Investing in climate risk: the new strategy–Sovereign Wealth Funds

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Investing in climate risk: the new strategy  -Sovereign Wealth Funds

Six sovereign wealth funds which collectively represent more than USD 3 trillion in assets have committed to only invest in companies that factor climate risks into their strategies, thereby helping to achieve the climate goals of the Paris Agreement.

By Houmi Ahamed-Mikidache

Given the size, long term investment horizons of sovereign wealth funds (SWFs), and the financial risks posed to SWFs should warming exceed 1.5°C above pre-industrial levels, SWFs are in a unique position to both benefit from sustainable market outcomes and to accelerate the transition to a low carbon economy. The six funds are organized in the “One Planet Sovereign Wealth Fund Working Group,  established in December 2017 at the One Planet Summit in Paris, France. The working group consists of the Abu Dhabi Investment Authority, Kuwait Investment Authority, the New Zealand Superannuation Fund, Norges Bank Investment Management of Norway, the Public Investment Fund of the Kingdom of Saudi Arabia, and the Qatar Investment Authority.

In a joint statement from all 6 SWFs, they said that “By using the Framework, SWFs can reinforce their long-term value creation, improve their risk-return profile, and increase long-term portfolio resilience by factoring and integrating climate issues into their decision-making.”

The framework

The framework is based on three principals: alignment, ownership, and integration. Alignment of investment decisions with climate change conscientiousness includes the recommendation of public reporting on the alignment and the consideration that the financial risks from climate change may prevent SWFs from delivering the same returns in the future.

The second principal of ownership encourages companies to take responsibility for climate change in their business strategy and planning, governance, and risk management. Companies are expected to understand the implications of their greenhouse gas emissions and take responsibility for reducing the emissions to levels agreed upon in the Paris Climate Agreement.

SWFs are also encouraged in the framework to help companies understand the financial risks of climate change that the Paris Agreement seeks to address. Ownership also suggests that SWFs require companies to provide regular reporting of climate change related data according to the Greenhouse Gas Protocol and the Task Force on Climate-related Financial Disclosures.

The third and final principal is the full integration of climate change related risk and investment opportunities into the SWF investment strategy. Funds should be managed according to the expected transition to a low carbon economy and include a focus on investment in climate change adaptation and mitigation to reduce investment risks. Climate change risk should also be considered in new investment decisions.  An investment that would increase greenhouse gas emissions and thus climate change will lead to greater risk in the future and should be avoided.

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