Doha, February 2022
A Game Changer? Sovereign Wealth Funds to Shake up the Race to Net-Zero with Their Billions
The investment decisions of Sovereign Wealth Funds (SWFs) are of vital importance in determining the pace of the ongoing energy transition and mitigating climate change, reports the Al-Attiyah Foundation in its latest Energy Report titled The Role of Sovereign Wealth Funds in Energy.
SWFs are large institutional investors with a fiduciary responsibility to their respective governments. The top 100 SWFs have total assets estimated at US$ 9,404bn. Of this, the top 10 account for 72% and the top 20 for 90%. 11 out of the top 20 are funded primarily by natural resource earnings, namely oil and gas in every case except that of Russia which also includes some hard minerals.
SWFs have specific features that make them important players in the progression of the global energy sector. Firstly, they are long-term institutional investors whose investment styles and capital allocation are important in achieving the UN Sustainable Development Goals (UN SDGs) and the Paris Climate Agreement target of limiting global warming to below 2°C.
Secondly, their investment strategies and investment horizons are important drivers in fulfilling the financing requirements and filling the large gaps across the energy and utilities sectors between actual levels and what is required to meet the goals of reducing emissions and energy poverty. And thirdly, their investment decisions as “large pockets of capital” have an important effect on setting a global precedent across capital markets, which at times is enhanced by their co-investment strategies with other global institutional investors that share similar regulatory and energy roles.
Despite the potential to affect positive change, Caisse des Depots (CDC) is the only SWF to have established an official strategy for reducing exposure to fossil fuel, the report found. In 2015 CDC joined the United Nation’s Portfolio Decarbonization Coalition (PDC), a group which aims to support greenhouse gas emissions cuts by “mobilizing a critical mass of institutional investors committed to gradually decarbonising their portfolios.”
And in 2019, the CDC renewed its sustainability policy to incorporate the UN SDGs. Among other parts of the policy, the CDC pledged to “increase the allocation to projects that support the transition to a low-carbon economy, with 20 million EUROS financed between 2018 and 2020 and new targets being developed in conjunction with the new EU Sustainable Finance taxonomy.”
Aside from CDC, other SWFs have started to take more prominent positions in the energy transition. The “One Planet Sovereign Wealth Funds Initiative” was founded in 2017 by the Abu Dhabi Investment Authority (ADIA), Public Investment Fund (PIF), Qatar Investment Authority (QIA), Kuwait Investment Authority (KIA), Norges Bank Investment Management (NBIM) and New Zealand Superannuation Fund (NZDF). It currently includes 19 sovereign funds around the world working to incorporate sustainable investing and hedge against climate change risks.
The six founding members said in a statement that by using the Framework created for the initiative “SWFs can reinforce their long-term value creation, improve their risk-return profile, and increase long-term portfolio resilience by factoring and integrating climate issues into their decision-making.”
Almost all global SWFs recognise that climate change is a risk and opportunity for their investment portfolios meaning more will develop strategies like the CDC and join projects such as the “One Planet Sovereign Wealth Funds Initiative” in the coming years.
To learn more on the role Sovereign Wealth Funds will play in the transition to renewables download the paper for free by visiting the Al-Attiyah Foundation’s website at https://www.abhafoundation.org.