Most sovereign wealth funds are failing to address the risks posed by climate change at a time when other big institutional investors are ramping up investment strategies to combat global warming.
A report by the International Forum of Sovereign Wealth Funds found only eight SWFs from a group of 34 have more than 10 per cent of their portfolios invested in climate-related strategies.
The piecemeal response to climate change by SWFs, which control $8.6tn in assets, raises questions over whether the state-backed vehicles are neglecting their fiduciary duty to protect the wealth invested on behalf of future generations.
The world’s largest SWFs include Norges Bank Investment Management, China Investment Corporation, the Public Investment Fund of Saudi Arabia, Abu Dhabi Investment Authority and Kuwait Investment Authority.
The analysis by the trade association, the first of its kind, also found that seven SWFs have not aligned any of their investments with climate change objectives. Five SWFs declined to disclose their allocations and a further eight of the IFSWF’s members did not respond to its questionnaire.
Duncan Bonfield, IFSWF chief executive, said 88 per cent of the funds surveyed claimed to incorporate climate change risks in their investment processes “in some way” but there were “sharp differences” in the approaches taken.
“Sovereign funds are increasingly considering climate risks and opportunities in their investment decisions. But they could be more ambitious and systematic in their approaches,” he said.
Selling fossil fuel investments by SWFs remains rare. Just 14 per cent of the respondents had made a divestment based on environmental considerations.
Bernardo Bortolotti, an economics professor at New York University in Abu Dhabi, said SWFs from the Gulf region and from other oil-producing nations were reluctant to embrace climate change policies because of “the elephant in the ground” — large crude oil reserves still to be extracted and sold.
Around two-thirds of the revenues of SWFs are derived from oil and natural gas production, according to Bortolotti.
“Investing in climate change mitigation would protect oil SWFs investment portfolios, but it will also accelerate the transition to renewables that could eventually come back to haunt their budgets,” he said.
In contrast, the SWF of New Zealand has cut its exposure to fossil fuels by 40 per cent since 2016 as part of its climate change investment strategy. NZ Super said the strategy had added NZ$600m in value to its NZ$54bn asset pool. It has set a new target of cutting its fossil fuel exposure by 80 per cent by the end of 2025.
Fifteen SWFs including five from the Middle East, have joined the One Planet Sovereign Wealth Funds working group which has been championed by President Emmanuel Macron of France. The working group has signed up to the Task Force on Climate-Related Financial Disclosures, a reporting framework designed to galvanise the global transition to a low carbon future, and also hopes to encourage other SWFs to join.
Steven Sowden, a principal at Mercer, the consultancy, said tackling climate change was now widely recognised as a fundamental fiduciary duty across the investment industry. “Sovereign wealth funds have an opportunity to be leaders in this space given their large financial resources,” he said.