19. The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.
19.1. If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.
19.2. The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.
In order to achieve a positive economic impact over time, ISIF will use three key economic concepts to assess how an investment or project will positively affect economic activity: Additionality, Displacement and Deadweight. Investments which are likely to result in high economic impact are those which deliver sustainable additional economic benefits and avoid displacement and deadweight.
The economic impact side of the mandate centres on three core economic impact criteria against which investment decisions are rigorously evaluated:
Additionality refers to the additional economic benefits to Gross Value Added (GVA) and Gross Domestic Product (GDP) which are likely to arise as a result of the investment under consideration, over and above what would have taken place anyway. ISIF defines additionality in a strictly economic, rather than social or environmental, sense. Features of economic additionality at portfolio company or investment level include: GVA, employment creation and qualitative aspects such as an investment’s contribution to Ireland’s enabling infrastructure, innovation capabilities and efficiency (e.g. through sectoral consolidation). ISIF investments may seek additionality in the medium to long term and may be directly into existing business entities or newly established ones.
Displacement refers to instances whereby the additionality created from an investment is reduced or made smaller at the overall economy level due to a reduction in such benefits elsewhere in the economy. An example would be an investee company of ISIF that competes with other Irish companies, reducing the overall impact of a successful investment on GVA of the whole economy.
Deadweight refers to instances whereby the economic benefits created from an investment would have been achieved in any event in the absence of intervention. ISIF is particularly focused on avoiding financial deadweight or, in other words, avoiding investing in opportunities that would have attracted private capital regardless of ISIF’s involvement.
ISIF takes into account the three impact criteria holistically: investments must have high additionality and low displacement and deadweight. Additionality is a necessary condition. Tolerance for deadweight is minimal: ISIF seeks not to compete with other sources of private capital but rather to be complementary to market sources of capital; it also requires potential investees to do a thorough survey of commercial funding available to them, prior to any ISIF investment. Displacement is sometimes harder to assess, especially in domestic sectors with a large number of SMEs, some of which may suffer as a result of ISIF’s investment in their competitors. In practice, compliance with the displacement criteria tends to skew investments towards export-oriented sectors and new technologies for which the market opportunity is growing fast (IT, pharmaceuticals, and biotech) and away from domestic economy service and retail sectors.
The Fund regularly participates in comparative studies, including Invesco’s Global Sovereign Asset Management Study and a World Bank study on Strategic Investment Funds to ensure that it keeps abreast of best practices in SWF asset management principles.
Sustainable and Responsible Investment
ISIF has also established a Sustainable and Responsible Investment Strategy (S&RIS) which is available at: https://isif.ie/uploads/publications/SRIS-2020.pdf
ISIF’s S&RIS builds on ISIF’s longstanding commitment to be a responsible investor as stewards of public assets by protecting and enhancing both the long-term value of the Fund and the reputation of NTMA in how it delivers its mandate. The S&RIS is focused on ensuring that the whole portfolio, global and Irish, third party managers, and investee companies are considering potential ESG risks and opportunities, particularly climate, as appropriate and that it is appropriately captured as a part of ISIF’s decision-making and portfolio management in multiple ways.
The key tools which ISIF uses to integrate a sustainable and responsible investment approach to the Fund’s activities are divestment, integrated analysis, active ownership and capital allocation. These tools are used to different degrees across the Directed Portfolio and the Discretionary Portfolio.
ISIF has developed a comprehensive ESG assessment framework which focuses on identifying material ESG risks, guides due diligence, and monitors KPIs throughout the investment life cycle, within the Irish Portfolio. The framework uses guidance from both European Bank for Reconstruction and Development (EBRD) and the Sustainability Accounting Standards Board (SASB) to assist in the identification, management and mitigation of potential ESG risks, combined with a range of asset class-specific tools based on guidance provided by the UN Principles of Responsible Investment (UNPRI). Some exclusion criteria are also applied.
ISIF has developed two carbon monitoring tools, one to estimate GHG emissions across the Irish Portfolio investments, and the other to calculate carbon savings associated with its renewable and alternative energy investments.
Additionally, ISIF seeks to engage with investors and organisations that share the Fund’s ambition to deliver on ESG priorities.
UNPRI - Leading Proponent of Responsible Investment
One of ISIF’s core investment principles is “to invest in accordance with global best practice standards of corporate governance, active ownership and with the UN-sponsored Principles for Responsible Investment (PRI)”. As a founding signatory to the PRI, the ISIF will continue to be guided by these six principles.
UNPRI requires signatories to report annually on implementation of the principles – ISIF has historically scored well above the median. ISIF’s most recent public submission is linked here
ISIF is also a supporter of the Carbon Disclosure Project (now known as CDP), a global mechanism whereby investors encourage companies to disclose their greenhouse gas emissions to investors. ISIF is also a supporter of Climate Action 100+ and is an endorser of the One Planet Sovereign Wealth Funds (OPSWF) initiative. The OPSWF initiative, launched in December 2017, establishes a framework for SWFs to systematically integrate climate change into their decision-making and how they can collectively support ambitious global climate action. The OPSWF initiative and its endorsers aim to advance alignment with the Paris climate goals and support the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as a universal standard. ISIF endorsed OPSWF in 2020.
ISIF is actively involved in promoting and developing responsible investment in Ireland through a range of forums including CDP Ireland and the Sustainable Investment Forum Ireland.
ISIF also adheres to the Santiago Principles.
Fossil Fuel Divestment and other Exclusions
ISIF has an investment exclusionary strategy in respect of cluster munitions and anti-personnel mines (which are prohibited investments under the Cluster Munitions and Anti-Personnel Mines Act 2008), nuclear weapons, coal production and processing, and tobacco manufacturing.
In addition to this strategy, the Fossil Fuel Divestment Act 2018 (FFD Act) provides for the divestment by ISIF from fossil fuel undertakings (effectively, companies that derive more than 20% of their revenues from the exploration, extraction and/or refinement of fossil fuels) within a practicable timeframe.
Fossil fuels are defined under the FFD Act as meaning oil, natural gas, peat, coal or any derivative thereof intended for use in the production of energy by combustion.
In this context, ISIF has developed a list of 256 fossil fuel and high carbon companies in which it will not invest, and this list which is published on ISIF's website is actively monitored and reviewed.
See link below for more information, the exclusion list and the Act: https://isif.ie/responsible-investment
Investment Policy - Climate Change Pillar
A key part of ISIF’s Sustainability and Responsible Investment Policy is Climate. Climate was made a priority investment theme in ISIF’s 2019 investment strategy and remains one of ISIF’s impact themes in ISIF’s current investment strategy. ISIF’s Climate Strategy is to make investments that help position Ireland for the net zero carbon economy envisaged under the national Climate Action Plan 202110 and improve the resilience of the Irish economy as the global market increasingly pivots towards sustainable business practices.
ISIF published its first Climate Report in November 2021, committing to support the long-term transition to Net Zero in Ireland before 2050 by driving substantial emissions reductions within the ISIF Portfolio and increasing ISIF's climate impact by 2030. As of year-end 2020,
As of 31 December 2021, ISIF had committed over €400 million to investments in the renewable energy, climate tech and forestry spaces. ISIF announced in 2021 that it would be targeting €1 billion in climate action-related investments over the following five years.