Almost all sovereign wealth funds (SWFs) accept climate change will impact investment portfolios but only a third have implemented formal strategies to address the challenge, a “first-of-its-kind” survey of the sector has found.
According to the International Forum of Sovereign Wealth Funds (IFSWF) study, 93 per cent of the 34 institutions captured in the inaugural poll “recognise that climate change is a risk and/or opportunity for their portfolios”.
“The majority also agree that financial markets are under-pricing climate change risks and that unchecked climate change will leave future generations of their citizens worse off,” the IFSWF report says.
But in spite of the almost universal acceptance of the risks only a minority of SWFs have climate change action plans, of which most are in early phases.
“Just over a third of respondents have a formal climate change or ESG strategy in place, though for many this was a relatively recent development,” the study says.
“Only Norges Bank Investment Management and the New Zealand Superannuation Fund [NZS] have had climate strategies in place for more than ten years and they continue to lead the way for other investors by taking steps to ensure that these policies remain relevant and ambitious.”
The report highlights the NZS climate strategy, including its recent policy refresh, as an example for others in the influential SWF sector.
While few SWFs have yet to establish formal climate change policies NZS-style, almost 90 per cent of respondents claim to include the factor in their investment processes “in some way”.
“… though the survey highlights some sharp differences in how systematic and sophisticated these approaches are,” the report says.
“… As many sovereign wealth funds are still at an early stage of developing and implementing their approach to climate change, the degree to which awareness and policies on climate change have manifested into capital allocation decisions remains uneven.”
Just 12 per cent of SWFs in the survey take no account of climate change in their investments while close to half take an ad hoc approach to the matter. Roughly a quarter of respondents lumped climate change in with broader ESG strategies; 12 per cent tackled the issue separately; and, 3 per cent included climate risks in “non financial investment modelling”.
“Only 30% of responding institutions had more than 10% of their portfolios invested in climate-related strategies, and of these only 7% had more than 50% of their portfolios aligned with climate strategies,” the IFSWF study says. “There is, however, more anecdotal evidence that sovereign wealth funds are increasingly dedicating capital to climate change solutions.”
However, the survey found “convincing stakeholders of the business case for action” and access to quality data were the biggest barriers to implementing climate change investments.
Last year the SWF body “made a joint statement of support for the recommendations of the Task Force for Climate-related Disclosures (TCFD)”, which is emerging as the global reporting standard. The NZ government has recently introduced new climate reporting rules that are based on the TCFD.
Last month, NZ industry consultant (and chair of the Financial Adviser Code Committee), Angus Dale-Jones, published a paper outlining the climate reporting process for NZ entities, including how the TCFD standards work.
“… climate disclosure if far more than a compliance activity; climate accountability is fast becoming central to how businesses operate,” Dale-Jones says in the report.
The IFSWF survey also notes the rapid uptake of climate change as a serious issue for the SWF sector, which collectively manages over US$8 trillion.
Duncan Bonfield, IFSWF chief, said in statement: “The analysis reveals that sovereign wealth funds are making significant progress towards integrating climate-change considerations into their investment processes. Although many still need to be more systematic and comprehensive, we believe this report demonstrates that sovereign wealth funds are taking this issue seriously.”
Nonetheless, translating climate change acceptance into SWF action may not be so simple.
“Changing investment practices in these large and complex institutions will take time,” the report says. “Neither is aligning with the goals of the Paris Agreement straightforward, with methodologies and pathways still being developed internationally.”
The study offers six recommendations to accelerate climate change strategies among SWFs ranging from adopting policies to hiring experts and improving communication to all stakeholders.
Formed in 2009, the IFSWF is a voluntary organisation of over 30 global government funds following the ‘Santiago Principles’ – offering 24 practical ideas “on appropriate governance and accountability arrangements, and the conduct of investment practices necessary for sound long-term investment procedures”