Will sovereign wealth funds green the markets?

25 November, 2019Ben Caldecott

The One Planet Sovereign Wealth Fund (SWF) Working Group is an international coalition of SWFs, established to address climate change. Ben Caldecott looks at what the group has achieved since then and why climate change matters for SWFs.
A flower growing in green grass

In December 2017 President Macron hosted the One Planet Summit in Paris to accelerate action on climate change.

Sovereign wealth funds (SWFs) from Abu Dhabi, Kuwait, New Zealand, Norway, Saudi Arabia and Qatar came together at that summit to announce a new One Planet SWF Working Group.

This was the first time SWFs have come together in a formal grouping explicitly, and solely focused on climate action and climate resilience.

Since then, this group has published, and begun to operationalise, a framework for how SWFs should systematically take account of climate change in their decision-making processes – and how they can act together to contribute to ambitious climate action.

This is an important development.

Shaping financial markets to invest sustainably

The successful implementation of the Paris Climate Change Agreement and the UN Sustainable Development Goals will in part hinge on how SWFs invest their capital over the coming years.

According to PwC, the total assets under management by SWFs will reach US$15.3 trillion by 2020, up from US$11.3 trillion in 2015. This capital will play a key role in shaping financial markets and financial decision-making globally.

SWFs can help to create a path for other large asset owners, such as pension funds, insurers, endowments, to follow.

While pension funds hold more money than SWFs – around $45 trillion – this is dispersed among hundreds, if not thousands, of pension funds.

In contrast, there are only a couple of dozen SWFs that count. These are big institutions that can move markets.

And crucially, unlike the vast majority of other financial institutions in the global financial system, SWFs have very long-term investment horizons.

They are investing on behalf of their citizens over many decades and generations. As a result, they can escape the trap of endemic short-termism that afflicts most investors.

This extended time horizon – combined with their scale and the concentration of capital in only a few institutions – means that SWFs are incredibly well positioned to play a pivotal role in aligning capital markets with sustainability.

It is also in their core interests to do so.

Why climate change matters for SWFs

Climate change matters for SWFs for three principal reasons.

First, climate-related risks will impact the value of SWF investments and portfolios. These include specific risks facing individual investments as well as risks that face all assets in an economy at the same time.

Second, these risks could have financial stability implications that would further impact SWF portfolios – either through direct losses, lower global growth, or increased volatility in their portfolios.

Third, the transition to a low-carbon economy is a capital-intensive process that will create specific investment opportunities – as well as opportunities to increase global demand for capital – thereby increasing interest rates and improving the ability of SWFs to generate returns.

The One Planet SWF Framework

So how should SWFs respond systematically to these challenges and opportunities?

The One Planet SWF Framework sets out how SWFs should:

  • factor climate change-related risks and opportunities into how they invest in order to improve the resilience of their portfolios
  • encourage companies they invest in to address climate change in their governance, business strategy and planning
  • build climate change considerations into their decision-making and report on their approach to climate change.

The framework places a significant emphasis on SWFs taking action themselves by upgrading their own practices and using their shareholdings to push the companies they own to do much more.

The challenge now will be effective implementation and ensuring adoption across as many SWFs as possible. It will also be important to review levels of ambition as the theory and practice of sustainable investment changes over time.

These are the identical challenges and opportunities that face other asset-owner groups and we are starting to see some convergence and cross-pollination between these initiatives.

Once asset owners move, the market will move as they are the ultimate clients of asset managers and together own large parts of the global banking system.

Ben CaldecottDr Ben Caldecott is founding Director of the Oxford Sustainable Finance Programme and an Associate Professor at the University of Oxford, as well as Co-Chair of the Global Research Alliance for Sustainable Finance and Investment.

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