Sovereign funds hold a significant share of global invested capital, with assets worth about USD 8.2 trillion (Sovereign Wealth Fund Institute, 2020[1]). They control about 8% of all listed equities worldwide (Capapé and Santiváñez, 2017[2]). By way of comparison, pension funds, the largest group of institutional investors, globally hold USD 45 trillion (WillisTowersWatson, 2019[3]). There is a close connection between many sovereign funds and natural resource wealth. 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 (Capape, 2017[4]). Many sovereign funds, especially in resource-rich countries, are large relative to their home economies. In 2015, 16 sovereign funds managed assets equivalent to more than 50% of their country’s GDP (Ossowski and Halland, 2016[5]). 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 (Capape, 2017[4]). The actions of a small number of large sovereign funds could thus have very important implications for the low-carbon transition.
The permanent income hypothesis (PIH) has for long been seen as the benchmark for the role of sovereign funds in the fiscal policy of resource-rich countries. According to the PIH, a country should save enough of its resource revenues (in a sovereign fund) to maintain a permanent income from the return on invested capital towards the indefinite future. However, over the last 6-8 years policy makers and academics have increasingly recognised that, in capital-starved countries, the returns to investing resource revenues domestically could be higher than from investing these revenues abroad – in both economic and financial terms (van den Bremer and van der Ploeg, 2013[6]). In contexts where capacity for high-quality investment management is available, and investment decisions can be implemented free from political influence, within strong corporate governance frameworks, this shift in attitudes has opened up opportunities for the domestic investment of resource revenues through SIFs.
A number of emerging markets and developing economies (EMDEs) have established SIFs, including, among others, Gabon, Ghana, India, Malaysia, Morocco, Nigeria, the Philippines, Senegal, Rwanda and Viet Nam. The level of climate alignment of these SIFs will determine the ability of their countries to reduce e greenhouse-gas emissions and achieve their intended nationally determined contributions (INDC) under the Paris agreement.
This report is structured as follows: Section 2 explains the relevance of sovereign funds and SIFs for climate finance. Section 3 considers the effect of climate risk and opportunities on sovereign funds and SIFs. Section 4 discusses the current role of sovereign funds and SIFs in climate finance, whereas Section 5 considers barriers that prevent sovereign funds and SIFs from adopting a more proactive role in the low-carbon transition, and how these barriers can be addressed. Section 6 concludes.