Climate change opens up new avenues of investment for sovereign funds

Climate change offers an opportunity for long-term investors such as sovereign wealth funds (SWFs) to invest in renewable energy projects and other low-carbon technologies that can yield sustainable returns and help diversify sources of wealth for future generations, according to a new study by PwC and the International Forum of Sovereign Wealth Funds (IFSWF). The report said that "the urgency of the problem means multiple sectors are vulnerable to disruption – either from climate change itself, or from increasing efforts to limit climate change, including policy, technology and market measures, together known as 'climate transition risks'". Will Jackson-Moore, PwC’s global private equity and sovereign funds leader, and Tarek Shoukri, the company’s PE and sovereign funds director, the authors of the report, also wrote that for SWFs, "particularly those whose wealth derives from commodities, that generate returns from investments in fossil fuels and carbon-intensive industries, this situation presents a potential double (or triple) whammy.” “Consequently, some are acting to reduce the impact of a move to a low-carbon economy on their portfolios.” A survey cited in the report showed that, globally, investors are now more concerned about environmental, social and governance issues than they were three years ago. The survey also indicated that over a third of investors are now taking action compared to a quarter in 2016. Norges Bank Investment Management, which manages Norway’s $1 trillion Government Pension Fund Global, the world’s largest sovereign investment body, has said it plans to phase out oil exploration from its investment portfolio as it seeks to diversify exposure to oil and gas, the report noted. Similarly, the New Zealand Superannuation Fund aims to significantly reduce its carbon emission intensity and exposure to carbon reserves by 2020 in an effort to boost its resilience to climate change. Around 40 per cent of the of the fund’s portfolio is now “low-carbon”. “While there are financial reasons for SWFs adapting their portfolios to the results of climate change, as state-owned investors, they are also likely to come under increasing [social] pressure to divest from fossil fuels in the future,” the report said. “These pressures, particularly from young people – the future generations for which many SWFs are meant to be saving [for] – only add more urgency to the need to consider climate risk and develop tangible and effective strategies.” However, climate change is also an opportunity for long-term investors like SWFs, as they can direct their capital into renewable energy projects and other low-carbon technologies to both benefit from the anticipated returns and diversify the source of their wealth, the report said. The authors cited the success in this area of Mubadala Investment Company, Abu Dhabi's strategic investment vehicle, which manages over $225 billion (Dh825.8bn) in assets. In 2007 Mubadala established clean energy company Masdar, which develops and operates utility-scale renewable energy projects and community grid projects. Over the past decade, Masdar has helped the UAE boost solar and wind farm development both at home and abroad. Masdar has a number of solar farms in Spain, and is a major shareholder in the London Array offshore wind farm in the UK, which it also developed. "As well as managing investment risks and protecting future generations from climate change, sustainable investing can help SWFs improve the quality of life for citizens today," the report said. Sustainability is very high on the agenda of the oil-fuelled economies of the Middle East. The oil rich Gulf countries account for a third of the world’s proven oil reserves and is home to some of the biggest sovereign funds in the world. The UAE is leading the charge in the broader Middle East to enforce the low-carbon economic agenda. At emirate level, Dubai’s Clean Energy Strategy 2050 calls for lowest carbon footprint in the world with clean energy accounting for 75 per cent of its total needs by 2050. In 2016 the Dubai Electricity and Water Authority also launched a Dh100bn Green Fund, with capital contributions from a variety of investors that include the private sector, international banks and large investment companies.

Climate change opens up new avenues of investment for sovereign funds

Abu Dhabi's focus on renewables a blueprint for others to invest in similar projects