Sovereign wealth funds are increasingly recognizing climate change as being part of their mandate and investing more in renewables.
The third annual survey by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Fund Network represented views from 40% of the world's wealth funds, with the aim of documenting how these investors understand the impact of climate change on their portfolios and what they are doing to mitigate their impact on the planet.
Among the findings, a report of the survey said 91% of respondents agreed that addressing climate change was consistent with their investment mandate — a simple yes/no question. In the 2021 survey, just 9% of respondents said addressing the effects of climate change was consistent with their investment mandate. In the 2021 survey, respondents had a third option, and 65% said addressing the effects of climate change was not strictly part of the investment mandate but was taken into account.
Asked about the primary reason for taking climate change into account, respondents cited reputational risk (60%), to improve long-term returns (60%), that it is "the right thing to do" (40%), and that there is a specific mandate to combat climate change (14%).
Sovereign wealth funds are also increasingly willing to engage with portfolio companies on environmental issues, at 65.7% in 2022 up from 50% saying they prefer to engage with companies over divesting in 2021.
There is also real action taking place, said Victoria Barbary, director of strategy and communications at the IFSWF. She cited figures showing that 51.8% of respondents now conduct carbon footprinting exercises across all or parts of the portfolio, up from 34% a year before.
There was also increased investment in renewables projects, with $8.3 billion of sovereign wealth fund investment in renewable energy in 2022, up from $5.6 billion in 2021.
"It has been a move from sovereign funds talking about taking action, to sovereign funds actually taking action and being active on the issue of climate," Ms. Barbary said in an interview. "The thinking has been done, and now it's the 'doing' phase."
The majority of cash flowing into renewable projects was in developed markets, with $3 billion of the total $8.3 billion allocated to Europe-based projects and $2 billion to those in North America.
Ms. Barbary said sovereign wealth funds look to be investing in the largest projects in developed markets first — the "big ticket" opportunities. The report added that these projects have the potential to make the most significant impact on reducing global carbon emissions, since these countries are among the largest emitters.
Investor-friendly regulatory and tax measures may also be enticing investors to developed markets for renewable energy projects, Ms. Barbary said, but emerging markets also hold financially attractive opportunities.
