Sovereign Wealth Funds (SWFs) have made significant progress in expanding their methods for assessing climate-related risks and reducing their climate impact, according to a new report from International Federation of Sovereign Wealth Funds (IFSWF).
The report, conducted in partnership with the One Planet SWF initiative, showed that over a third (34%) of the respondents have now carbon-footprinted their portfolios, up from 23% last year. Similarly, 31% now use climate scenario analysis, versus 17% in 2020. Similar progress could be seen in climate stress-testing, low carbon portfolio analysis and stranded assets risk analysis.
Like other investors however, SWFs appeared to struggle with defining Key Performance Indicators (KPIs) and metrics on which to assess their strategy.
The survey report outlined investment practices from OPSWF Network members, including 46 sovereign wealth funds. In total, 34 SWFs responded, of which 12 were from Asia Pacific (Apac).
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SWFs have become more systematic in their approach to ESG, said the IFSWF.
In 2020, only 24% of respondents incorporated ESG considerations in their investment process and only 18% had a dedicated ESG team, while 48% said they did not take a systematic approach to climate change.
A year later, 71% of respondents have adopted an ESG approach and less than 10% said that they didn’t consider climate change in their investment approach at all. Indeed, 65% are now proactively managing climate.
A key reason for the shift in stance, according to the IFSWF, was that stakeholder opposition had declined over the past year. In 2020, 20% of respondents reported that a substantial obstacle to adopting ESG was that stakeholders did not believe these issues to be important. This year, this proportion had dropped to only 3%.
The issues that were the most pressing for the survey respondents were technical challenges, such as scenario analysis, carbon footprinting, and target setting.
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A spokesperson for GIC said the Singaporean SWF closely manages its environmental impact, and has achieved its target to become carbon-neutral in its global operations by the financial year 2020 to 2021.
“We started measuring our global corporate carbon footprint in 2019 and have developed a dashboard to help us track and manage our carbon footprint. We now have a view of the emissions profile of our operations, pre-pandemic,” said GIC in its recent annual report.
Within the same report, GIC talks about investing in thematic opportunities arising from climate change and other sustainability topics, including “renewable energy assets, green buildings and technologies that support the low-carbon transition”.
From a pure investment perspective, SWFs continued to favour more established opportunities like renewable energy, with 70% of respondents saying it was the most attractive climate-related sector.
There are indications, though, that they have developed a more detailed and nuanced view of where attractive investments lie, said the IFSWF. “This trend suggests that they may embrace a wider range of investment opportunities, including catastrophe insurance and other financial safeguards.” IFSWF’s own data supports this view.
Given the flurry of SWF activity in the agritech sector in the last two years, it is surprising that sovereign investors now appear to view this sector as less attractive than they did in 2020. This may be a function of increasing competition and higher valuations in the space.
Measuring real progress on ESG integration; cutting the carbon footprint of their portfolios; and the adoption of targets and metrics for carbon reduction, rather than speed of implementation; will be key to understanding how SWFs are performing going forward.
However, more respondents (58% in 2021, up from 38% in 2020) reported that they struggle to find reliable data on which to base their strategies. This may be because asset managers and banks all have different approaches and methodologies to measuring climate impact, which makes it hard for SWFs to integrate the data into a consolidated and consistent dashboard or data set.
As a result of this lack of certainty about appropriate hard metrics, most SWFs have yet to fully report on their climate approach: for instance, 83% of respondents that use a climate change or ESG approach don’t publish their climate change strategy.
Although there has been an improvement in reporting — 35% of respondents still do not report anywhere on how they are tackling climate change, down from two-thirds last year — most SWFs are not yet disclosing much information on this topic.
Twenty per cent of respondents (up from 17% last year) only report on climate change directly to their stakeholders, and a further fifth describe their climate change approach in their annual reports, but less than 20% of respondents have a separate climate change report or use one of the accepted sustainability reporting standards for their publicly available annual report.
Overall, SWFs do need to make more progress on developing and using metrics and targets for their climate exposure and reducing their carbon footprint. This progress is in turn dependent on efforts to develop bespoke methodologies, deepen expertise, and engage with their stakeholders to ensure they are comfortable with public targets and metrics that might not be achieved due to external circumstances.
The survey revealed that SWFs are engaging with international climate change associations and their peers to ensure they can make an impact on reducing carbon emissions globally.