The NYU Abu Dhabi (NYUAD) Transition Investment Lab (TIL) has marked its first year of activities by publishing its inaugural TIL Annual Report, which studies how sustainable investments can contribute to solving the most pressing socio-economic issues in Middle East, Africa, and Southern Asia (MEASA).
Established in April 2021, TIL is a new center hosted by NYUAD devoted to the study of sustainable finance. With the support of Mubadala Investment Company and Al Maskari Holding, TIL aims to fill the knowledge gaps preventing large-scale investment delivering the United Nations Sustainable Development Goals (SDGs). The TIL Annual Report aims to become a standard reference in the field.
The report notes that the MEASA has the world’s highest growth potential. Over the last decade, its GDP per capita has almost doubled in real terms, outpacing the growth of the rest of the world, while this century’s entire world population growth projected will originate from MEASA, yet it accounts only for 15 percent of global GDP. This asymmetry is responsible for the “MEASA underweight” observed in financial markets, as global institutional investors allocate less than four percent of their listed assets to the region, with a share shrinking to less than one percent in private markets.
Using UN rankings of the current state of meeting the SDGs, 61 of the 73 countries (83 percent) below the world mean are from MEASA. The annual investment gap to meet SDGs in 2030 is estimated at around USD two trillion, while COVID-19 has increased the investment shortfall to USD 4.2 trillion.
Speaking of the potential for increased investments in the region, Bortolotti added: “Targeted ‘transition investment’ improves the fundamentals of emerging economies, mitigates global socio-economic and environmental risks, and ultimately boosts portfolio value of assets under management, aligning the interests of beneficiaries and society at large.”
Bortolotti also noted the role that the UAE capital can play in leading the growth of transition investment. “Abu Dhabi, as a financial and logistics hub for the region, combined with its sovereign wealth fund community and with the support of ADGM and ADX as prominent financial enablers, is uniquely positioned to turn TIL aspiration into a reality.”
Overall, responsible investing rose by nearly one third between 2016 and 2020 to reach USD 35 trillion, representing 36 percent of total professionally managed assets. Mutual funds and exchange-traded funds (ETFs) that self-report as having Environmental, Social, Governance (ESG) or socially responsible investment (SRI) mandates have shown even faster growth. The assets managed by these funds have increased more than tenfold over the past five years and now stand at approximately USD 2 trillion.
Role of Sovereign Wealth Funds
Sustainable investments by global sovereign wealth funds (SWFs) were found to be limited but gaining momentum. From a total of 3,505 SWF transactions, worth more than USD 1,000 billion executed since 2000 to date, 564 deals representing USD 73.5 billion were flagged by the TIL Report as ‘sustainable (SDG) investments’.
Singaporean funds Temasek and GIC lead the ranking by sustainable investment deals with a total of 139 investments, followed by Abu Dhabi-based Mubadala with 50 deals. The Qatar Investment Authority is in the top position by value thanks to the USD 20 billion investment in sustainable railways infrastructure, followed by the two Singaporean funds with a total of USD 20 billion.
While SWFs are well positioned to contribute to achieving the SDGs, SWF sustainable investment currently represents only 16 percent of the total number of transactions, and seven percent of the total value of the SWF transactions, a phenomenon that the authors label the “SWF paradox”. However, the report shows a recent increase in activity, as total sustainable investment accelerated in 2017 and peaked in the last sample year 2020.
This growing trend includes an impressive concentration in healthcare, where deals worth USD 29 billion in sustainable investment are reported. Indeed, SWFs played a key role in the medical response to the COVID-19 pandemic, with some of them backing the discovery of the most successful vaccines, such as BioNTech-Pfizer and Moderna.