Central banks and sovereign wealth funds have net zero firmly in their sights
Sovereigns and central banks across MEA are reshaping the investment landscape by chasing green funds at home and abroad, carbon-free giga-projects and climate change investment coalitions
Josette Rizk, director of Institutional Clients for MEA, Invesco
It is a welcome shift on a critical topic that official financial institutions are pivoting so decisively to projects with an environmental, social and governance (ESG) dimension. A great many projects in the Middle East seeking solutions to climate change challenges today have the support of sovereign wealth funds (SWFs) and central banks in the region. Not only are they sustainable by design but they mirror a sharp focus from national governments across the region on achieving net zero economic development.
The move makes perfect sense in the context of a post-pandemic world economy skewed by supply chain constraints, commodity shortages and historic quantitative easing. The present threat of inflation – or even stagflation – makes pursuing resilient investments a solid decision for countries seeking economic diversification. Economic growth and sustainability are influenced by environmental and social issues. These dynamics leave official institutions like SWFs and central banks well positioned to send a signal to the industries in which they invest about sustainability and ESG, with several having integrated climate risk and other ESG factors into investment operations.
The extent to which these institutions have switched focus is illustrated in Invesco’s ninth annual Global Sovereign Asset Managers Study (IGSAMS). Survey data shows that 43 percent of sovereign funds and 60 percent of central banks in the Middle East (total sample = 12) have pivoted towards making ESG a priority since the pandemic.
The study found the focus among sovereigns and central banks had zeroed in on climate change, in particular climate-proofing their portfolio by tracking carbon exposure, setting carbon standards and finding assets to meet their stated climate-related objectives. Furthermore, sovereigns are looking for ‘winners’ in the shift to a low-carbon economy, sometimes through direct investment.
Net zero public investment
The shift shows that governments in the region are increasingly wedded to the idea that central bank balance sheets and sovereign funds should be used to mitigate climate change. Several regional SWFs are at the forefront of the global ESG conversation, with the Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA) and Saudi Arabia’s Public Investment Fund (PIF) among the founding members of ‘One Planet Sovereign Wealth Funds’ to discuss the key issue of financing climate action.
In July 2018, the coalition published a framework to promote the integration of climate change analysis in the management of large, long-term diversified asset pools. Saudi Arabia needs no convincing: its PIF is one of the region’s more vociferous investors in net zero programmes, projects and technologies.
The fund is an important backer of several giga projects in the kingdom to be driven by ESG values, with future technologies forming the cornerstone of its development strategy. It has also made significant investments to specifically develop the renewable energy sector, including solar and clean energy projects.
Across the border, the UAE confirmed it is working on a ‘whole-of-government’ approach to set a feasible timeline towards a net-zero goal, potentially becoming the first OPEC nation to set such a bold climate target.
Backing green industry abroad
Governments in the region have also recognised the enormous contribution that private sector innovation is making on national net zero targets – even when those investments are thousands of miles away. In 2018 Saudi Arabia’s PIF invested a majority stake in a California-based Tesla rival called Lucid Motors, an electric vehicle manufacturer, which recently announced it is going public.
The strategy of targeting sustainable investments at home and abroad also underpins the approach taken by ADIA. Its portfolio includes the market-leading owner and operator of clean energy projects in India, Greenko, which develops, builds and serves wind, hydro and solar assets.
Policy challenges
Sovereign investment in climate has deepened as they push on in their search for sustainable investment opportunities. Fifty-seven percent of sovereigns in the Middle East believe the market has not fully priced in the long-term implications of climate change, offering opportunities for alpha.
Yet the study suggests there are idiosyncrasies arising from differences in the purpose of sovereign wealth funds which influence ESG adoption. Leading the way are development sovereigns, who embrace private equity-style investments driven by net-zero commitment as we are seeing in the region. As their objectives balance development and investment returns with very long-term investment horizons, they are natural candidates to consider ESG. Liquidity sovereigns, on the other hand, are more focused on maintaining liquidity to assist funding budget shortfalls, with a lower percentage of global liquidity sovereigns having a formal ESG policy.
Early-stage ESG themes
SWFs also recognise the fundamental role that ESG investments have in supporting new industries like hydroponics (growing crops without soil) and vertical farming – all part of the net zero conversation. The opportunities for relatively early-stage themes such as mobility, electrification and carbon reduction have come into focus as SWFs aim to break the linkage between economic growth and carbon emissions in order to deliver a low carbon future.
As new ESG investment opportunities like these emerge, portfolio managers look set to increase the supply of ESG products through the creation of ESG-focused portfolios and investments. Not only does this meet the growing appetite for a more sustainable economic model amongst the general public, but it enables central banks, SWFs and investors to futureproof their assets for the long term. This is a commonsense roadmap to building a net zero future that MEA central banks, SWFs and governments should be proud of.
The writer is director of Institutional Clients for MEA at Invesco
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Central banks and sovereign wealth funds have net zero firmly in their sights
Sovereigns and central banks across MEA are reshaping the investment landscape by chasing green funds at home and abroad, carbon-free giga-projects and climate change investment coalitions
It is a welcome shift on a critical topic that official financial institutions are pivoting so decisively to projects with an environmental, social and governance (ESG) dimension. A great many projects in the Middle East seeking solutions to climate change challenges today have the support of sovereign wealth funds (SWFs) and central banks in the region. Not only are they sustainable by design but they mirror a sharp focus from national governments across the region on achieving net zero economic development.
The move makes perfect sense in the context of a post-pandemic world economy skewed by supply chain constraints, commodity shortages and historic quantitative easing. The present threat of inflation – or even stagflation – makes pursuing resilient investments a solid decision for countries seeking economic diversification. Economic growth and sustainability are influenced by environmental and social issues. These dynamics leave official institutions like SWFs and central banks well positioned to send a signal to the industries in which they invest about sustainability and ESG, with several having integrated climate risk and other ESG factors into investment operations.
The extent to which these institutions have switched focus is illustrated in Invesco’s ninth annual Global Sovereign Asset Managers Study (IGSAMS). Survey data shows that 43 percent of sovereign funds and 60 percent of central banks in the Middle East (total sample = 12) have pivoted towards making ESG a priority since the pandemic.
The study found the focus among sovereigns and central banks had zeroed in on climate change, in particular climate-proofing their portfolio by tracking carbon exposure, setting carbon standards and finding assets to meet their stated climate-related objectives. Furthermore, sovereigns are looking for ‘winners’ in the shift to a low-carbon economy, sometimes through direct investment.
Net zero public investment
The shift shows that governments in the region are increasingly wedded to the idea that central bank balance sheets and sovereign funds should be used to mitigate climate change. Several regional SWFs are at the forefront of the global ESG conversation, with the Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA) and Saudi Arabia’s Public Investment Fund (PIF) among the founding members of ‘One Planet Sovereign Wealth Funds’ to discuss the key issue of financing climate action.
In July 2018, the coalition published a framework to promote the integration of climate change analysis in the management of large, long-term diversified asset pools. Saudi Arabia needs no convincing: its PIF is one of the region’s more vociferous investors in net zero programmes, projects and technologies.
The fund is an important backer of several giga projects in the kingdom to be driven by ESG values, with future technologies forming the cornerstone of its development strategy. It has also made significant investments to specifically develop the renewable energy sector, including solar and clean energy projects.
Across the border, the UAE confirmed it is working on a ‘whole-of-government’ approach to set a feasible timeline towards a net-zero goal, potentially becoming the first OPEC nation to set such a bold climate target.
Backing green industry abroad
Governments in the region have also recognised the enormous contribution that private sector innovation is making on national net zero targets – even when those investments are thousands of miles away. In 2018 Saudi Arabia’s PIF invested a majority stake in a California-based Tesla rival called Lucid Motors, an electric vehicle manufacturer, which recently announced it is going public.
The strategy of targeting sustainable investments at home and abroad also underpins the approach taken by ADIA. Its portfolio includes the market-leading owner and operator of clean energy projects in India, Greenko, which develops, builds and serves wind, hydro and solar assets.
Policy challenges
Sovereign investment in climate has deepened as they push on in their search for sustainable investment opportunities. Fifty-seven percent of sovereigns in the Middle East believe the market has not fully priced in the long-term implications of climate change, offering opportunities for alpha.
Yet the study suggests there are idiosyncrasies arising from differences in the purpose of sovereign wealth funds which influence ESG adoption. Leading the way are development sovereigns, who embrace private equity-style investments driven by net-zero commitment as we are seeing in the region. As their objectives balance development and investment returns with very long-term investment horizons, they are natural candidates to consider ESG. Liquidity sovereigns, on the other hand, are more focused on maintaining liquidity to assist funding budget shortfalls, with a lower percentage of global liquidity sovereigns having a formal ESG policy.
Early-stage ESG themes
SWFs also recognise the fundamental role that ESG investments have in supporting new industries like hydroponics (growing crops without soil) and vertical farming – all part of the net zero conversation. The opportunities for relatively early-stage themes such as mobility, electrification and carbon reduction have come into focus as SWFs aim to break the linkage between economic growth and carbon emissions in order to deliver a low carbon future.
As new ESG investment opportunities like these emerge, portfolio managers look set to increase the supply of ESG products through the creation of ESG-focused portfolios and investments. Not only does this meet the growing appetite for a more sustainable economic model amongst the general public, but it enables central banks, SWFs and investors to futureproof their assets for the long term. This is a commonsense roadmap to building a net zero future that MEA central banks, SWFs and governments should be proud of.
The writer is director of Institutional Clients for MEA at Invesco
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