Despite Rhetoric, Direct Sovereign Wealth Fund Investments Fall Flat in Renewables

Posted on 02/08/2021

The wealth of the world’s largest sovereign wealth funds is substantially built from fossil fuels such as oil and gas. Following the logic that oil and gas pollution contribute to the global warming of the planet, sovereign wealth funds could be perceived as a financial contributor to climate change, similar to companies like ExxonMobil, BP Plc, and Chevron. Since 2008, Western policymakers and college professors have urged sovereign wealth funds to use their oil and gas wealth to fund renewable energy generation and technologies. Many academics and organizations like the OECD Development Centre view sovereign wealth funds, due to their size and market power, of possessing the ability to catalyze faster adoption of renewable energy to displace fossil fuels. Sovereign investors have supported and invested in solar and wind assets, but cautioned that investments must be commercial in nature. The Paris Agreement under the United Nations Framework Convention on Climate Change is a major international force changing the way institutional investors allocate their capital. The Paris Agreement’s goals requires an overall decline in the production and consumption of fossil fuels. This may result in a decline in revenue for those sovereign funds financed by oil and gas revenues, thus creating financial instability for these governments, which could lead to political changes.

Despite rhetoric of sovereign wealth funds putting large amounts of capital into renewables, the direct investment data tells a different story. Keep in mind, this analysis excludes manager funds that invest in renewables, electric vehicle (EV) companies like Tesla and Lucid Motors, and green bond investments. Sovereign funds like Saudi Arabia’s Public Investment Fund (PIF) have backed EV companies like Tesla and Lucid Motors, while the Qatar Investment Authority and Mubadala Investment Company invested in Xpeng Motors. Sovereign funds have also preferred to put invest in renewable energy producers in fast-growing markets like India. This analysis focuses on direct investments made by sovereign wealth funds in the selected fossil fuel group versus the selected renewables group. In addition, some countries have dedicated companies, banks, state-owned enterprises, or subsidiaries dedicated to renewable energy investing.

Direct Investments by Sovereign Wealth Funds – Fossil Fuels vs. Renewables

Source: – SWFI Global Asset Owner Terminal

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Buyer Type: Sovereign Wealth Fund

Type: Deal, New Security Issue, Open Market

Industry Type: Solar Electrical Equipment, Solar Power, Solar and Wind, Wind Farms, Renewable Electricity, Renewables, Hydropower, Geothermal Energy, Biomass.

Industry Type: Oil Equipment, Services and Distribution, Oil, Gas and Consumable Fuels, Pipelines, Natural Gas, Natural Gas Pipelines, Oil and Gas Drilling, Oil and Gas Producers, Oil and Gas Exploration and Production, Oil and Gas Refining and Marketing.

For example in 2020, sovereign wealth funds directly invested US$ 10.26 billion in the selected fossil fuel industry group, while investing US$ 1.17 billion in the renewables cohort. For 2019, sovereign wealth funds directly invested US$ 6.18 billion in the oil and gas comparable versus US$ 2.89 billion in the renewables group. From a diversification stand point, renewables could partially hedge the capital of these sovereign funds from a drop in oil price or sustained low price in oil. At the same time, the rapid adoption of low-carbon economies would come back to plague the fiscal budgets of these oil-based economies, at least in the short-to-medium term. Already, a number of Gulf countries and Latin American countries dependent on the price of oil have witnessed substantial distress in their fiscal budgets, coupled with the cost of the coronavirus pandemic.

Only a handful of sovereign wealth funds have a sizable portion of their assets toward climate-related strategies, while public pension funds in Canada and Europe are putting massive amounts of capital to work. A number of sovereign wealth funds partnered to create the One Planet Sovereign Wealth Funds Framework to accelerate the integration of climate change analysis into the management of investments. Fifteen sovereign wealth funds have joined this framework entity. However, many of the larger sovereign wealth funds derive their funding from fossil fuels such as oil and natural gas. Norway Government Pension Fund Global, Kuwait Investment Authority, Abu Dhabi Investment Authority, Qatar Investment Authority, and the Alaska Permanent Fund are some sovereign wealth funds that get funding from fossil fuel sources.

Keywords: ESG, One Plant Sovereign Wealth Fund, One Planet Managers Initiative.

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