- Sovereign wealth funds invest more in oil and gas than in renewables
- But has stepped up investment in renewables over the past four years
- Australian and New Zealand funds beat Norway in ESG analysis of equities
- Lack of ESG action threatens performance, experts say
LONDON, Aug. 9 (Reuters) – The risks don’t come in the longer term than climate change, so you can expect sovereign wealth funds to be everywhere, as investment giants with decades in sight.
Yet the world’s largest sovereign wealth funds are only making uneven progress in tailoring investment plans to account for environmental, social and governance factors, according to data on energy investments, an ESG analysis of holdings in actions of some of the funds, as well as a survey of stakeholders.
This data provides snapshots of the complex and often opaque world of sovereign wealth funds, which collectively hold nearly $ 8 trillion in assets.
The industry has invested $ 7.2 billion in renewables since 2015, for example, less than a third of the amount poured into oil and gas, according to data from the International Sovereign Wealth Fund Forum (IFSWF).
The Antipodean funds, which publicly disclose their investments, have performed well in the ESG analysis of major companies’ holdings. New Zealand also said it plans to reduce the emissions intensity of its overall portfolio by 40% by 2025, referring to an income-proportional emissions measure.
Middle Eastern funds face a more difficult task to decarbonize their portfolios, given the long-standing dependence of their economies on fossil fuels. They did not disclose any climate targets, although most plan to step up their ESG focus.
The Reuters survey showed a divergence in the general approaches of funds vis-Ã -vis companies with poor ESG ratings; The Hong Kong Monetary Authority (HKMA) fund and Singapore’s GIC prefer to try to bring about change from within, while Antipodes and Norwegian funds are more willing to pair this approach by excluding stocks.
Any failure or delay in future-proof portfolios could threaten the long-term performance of sovereign wealth funds, created to protect the wealth of generations to come and bolster state revenues, according to many investment experts. .
And since the funds are among the largest investors in the world, their ESG positions can affect how quickly companies put their businesses on a more sustainable basis, 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 thinks about these issues, or doesn’t, âsaid Aniket Shah, global head of ESG research and sustainability at Jefferies.
“They are the only investor where the duration of investment and the duration of the scale of these issues are aligned with each other, more than with pension funds.”
OIL AND GAS OPERATIONS
The need for change is widely recognized.
Several funds, including those in Abu Dhabi, New Zealand, Norway, Kuwait, Qatar and Saudi Arabia, have joined the One Planet Initiative, a desire to integrate climate risks into the management of large sources of capital.
More than 30 funds are also members of the Santiago Principles, a set of voluntary goals aimed at promoting good governance, accountability, transparency and prudence.
Yet progress has come to a halt for these investment behemoths, which are playing a role in accelerating the shift away from carbon globally.
The sovereign wealth fund industry has spent more on oil and gas transactions than on renewables almost every year since 2015, including 2021 so far, according to data compiled for Reuters by wealth fund industry group IFSWF . The only exception was 2016.
In terms of the number of transactions during these years, there was a more even distribution between the two sectors.
Annual investments in renewables are on the rise, however, while Enrico Soddu, head of data and analysis at IFSWF, said some investments in oil and gas should help move away from carbon. and include pipelines, which could be adapted to transport hydrogen in the future.
That said, renewables have accounted for less than a quarter of the total number of sovereign wealth fund infrastructure investment deals over the past decade, behind 29% of public pension funds, according to data from Preqin. .
Comparing the progress of funds on ESG can be difficult, as they vary in terms of history, geography, and size. Many invest in areas like infrastructure, real estate, and private equity, where progress may be more difficult to assess, while some are more open about their holdings than others.
A look at the top 25 stocks in those funds that publicly disclose their holdings – Australia, New Zealand and Norway – showed Australia’s $ 166 billion Future Fund to have the highest-rated portfolio, according to ESG scores calculated at the using data from three of the top reviewers. : MSCI, Sustainalytics and Refinitiv.
It was followed by New Zealand’s $ 41 billion NZ Super Fund and Norway’s $ 1.3 trillion Norges Bank Investment Management, the largest fund in the world.
“New Zealand and Australian funds are more advanced than anyone in terms of integrating climate risk but also ESG in general,” said Massimiliano Castelli, head of strategy and advice at UBS, Global Sovereigns Markets.
Sovereign wealth funds in general have been “a little too late” to embrace ESG, he added.
HOW FREQUENCY DO YOU VOTE?
Wealth funds say climate risk is significant, according to Reuters’ survey of 13 sovereign wealth funds, although they have given varying responses on their ESG strategies and goals.
New Zealand is one of the few funds to disclose ESG objectives. The Norwegian fund said it pushed companies it had invested in to disclose non-financial data, such as greenhouse gas emissions or water consumption.
The $ 649 billion Abu Dhabi Investment Authority (ADIA) said it has incorporated climate risks into investment planning, as has Australia’s Future Fund, which said ESG factors “may be important to the economy. investment performance “.
Temasek Holdings, a $ 417 billion Singaporean company, said it assessed the emissions profile of target companies, while the $ 581 billion HKMA said it was studying measures and objectives to help it manage climate risk.
The frequency of fund votes at shareholder meetings – considered by sustainable investment experts as an element of good ESG governance – also differed.
New Zealand’s SWF said it voted at around 99% of annual general meetings (AGMs) of its portfolio companies, while Norway’s voting record was 98%. The Australian fund said it exercises all eligible voting rights in listed companies.
Temasek and the $ 453 billion CPG did not disclose details of how often they voted. HKMA said its external managers exercise voting rights.
Saudi Arabia’s $ 430 billion Public Investment Fund (PIF), $ 534 billion Kuwait Investment Authority (KIA), $ 295 billion Qatar Investment Authority (QIA) and Investment Corporation Dubai’s $ 302 billion ICD did not answer questions.
Chinese funds contacted – the $ 1,000 billion China Investment Corporation (CIC) and the $ 372 billion National Council for Social Security Fund – also did not respond.
RISK ADJUSTED RETURNS
According to an analysis by industry research firm Global SWF, funds that have led the way in ESGs also tend to show better overall financial returns in recent years.
Between 2015 and 2020, the New Zealand fund had a compound annual growth rate (CAGR) of 9.5%, Australia’s Future Fund had 8% and Norway’s 7.7%, calculated the global SWF, on the basis of their financial results.
This was ahead of estimates from PIF, GIC ADIA, but below those of many public pension funds, which are widely considered to be further ahead on ESG than wealth funds.
The PIF, ADIA and GIC declined to comment on Global SWF’s estimates.
The precise role of ESG in performance is, however, unclear, as other factors are at play, such as the investment mandate and asset allocation. Still, Diego LÃ³pez, Managing Director of Global SWF, is sure it’s a significant influence.
âThere is definitely a relationship between the ESG effort and financial returns,â he said. “Those funds that don’t deal with good governance and sustainability generally don’t work very well.”
Additional reporting by Gwladys FouchÃ© in Oslo, Anshuman Daga in Singapore, Alun John in Hong Kong, Cheng Leng in Beijing, Saeed Azhar and Davide Barbuscia in Dubai; Editing by Pravin Char
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