© Reuters. FILE PHOTO: Steam rises from a chemical plant in an industrial area in Hamilton, Ontario, Canada, May 13, 2017. REUTERS / Chris Helgren / File photo
By Tom Arnold and Simon Jessop
LONDON (Reuters) – The risks don’t come much longer term than climate change, so it is to be expected that sovereign wealth funds will be everywhere, like investment giants with decades in their sights.
However, the world’s largest sovereign wealth funds are only making uneven progress in adapting investment plans to take into account environmental, social and governance factors, according to data on energy investments, an ESG analysis from the equity holdings of some of the funds, plus a stakeholder survey. .
Such data provides snapshots of the complex and often opaque world of sovereign wealth funds, which together hold close to $ 8 trillion in assets.
The industry has invested $ 7.2 billion in renewable energy since 2015, for example, less than a third of the amount dumped into oil and gas, data from the International Forum of Sovereign Wealth Funds (IFSWF) showed.
The Antipodean funds, which publicly disclose their investments, scored highly in the ESG analysis of major corporate holdings. New Zealand also said it planned to reduce the emissions intensity of its overall portfolio by 40% by 2025, referring to an emissions measure commensurate with revenue.
Middle East funds face a more difficult task in decarbonizing their portfolios, given their economies’ long dependence on fossil fuels. They did not disclose climate targets, although most plan to strengthen their ESG approach.
The Reuters poll showed a divergence in the funds’ overall approaches to companies with poor ESG ratings; The Hong Kong Monetary Authority (HKMA) fund and Singapore’s GIC prefer to try to drive change from within, while the Antipodean and Norwegian funds are more prepared to combine that approach with the exclusion of stocks.
Any failure or delay in future-proof portfolios could threaten the long-term performance of sovereign wealth funds, established to safeguard wealth for generations to come and shore up state revenue, according to many investment specialists.
And since the funds are some of the largest investors in the world, their ESG positions can affect how quickly corporations get their businesses on a more sustainable basis, experts say.
“Sovereign wealth funds are the long-term investment capital of the world, so the way they respond to climate change and ESG is the purest case study of how a long-term asset allocator should think and think about these. issues, or it doesn’t. “said Aniket Shah, global director of sustainability research and ESG at Jefferies (NYSE :).
“They are the only investor where the investment term and the scale term of these issues are aligned with each other, more than with pension funds.”
OIL AND GAS OFFERS
There is wide recognition of the need for change.
Several funds, including those from Abu Dhabi, New Zealand, Norway, Kuwait, Qatar and Saudi Arabia, have joined the One Planet Initiative, an initiative to integrate climate risks into the management of large equity funds.
More than 30 funds are also members of the Santiago Principles, a voluntary set of objectives aimed at promoting good governance, accountability, transparency and prudence.
However, progress has been sustained for these investment giants, who play a role in setting the pace of global change away from carbon.
The SWF industry has spent more on oil and gas deals than on renewable energy in almost every year since 2015, including 2021 until now, 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 those years, there was a more even split between the two sectors.
However, annual investments in renewables are increasing, while Enrico Soddu, head of data and analysis at IFSWF, said that some investments in oil and gas would help in the transition from carbon and included pipelines, which could be adapted to transport hydrogen. in the future.
That said, renewable energy has accounted for less than a quarter of the total number of sovereign wealth fund infrastructure investment deals over the past decade, down from 29% of public pension funds, according to data from Preqin.
Chart: SWF Investments in Oil and Gas vs. Renewables https://graphics.reuters.com/SWF-ESG/zgpomwdoxpd/chart.png
Comparing the progress of funds in ESG can be difficult, because they vary in history, geography, and size. Many invest in areas such as infrastructure, real estate and private equity, where progress can be more difficult to measure, while some are more open than others about their holdings.
A snapshot of the top 25 stocks in those funds that publicly disclose their holdings – Australia, New Zealand and Norway – showed Australia’s $ 166 billion Future Fund had the highest scoring portfolio, based on calculated ESG scores. with data from three of the leading reviewers: MSCI, Sustainalytics, and Refinitive.
It was followed by New Zealand’s NZ Super Fund of $ 41 billion and Norges Bank Investment Management of Norway, the world’s largest fund, of $ 1.3 trillion.
“The New Zealand and Australian funds are ahead of anyone in terms of integrating climate risk, but also ESG in general,” said Massimiliano Castelli, head of strategy and advisory at UBS, global sovereign markets.
Sovereign wealth funds in general have been “a bit late” in adopting ESG, he added.
Chart: SWF ESG Equity Scores https://fingfx.thomsonreuters.com/gfx/mkt/xmpjogwznvr/Capture.PNG
HOW OFTEN DO YOU VOTE?
Endowment funds say climate risk matters, according to a Reuters poll of 13 SWFs, though they gave mixed responses about their ESG strategies and any goals.
New Zealand is one of the few funds that discloses ESG objectives. The Norwegian fund said it pressured companies it 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 incorporated weather risks as part of investment planning, as did Australia’s Future Fund, which said ESG factors “may be important to the return on investment “.
Singapore $ 417 billion Temasek Holdings said it assessed the emissions profile of target companies, while the $ 581 billion HKMA said it was studying metrics and targets to help manage climate risk.
The frequency with which funds were voted on at shareholder meetings, seen by sustainable investment experts as an element of good ESG governance, also differed.
The New Zealand SWF said it voted in about 99% of the annual general meetings (AGM) of its portfolio companies, while Norway’s record for votes was 98%. The Australian fund said it exercised all eligible voting rights in publicly traded companies.
Temasek and the $ 453 billion GIC did not release details on how often they voted. HKMA said its outside managers exercised voting rights.
Saudi Arabia’s $ 430 billion Public Investment Fund (PIF), the $ 534 billion Kuwait Investment Authority (KIA), the $ 295 billion Qatar Investment Authority (QIA), and the Kuwait Investment Authority (KIA) of $ 295 billion. Dubai Investments (ICD) of $ 302 billion did not answer questions.
The Chinese funds contacted – the $ 1 trillion China Investment Corporation (CIC) and the $ 372 billion National Social Security Fund Council – did not respond either.
RISK ADJUSTED RETURNS
There are signs that funds that have led the way in ESG have also tended to enjoy better overall financial returns in recent years, according to an analysis by industry research firm Global SWF.
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%, Global SWF calculated, based on of your financial results.
That was ahead of estimates for companies like PIF, GIC ADIA, but below those for many public pension funds, which are generally considered more advanced in ESG than equity funds.
The PIF, ADIA and GIC declined to comment on Global SWF’s estimates.
However, the exact role of ESGs in performance is unclear as there are other factors at play, such as investment mandate and asset allocation. However, Diego López, CEO of Global SWF, is sure that he is a significant influence.
“There is definitely a relationship between ESG effort and financial returns,” he said. “Funds that don’t address proper governance and sustainability generally don’t do very well.”