This year the International Forum of Sovereign Wealth Funds – IFSWF – took a slightly different approach to their annual survey. Instead of looking at investment beliefs, they focused more on the policies and practical steps sovereign wealth funds are taking to implement their climate-change policies. Such an approach makes the survey more relevant as it provides a better representation of where sovereign wealth funds are in this shift of investment practice. The new format also enables more granularity on their implementation of climate-change-related standards.
The previous survey of the IFSWF in 2021 named In Full Flow: Sovereign wealth funds mainstream climate change, revealed the significant progress sovereign wealth funds had made in considering climate change in their investment process over the previous twelve months. Given such rapid advances, in 2022, the IFSWF expected to see a levelling off of this process and perhaps less dramatic trends. However, sovereign wealth funds continue to prioritise integrating climate-related issues into their investment process and understand the impact of climate change on their investments.
Over the last three years, IFSWF surveys have revealed how sovereign wealth funds have embraced the issue of climate change. In 2022, a third of the respondents reported they had adopted a climate-change strategy since the first report in 2020. The issue is also becoming more formalised as part of their mandate. In 2021, only 9% of respondents said that “addressing the effects of climate change [was] part of [their]” mandate”. However, 65% said that while climate change issues were “not strictly part of our mandate” but did consider it when investing. A year later, 91% of our respondents said that they believed addressing climate change was consistent with their mandate, while 74% said it was actively part of their mandate.
IFSWF have also observed a change in the motivations for sovereign wealth funds to include climate-related criteria in their investment process. In 2021’s survey, half of the respondents said they had decided to consider climate change in their investment decisions because it was “the right thing to do” rather than for any financial benefit. Only 23% believed doing so would improve long-term returns or reduce risk. However, fast forward to 2022, 60% of respondents said that they integrated climate change considerations into the investment process to minimise risk and improve long-term returns, with 40% saying it was “the right thing to do”.
The report details how sovereign wealth funds’ implementation are going forward and how they have reported significant progress in their understanding of the detrimental effect climate change may have on their long-term returns and how they monitor their impact. They have also become more transparent, requiring better reporting from their asset managers and portfolio companies, and now produce more information on how they approach the issues.
Nevertheless, they still report significant barriers to their progress, particularly in gathering data on climate impact from portfolio companies (particularly unlisted firms) and asset managers. Without accurate data, it is difficult for sovereign wealth funds and other investors to understand their risk exposure to climate change accurately and their portfolio’s contribution to carbon emissions. While it is true that sovereign wealth funds can request this information, it is also important to not overburden these companies and asset managers by standardising the data requested.
Source: IFSWF