Wealth funds increase focus on climate change

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Sovereign wealth funds have invested more than $5 billion in agritech, forestry and renewables opportunities over the past five years as part of an increased push toward climate change-aware investing.

An inaugural survey of 34 sovereign wealth funds, representing 43% of the world’s sovereign funds, was conducted in September by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds.

The survey found that these funds made 18 investments in agriculture technology, forestry and renewables opportunities in 2020 at a total value of $2 billion, up from eight investments valued at $324 million in 2015.

A report of the findings said the increased investment is one example of how sovereign wealth funds have increased the need to take action to mitigate the effects of climate change. Among the respondents to the survey, 93% recognize that climate change is a risk and/or opportunity for their portfolios, while 88% said they take climate change into account in their investment processes in some way.

Many sovereign wealth funds are focusing on opportunities in real assets, such as renewable energy generation, energy efficiency projects and low-emission transport. Multiasset and/or whole portfolio approaches are in the minority, the report said.

Just over a third of responding funds (36%) have a formal climate-change strategy in place, with 55% of these funds adopting the policies since 2015 and 30% since 2018.

Responsibility for the approach to climate change sits with boards or CEO-level executives for 60% of funds, with the remainder stating that responsibility lies with investment teams, the CIO, a responsible investment team or another department.

Climate-related strategies represent more than 10% of portfolios for 30% of responding wealth funds.

However, two main barriers remain for sovereign wealth funds when it comes to investing in a climate-aware way: finding appropriate data on which to base decisions and convincing stakeholders of the business case for moving ahead with such investments.

Regarding better data, members of the OPSWF recently signed a joint statement calling for enhanced climate-related financial disclosure. On the convincing point, 10% of those surveyed said they expect climate strategies to lead to negative returns in the short term, while 3% expect negative long-term returns.

The survey made six recommendations to wealth funds based on the survey findings: to adopt and implement climate-related strategies; to seek appropriate talent and expertise; to explore board member and executive education; to use metrics to show not only climate impact but also comparable returns and risk reduction; to communicate to all stakeholders the strategic importance of climate change; and to partner with peers and international initiatives to share experience and generate greater leadership from within the wealth fund network.

“The analysis reveals that sovereign wealth funds are making significant progress towards integrating climate-change considerations into their investment processes,” Duncan Bonfield, IFSWF CEO, said in a comment accompanying the report. “Although many still need to be more systematic and comprehensive, we believe this report demonstrates that sovereign wealth funds are taking this issue seriously.”

The IFWSF has represents almost 40 sovereign wealth funds. The OPSWF has 33 members.

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