How climate-focused are sovereign funds?

(REUTERS) – Risks don’t come much longer term than climate change, so you might expect sovereign wealth funds (SWFs) to be all over it, as investment giants with decades in their sights.

Yet the world’s biggest SWFs are making only patchy progress in adapting investment plans to account for environmental, social and governance factors, according to data on energy investments, an environmental, social and corporate governance (ESG) analysis of the equity holdings of some of the funds, plus a survey of the players.

Such data provides snapshots of the complex and often opaque world of sovereign funds, which collectively hold nearly US$8 trillion (S$10.8 trillion) in assets.

The industry has invested US$7.2 billion in renewable energy since 2015, for example, less than a third of the amount poured into oil and gas, data from the International Forum of SWFs (IFSWF) showed.

The Antipodean funds, which publicly disclose their investments, scored highly in the ESG analysis of major corporate holdings. New Zealand also said it planned to cut the emissions intensity of its overall portfolio by 40 per cent by 2025, referring to a measure of emissions proportional to revenue.

Middle Eastern funds face a tougher task to decarbonise their portfolios, given their economies’ longstanding reliance on fossil fuels. They did not disclose climate targets, although most are planning to beef up their ESG focus.

Hong Kong Monetary Authority’s fund and Singapore’s GIC prefer to try to drive change from within, while the Antipodean and Norwegian funds are more prepared to twin that approach with excluding stocks.

Any failure or lag in future-proofing portfolios could threaten the long-term performance of SWFs, established to safeguard wealth for generations to come and to buttress state revenues, according to many investment specialists.

And given that the funds are some of the world’s biggest investors, their ESG positions can affect how quickly corporations put their businesses on a more sustainable footing, the experts say.

“Sovereign wealth funds are the long-term investment capital of the world, so how they respond to climate change and ESG is the purest case study of how a long-term asset allocator should and does think about these issues, or doesn’t,” said Mr Aniket Shah, Jefferies’ global head of ESG and sustainability research.

Oil and gas deals

There is broad acknowledgement of the need to change.

Several funds, including those from Abu Dhabi, New Zealand, Norway, Kuwait, Qatar and Saudi Arabia, have signed up to the One Planet Initiative, a drive to integrate climate risks into the management of large pools of capital.

More than 30 funds are also members of the Santiago Principles, a voluntary set of goals aimed at promoting good governance, accountability, transparency and prudence.

Yet progress has been halting for these investment behemoths, which play a role in setting the pace of the global shift away from carbon.

The SWF industry has spent more on oil and gas deals than renewable energy in almost every year since 2015, including this year so far. The exception was 2016. In terms of the number of deals over those years, there was a more even split between the two sectors.

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Annual investments in renewables are rising, though, while Mr Enrico Soddu, IFSWF’s head of data and analytics, said some oil and gas investments were to help in the transition away from carbon and included pipelines, which could be adapted to carry hydrogen in future.

That said, renewable energy has accounted for less than a quarter of SWFs’ overall number of infrastructure investment deals over the past decade, lagging behind the 29 per cent of public pension funds, according to Preqin data.

Australia shines

Comparing funds’ progress on ESG can be difficult, because they vary in history, geography and size. Many invest in areas such as infrastructure, real estate and private equity, where progress can be trickier to gauge, while some are more open than others about their holdings.

A snapshot of the top 25 equities of those funds that publicly disclose their holdings – Australia, New Zealand and Norway – showed Australia’s US$166 billion Future Fund had the highest-scoring portfolio, according to ESG scores calculated using data from three of the top raters: MSCI, Sustainalytics and Refinitiv.

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It was followed by New Zealand’s US$41 billion NZ Super Fund and Norway’s US$1.3 trillion Norges Bank Investment Management, the world’s largest fund.

“The New Zealand and Australia funds are more ahead than anybody else in terms of integration of climate risk but also ESG in general,” said Mr Massimiliano Castelli, UBS’ head of strategy and advice, global sovereign markets.

SWFs in general have been “a little bit too late” in embracing ESG, he added.

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