Sovereign wealth funds to launch ESG framework next year as sector steps up on climate change

Six of the world’s leading sovereign wealth funds, which more than $2trn under management, have formed a working group to look at climate change issues in their long-term investments.

Norges Bank Investment Management (NBIM), the New Zealand Superannuation Fund, the Abu Dhabi Investment Authority, the Qatar Investment Authority, the Public Investment Fund of the Kingdom of Saudi Arabia and the Kuwait Investment Authority have founded the One Planet Sovereign Wealth Fund Working Group. The aim is to “accelerate efforts to integrated financial risks and opportunities related to climate change in the management of large, long-term asset pools”.

As part of this, the consortium has committed to developing an ESG framework to address climate change issues. This will include methods and indicators “that can inform investors’ priorities as shareholders and participants in financial markets”. The framework, methods and indicators will all be published next year, it said in a statement.

“A common platform around the business risks of climate change and the opportunities of an increasingly lower carbon economy does not currently exist among sovereign wealth funds,” it continued, saying there was “general agreement that an effort to help foster a shared understanding of key concepts, appropriate methodologies, and relevant ESG indicators could accelerate the integration of such considerations in long-term asset management”.

The group, which was spearheaded by France’s President Macron and will be supported by the French government, will work with other institutional investors on the ESG frameworks, it said.

The collected assets under management of sovereign wealth funds globally are expected to reach $15trn by the end of the decade, but so far the sector as a whole has been relatively quiet on climate change.Last year, the International Forum of Sovereign Wealth Funds launched a working group to “explore the implications” of climate change. However, a spokeswoman for the group recently told RI that the group had been shelved as part of “some internal reorganisation to improve our efficiency”.

“We no longer have a dedicated climate change working group, but this well continue to be an important theme and there is definitely an appetite to continue to explore the topic,” she said, adding that the forum continued to host sessions on the topics at its events.

On an individual level, some of the sovereign wealth funds have been proactive on climate change already: most recently, NBIM requested permission to remove oil and gas companies from its benchmark index, for financial risk reasons. New Zealand Super performs carbon footprinting and has commitments to engage with companies on climate and pursue investment opportunities in the field.

“Having both size and long-term investment horizons, sovereign wealth funds are uniquely positioned to promote long-term value creation and sustainable market outcomes,” said the working group. “Their future returns are intrinsically linked to global growth and prosperity. Appropriate to their investment objectives, they can demonstrate management practices that optimise profits while simultaneously supporting the COP21 objectives.”

More sovereign wealth funds are expected to join the group in coming months, it said.

“There is growing evidence that institutional investors that prioritise ESG through ownership and investment are also well positioned to reap financial benefits and that is the intention of this group.”