Sovereign Wealth Funds Adopt More Tools to Monitor Climate Impact

Sovereign wealth funds, many of them committed to combatting climate change, are now employing more sophisticated means of measuring their impact on the environment, a survey of 48 SWFs indicated.

SWFs also now demonstrate “increased sophistication in climate finance,” according to the study by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds Network, their fourth such poll. The latest version was conducted in 2023 and released this week.

For instance, the funds used to flock into private asset classes dedicated to green themes, such as private markets and real estate, considering these investment sectors easier to influence, the report stated. Only about one-third of them listed climate-related investments in publicly traded assets.

Now, however, SWFs are entering public assets such as stocks, which they had avoided out of fear about equities’ relative volatility. Take renewable energy stocks, which suffered with rising interest rates that began in 2022. Lately, 53% of the funds reported investing in these equities. Renewable energy shares have seen their prices dip and thus offer good entry points for investors, the report contended.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Among the funds’ new techniques: adopting carbon footprinting, which tracks how much greenhouse gas an activity is producing, and climate scenario analysis, which gauges how much climate risks affect the financial health of institutions and the overall financial system.

At the same time, SWFs are more “interested in different climate financing instruments and safeguards” than before, the study noted. It pointed to increased use of catastrophe insurance. This coverage “acts as a portfolio diversifier because it is negatively correlated to equity markets,” the study concluded—presumably as portfolio insurance. So when natural disasters and other such events harm stock markets, insurance payouts offset policyholders’ equity losses.

More and more, SWFs (77% in the latest survey, up from 70% the year before) are requiring that asset managers outline how they are approaching climate change investing. By doing this, the study declared, “sovereign wealth funds are playing their role in holding their asset managers accountable for their climate impact and making a contribution to protecting the industry against greenwashing,” which occurs when entities make misleading claims about environmental benefits.

Africa is “an increasingly attractive geography for sovereign wealth funds to look for climate change solutions,” the report advised. While that continent is “challenging and unfamiliar” to SWFs, the study found that the funds are “working on understanding these new markets.”