Climate change has made itself felt in various aspects of modern life, and the most recent sector to feel its impact is finance.
In particular, sovereign wealth funds (SWFs) have been hampered by how financial managers adapt investment plans to become more compliant with evolving environmental, social, and governance (ESG) standards.
The energy sector is one such area. Based on recent studies regarding energy investment as well as an ESG analysis of the industry, companies are having a difficult time in making their plans more sustainable.
Currently, SWFs across the globe hold $8 trillion in collective assets. However, additional data from the International Forum of Sovereign Wealth Funds (ISWF) also shows that these have invested $7.2 billion into the renewable power industry – less than a third of what has been invested in natural gas and fossil fuels.
Which are the most ESG-compliant SWFs?
SWFs from countries that have long advocated for clean energy or have solid plans regarding reducing the use of fossil fuels scored the highest when it came to ESG-compliance.
For example, funds from New Zealand led the pack in terms of both transparency and compliance. Antipodean funds have always disclosed their investments to the public and also scored well in the ESG analysis of several major holdings. It should also be noted that the country aims to cut emission-heavy industry from its portfolio by 40% come 2025.
Elsewhere, countries are struggling to decarbonize their investment portfolios. In the Middle East, home to the biggest fossil fuel companies in the world, SWFs are having a hard time making the necessary adjustments. While some companies have announced plans to improve their ESG compliance, the majority have yet to disclose their compliance targets.
Meanwhile, funds in Hong Kong and Singapore are making internal changes in order to meet ESG standards.
What are the potential consequences?
Future-proofing SWFs is one way by which wealth may be protected to benefit future generations. However, if investors opt not to make the necessary adjustments, then the long-term performance of these funds can be jeopardized.
Today, over 30 SWFs have signed on for the Santiago Principles, a voluntary initiative that promotes good corporate governance, financial accountability, ethical transparency, and prudence.
Given how many of these SWFs rank among the world’s biggest investors, what they do about climate change will say a lot about their priorities as well as their social responsibility. However, most SWFs have invested more in conventional fuel deals than renewable energy, so progress towards full compliance has been slow.
Nevertheless, the IFSWF is optimistic that more funds will choose to go the lower-carbon / zero-carbon route in the near future. Indeed, annual investment in renewable energy initiatives is currently on the rise, and some oil and gas investments are being redirected towards the transition to lower-carbon alternatives, including the adaptation of oil or gas pipelines to carry hydrogen as a cleaner and safer power source.