nacvalovaite is a Research Fellow at Research Fellow Kellogg College, Oxford. She holds an MSt in International Human Rights Law (2011), and a DPhil on Regulation of Sovereign Wealth Funds (2018), both from the University of Oxford. Ana is working on a three-year research project in Kellogg’s Centre for Mutual & Co-owned Business, researching the potential of Sovereign Wealth Funds (SWFs) and other forms of state capital to direct investments towards cooperative models, employee-owned businesses, and social enterprises, which tend to be aligned with the UN’s Sustainable Development Goals (SDGs) and objectives for achieving net zero emissions.
