Sovereign funds’ action or inaction on climate finance could strongly influence the world’s ability to reach the goals of the Paris Agreement and limit global warming to below 2 degrees Celsius, according to the OECD Development Centre’s recent work on ways to mobilise resources for the low-carbon transition.
The role of sovereign and strategic investment funds in the low-carbon transition shows that sovereign funds have so far played a very limited role in climate finance. Initiatives to address climate impact remain largely aspirational, and only a minority of sovereign funds systematically address climate risk to their portfolios. Few have adopted climate-focused active ownership policies to reduce the carbon footprints of their portfolios, and less than 1% of sovereign funds’ investments go to low–carbon solutions.
The report provides guidance on how governments can support their sovereign funds in becoming climate-aligned commercial investors. To achieve higher public allocations to low-carbon solutions, many sovereign funds would need to undertake major investments in capacity building at the levels of board, management and staff, and across several areas. This includes capacity to engage with portfolio companies on climate-related issues; capacity to select and monitor asset managers based on their climate-related performance; as well as – for the stronger sovereign funds – capacity to invest directly in low-carbon infrastructure.
According to The role of sovereign and strategic investment funds in the low-carbon transition, the establishment of synergies between sovereign funds and strategic investment funds (SIFs) can help scale up investments in clean-energy infrastructure. SIFs differ from sovereign funds by having double bottom line objectives of financial returns combined with the achievement of policy goals, and are usually domestically focused. Sovereign funds could benefit from collaborating more closely with SIFs that already have many of the skills required for playing an important role in climate finance, as well as with pension funds that have built the capacity for direct infrastructure investment. For SIFs, collaboration with sovereign funds would provide an opportunity to scale their investments in low-carbon infrastructure and other climate-related assets. This could be done by channelling part of sovereign funds’ capital through SIFs, or by setting up joint investment platforms with SIFs to pool resources and expertise to co-invest in green infrastructure.
The Report recalls that sovereign funds hold a significant share of global invested capital, with assets worth about USD 8.2 trillion. They control about 8% of all listed equities worldwide. And 57% of sovereign funds are capitalised from natural-resource revenues, mainly from oil and gas, with the remaining 43% being funded from non-commodity sources such as foreign exchange reserves and fiscal savings rules. At the same time, the capital held by sovereign funds is highly concentrated, with the largest 20 sovereign funds controlling about 90% of total sovereign fund assets. The commitment to action of a small number of large sovereign funds could thus play a central role in low-carbon transition.
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For more information, please contact Bochra Kriout at the OECD Development Centre’s Press Office (Tel: +33(0) 145 24 82 96; email: Bochra.Kriout@oecd.org).