MADRID — Since September 2015, when the UN General Assembly launched its 2030 Agenda — a plan to reach 17 Sustainable Development Goals (SDGs) within 15 years — the concepts have been gaining momentum worldwide. The ultimate purpose of the SDGs is to eradicate poverty, and slowly but surely, people are realizing their importance and working to bring them about.
The Millennium Development Goals that preceded the SDGs, between 2000 and 2015, made real progress on reducing poverty, improving access to drinking water, and making primary education more widely available. This relative success bodes well for the SDGs, which now have a more social and environmental emphasis.
Here at the Sovereign Wealth Lab, located within the IE Business School in Madrid, we have seen a growing interest among Sovereign Wealth Funds (SWFs) to understand long-term risks and opportunities associated with things like aging populations, faster urbanization and emerging middle classes in Asia. There's also an interest in climate change and sustainable development goals.
The theme of the 2016 International Forum of Sovereign Wealth Funds — held in New Zealand right around the time Donald Trump was taking office in the United States — was Investing in a Climate of Change. This was a clear allusion to geopolitical tensions emerging then and to the risks and opportunities that come with climate change, now a central part of the 2030 Agenda.
New Zealand and Norway have integrated climate criteria into their regular investment process.
SWFs manage $7.5 trillion dollars of assets. In total they represent wealth exceeded only by the GDP of the United States, China and India. Sovereign Funds would thus be the world's fourth economic power. In addition, as Sovereign Wealth Lab reports indicate, they represent a relatively small number of investors. Six governments (Norway, China, the UAE, Kuwait, Saudi Arabia and Singapore) control 87% of this industry. This means that mobilizing the bulk of these assets is not as dispersed or unthinkable a task as one might imagine.
In fact, the aim of a recent project by UN Environment is to mobilize the resources of SWFs toward SDGs. Its report estimates that SWFs invested $11 billion in "green assets' in the last three years, which is 0.15% of all the industry's assets and 7% of all their investments in that time.
SWFs of developing countries like China, Morocco, Saudi Arabia, Singapore or the UAE are investing in green infrastructures, directly or indirectly, through specialized funds. But they have no strategies yet to consistently integrate climatic criteria in their investment process. An outstanding example of green investments in developing countries comes from Masdar, a branch of the UAE's Mubadala Investment Company, which has invested $2.7 billion in renewable energy projects with capacity exceeding 1.1 gigawatts.
Among developed countries, the investment strategies of countries like New Zealand, Norway, France and Australia stand out. The first two have integrated climate criteria into their regular investment process and their SWFs lead the way in hydrocarbon disinvestment actions.
Factory chimney polluting surrounding environment — Photo: Veeterzy/Unsplash
The UN Environment report observes that SWFs still face obstacles to making their green investments systematic. The three main obstacles are an apparent contradiction between profitability and green investments (doing good by doing well), which would hinder many such funds in their "fiduciary" duty to increase the national wealth; the lack of social pressure, especially in markets, to invest with green criteria; and the costs of measuring the carbon footprint of existing SWFs.
To these we may add the debate about how to implement changes. Should they disinvest from highly polluting industries or remain their stockholders to pressure the firms to change their sustainability policies and strategies?
The positive aspect is that an increasing number of SWFs have improved their investment capabilities in recent years with entry into complex private sectors. Today they are better able to invest in sustainable infrastructure, farming or transport funds or assets that are so crucial to SDGs. In addition, many of these investments are inherently long-term oriented, which fits well with the visions of sovereign funds.
The SWF Working Group, formed in December 2017 under the aegis of French President Emmanuel Macron, brings together six sovereign funds and aims to design sustainable investment criteria for these funds. Its work will be crucial in attaining the 2030 sustainable development goals.
*The author is the director of the IE Business School's Sovereign Wealth Lab, in Madrid