Following the Paris deal on international climate change, governments are beginning to explore new financing mechanisms for investing in the growing low carbon economy. Over the next decade . Recognizing the untapped potential of SWFs, two key questions emerge: how can SWFs increase their exposure to green asset classes? And what are the constraints?
Investors and financial institutions are becoming increasingly aware of the risks associated with fossil fuel projects and are showing growing interest in green bonds and other financing tools that facilitate investment in low-carbon energy solutions.
Being patient investors, with longer term investment horizons than many others in the financial services sector, . In the November 2016 annual meeting of the International Forum of Sovereign Wealth Funds in Auckland, participants highlighted that SWFs are particularly well-positioned to become trailblazers in green investment. The majority of members are oil-based SWFs which are looking to economic diversification of their finite carbon wealth into industries and sectors that would yield broader societal, economic and financial benefits.
sovereign wealth funds
Sovereign Wealth Funds (SWFs) currently have a very limited role in climate finance and green investment – reportedly, below the average for institutional investors. According to the Asset Owners Disclosure Project (AODP), which evaluates institutional investors on the basis of their low-carbon performance, five of the 10 lowest-rated large investment funds were SWFs.
However, the more progressive SWFs are currently divesting from assets with large climate-related risks, and some countries are pondering whether their SWF should take a more pro-active role in green finance. What lies ahead for SWFs in this rapidly changing landscape?
SWFs could have an impact on climate finance
The sheer amount of capital managed by SWFs means that their impact on green finance, while marginal historically, has the potential to become significant. According to the Sovereign Wealth Fund Institute (SWFI), SWFs hold assets worth approximately $7.4 trillion, and the total capital of SWFs has more than tripled over the last decade.
But SWFs’ mandate does not typically include green finance. To the extent that they have been active in this area, it has been to reduce climate-related risk to their portfolios – including exposure to fossil fuels. For example, last October the $22.6 billion New Zealand Superannuation Fund (NZSF) announced a strategy to address climate-change risks that represent a “material” issue for long-term investors, and to “intensify its efforts” in areas including alternative energy, energy efficiency and “transformational” infrastructure. Norway’s giant Government Pension Fund Global ($873 billion) has adopted similar policies to reduce climate-related risk.
Sovereign Wealth Funds (SWFs) represent a large and growing pool of savings and an increasing number are owned by natural resource exporting countries. The funds have a variety of objectives, including intergenerational equity and macroeconomic stabilization. Traditionally they have invested abroad, increasingly in developing country assets, but always as part of a strategy to boost yields while remaining diversified. However, a recent trend sees an increasing number starting to invest in their domestic markets, including in infrastructure and other greenfield investments. Angola, Kazakhstan, Malaysia and Nigeria are examples; funds with a domestic investment mandate are also being established by Colombia, Morocco, Mozambique, Sierra Leone, Tanzania, Uganda and Zambia.
- sovereign wealth funds
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