Sovereign wealth funds are starting to take environmental, social and corporate governance issues a lot more seriously, in a sign that some of the world’s most influential investors may be ready to reallocate their vast fortunes in more planet-friendly ways.

Over 70% of sovereign funds surveyed by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds group said they now incorporate ESG “considerations” in their investment process, up from just 24% a year earlier, according to a report published on Thursday. At the same time, 41% said they were planning on “upskilling” their investment teams on ESG topics, while 38% said they were either expanding or establishing a dedicated ESG team.

ESG investing has morphed from a niche theory to a US$35 trillion market, with investors of all stripes jumping on the bandwagon amid pressure from clients, shareholders and regulators to take climate change and social justice into account. Sovereign funds, most of which were set up by petrostates, have been among the slowest movers with the governments that oversee them often failing to set greener investment mandates.

Duncan Bonfield, chief executive of IFSWF, said the latest increase in ESG awareness among sovereign funds is significant because of “the clear message it sends to the investment markets and the asset management industry.” Asset owners “now expect asset managers and companies to be fully engaged on the transition to a low-carbon future."

Sovereign funds are gradually becoming more sophisticated in their approach to the transition and in assessing climate-related risks and opportunities. Just over a third of respondents have calculated the carbon footprint of their portfolios, up from 23% last year, while 31% now use climate-scenario analysis compared with just 17% in 2020.

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The survey, which is based on responses from 34 funds, showed a key reason for the new embrace of ESG -- especially climate topics -- is a decline in “stakeholder opposition.” While a fifth of respondents to a 2020 survey said “a substantial obstacle to adopting an ESG or climate change investment approach was that stakeholders did not believe these issues to be important,” only 3% reported such a response this year.

For sovereign funds seeking out ESG-friendly investments, renewable energy is the most popular area of investment with 70% of respondents saying it was “the most attractive climate-related sector.” Those investments are typically made in private equity, real assets and listed equity asset classes, according to the report.

Photo: Bloomberg