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Sovereign Wealth Funds’ Views on Climate Evolving Rapidly

Report finds tenfold jump in SWFs that see addressing climate change as consistent with their mandate.

By Michael Katz



In less than two years, sovereign wealth funds’ views of climate change’s impact on investment returns has evolved rapidly, according to a report that finds that the funds now see the issue as a financial one, rather than a social one.

The third annual report, released by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds Network, details a survey of and interviews with 40% of the world’s sovereign wealth funds. The research found that the institutional investors are integrating climate-related issues into their investment process far more than had been expected.

“In 2022, we expected to see a leveling off of this process and perhaps less dramatic trends,” the report stated. “However, even in the aftermath of the COVID-19 pandemic and the on-going conflict in Ukraine, sovereign wealth funds continue to prioritize integrating climate-related issues into their investment process and understand the impact of climate change on their investments.”

The report said that in 2021, only 9% of respondents said addressing the effects of climate change was part of their mandate, while 65% said climate change issues were not strictly part of their mandate, though they did consider it when investing. But just a year later, 91% of respondents said they believed addressing climate change was consistent with their mandate, and 74% said it was actively part of their mandate.

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There has also been a significant change in the reason sovereign wealth funds provide for including climate-related criteria in their investment process. In 2021’s survey, half of the respondents said they were considering climate change in their investment decisions because it was “the right thing to do,” rather than for its financial benefit, while 23% said doing so would improve long-term returns or reduce risk. However, there was a sharp turn in 2022, as 60% of respondents said they integrated climate change considerations to minimize investment risk and improve long-term returns, with 40% saying they were motivated because it was “the right thing to do.”

The IFSWF and One Planet SWF Network also said in the report that in 2020, they laid down six challenges to sovereign wealth funds. After two years, “we have observed progress across all six challenges,” the organizations stated.

The six challenges were: adopt and implement climate-related policies; seek out the appropriate talent and expertise; explore board member and executive education; use metrics to show climate impact, as well as comparable returns and risk reduction; communicate the strategic importance of climate; and partner with peers and international initiatives to share experience and generate greater leadership.

“Since 2020, the sovereign wealth funds that responded to our survey 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,” the report stated. “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.”

However, sovereign wealth funds are still finding significant barriers to their progress, the report said, particularly in acquiring data on climate impact from portfolio companies 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,” said the report. “While it is true that sovereign wealth funds can request this information, it is also important to not over-burden these companies and asset managers by standardizing the data requested.”


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Home > News > Asset Allocation > Korean National Pension Fund Loses More Than 8% in 2022
Asset Allocation

Korean National Pension Fund Loses More Than 8% in 2022

Despite downturn, the $684.5 billion fund’s losses were offset by an increased allocation to alts.

 

By Michael Katz



The Republic of Korea’s National Pension Fund reported an 8.22% investment loss for the fiscal year that ended on December 31, which it attributed to combination of monetary tightening by central banks and Russia’s invasion of Ukraine.

However, some of the South Korean fund’s losses were offset by an increased allocation to alternative assets, as well as by foreign exchange gains from a strengthening dollar, as the fund ended year with an asset value of 890.5 trillion won ($684.5 billion).

Domestic equities weighed down the portfolio the most, losing 22.76%, while foreign equities was the second-worst performing asset class with a 12.34% loss for the year. The fund attributed the losses in equities to “ongoing market volatility at home and abroad triggered by the prolonged war in Ukraine and the U.S. Federal Reserve’s aggressive tightening stance to tame surging inflation.”

Due to sharply rising interest rates, the portfolio’s domestic and foreign fixed-income investments fell 5.56% and 4.91%, respectively, while short-term assets were down 0.86% for the year. The fund noted that it was “highly unusual” that equity and fixed-income markets fell in tandem during the year.

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“Historically, equity has been considered risky and fixed income has acted as a safe haven, moving in opposite directions and thereby offsetting each other,” the pension fund’s report stated. “That was not the case in 2022 as both plunged simultaneously for the first time since the stagflation in the 1970s in the overseas markets and for the first time since 2001 in the domestic market.”

Alternative investments, which benefited from capital appreciation and realized gains from real estate and infrastructure assets, were the top-performing assets, returning 8.94% during the year. The fund said its alts assets were also aided by the strengthening of the U.S. dollar.

Despite the down year, the pension fund said its traditional asset classes outperformed their respective benchmarks on a time-weighted return basis. Foreign fixed income outperformed its benchmark by 88 basis points; domestic equity by 47 bps; foreign equity by 15 bps; and domestic fixed income by four bps.

The pension fund said that after the challenging year in 2022, global financial markets started 2023 on a stronger footing and the National Pension Service’s investment portfolio, including equity and fixed income, has recovered from the losses that occurred last year.

“Heightened external uncertainty made 2022 an extremely rare year where both equity and fixed income tumbled together,” Kim Tae-hyun, the chairman and CEO of the NPS, which manages the fund, said in a release. “Looking ahead, I expect that financial markets will maintain recovery pace and the fund will generate better returns in 2023.”


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