The IFSWF and One Planet Sovereign Wealth Funds (OPSWF) released their report entitled –  In Full Flow: Sovereign Wealth Funds Mainstream Climate Change. The report is the second comprehensive survey of sovereign wealth funds’ attitudes towards climate change.

This year IFSWF and OPSWF focused on the practical challenges of integration and implementation of climate change into the investment process, rather than on the respondents’ views about it.

The 2021 survey shows that sovereign wealth funds have made substantial progress in addressing climate change. This year, 71% of respondents have adopted an environmental, social and governance (ESG) approach and less than 10% told us that they didn’t consider climate change in their investment approach at all, while only 20% of the respondents considered climate change in an unsystematic manner.

This is substantial progress, considering that in 2020, only 24% of respondents incorporated ESG considerations in their investment process and only 18% had a dedicated ESG team, while 48% told us that they did not take a systematic approach to climate change.A more systematic approach is shown as we asked respondents whether they had implemented or considered five different methods of assessing climate-related risks and opportunities to understand portfolio exposure to climate-change risks, manage and reduce their climate impact.

In 2021, there was substantial growth in the use of all five methods reported by sovereign wealth funds. For example, 34% of 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 can be seen in climate stress-testing, green- and low-carbon portfolio analysis and stranded value/assets at risk analysis.

In terms of how sovereign wealth funds are allocating their assets in a way that can have an at-scale impact on carbon reduction, they continue to favour more established opportunities. For example, renewable energy remains the most popular investment sector. However, our survey results provide some indication that sovereign wealth funds are beginning to look at a wider range of climate-related investment opportunities including catastrophe insurance and other financial safeguards as they become more knowledgeable. Indeed, IFSWF data already shows that sovereign wealth funds are making a broader spread of investments in climate-related sectors.

In short, a year after we have seen rapid adoption of climate-related policies and many more sovereign wealth funds are applying a more strategic and systematic approach to climate change in their portfolios than they did just 12 months ago.

There are three more points to highlight this year.In terms of talent and expertise, it is clear that institutions are investing in their teams, and they are hiring specialist personnel. However, a larger number of sovereign wealth funds report struggling to find and attract talent and expertise.

Sovereign wealth funds’ stakeholders are increasingly supportive of adopting climate change and broader ESG strategies, not only in terms of the rapid adoption of these processes but also in the decline in stakeholder opposition to the topic.

More sovereign wealth funds have joined international initiatives to engage in the climate debate, learn from their peers and show leadership. It is clear from this year’s survey that sovereign wealth funds understand the benefits of joining such groupings not only to enhance their organisations’ reputation but also to help enhance their climate impact.

“The significance of the sovereign wealth funds’ rapid progress on climate investing is not just the unlocking of trillions of dollars of long-term investment into a long-term challenge – it is also the clear message it sends to the investment markets and the asset management industry.  Asset owners now expect asset managers and companies to be fully engaged on the transition to a low-carbon future.”

Duncan Bonfield, CEO IFSWF

Find the report  In Full Flow: Sovereign Wealth Funds Mainstream Climate Change here.

Source: Victoria Barbary – IFSWF