Environmental, Social, and Governance (ESG) principles

INTEGRATING ESG PRINCIPLES INTO THE INVESTMENT PORTFOLIO

Environmental, social, and governance (ESG) factors have become increasingly significant in the business and investment landscape due to recent trends such as global warming, resource scarcity, growing social inequality, and the shift towards improved corporate governance. Experience shows that ESG integration not only helps companies comply with regulations addressing these issues but can also enhance long-term financial performance.

These trends are reflected in the investment strategies of financial institutions, particularly sovereign wealth funds. As guardians of national wealth, sovereign wealth funds are committed to supporting sustainable development, ensuring healthy financial growth, and managing state assets with social responsibility.

As the State Oil Fund of the Republic of Azerbaijan, we recognize the importance of ESG principles and strive to integrate ESG into our investment portfolio as part of our mission and vision.

SOFAZ vision:

“SOFAZ is committed to its mission of safeguarding the financial assets of future generations by diligently pursuing a long-term investment strategy. By adopting a systematic approach to Environmental, Social, and Governance (ESG) factors, we aim to both mitigate risks and identify investment opportunities that align with our overarching goal. This approach, aligning with our focus on maximizing risk-adjusted returns, seeks to protect and enhance the real value of our assets, providing long-term security for the future.”

Analyzing the ESG indicators for each asset type in SOFAZ's investment portfolio, we find that as of 2023, the ESG performance for fixed income assets and the equity portfolio demonstrated lower carbon emissions compared to the benchmark. Additionally, in alignment with the UN Sustainable Development Goals, 61% of companies in the equity portfolio contributed positively to gender equality, 36% to economic development, and 35% to climate action.

In the private equity portfolio, the transparency score was 72%, significantly higher than the market average of 9%. Similarly, the real estate portfolio achieved a transparency score of 73%, compared to the sector average of 11%, indicating notably high transparency scores for both asset types.

In advancing our goals, we are planning to integrate ESG principles into our private equity and real estate investments across three key areas. Our strategy includes enhancing manager assessments by embedding ESG criteria into our scoring model, conducting thorough evaluations during the due diligence process for new investments using tailored ESG questionnaires, and implementing regular monitoring of existing investments within the SOFAZ portfolio.