Allianz : The climate is changing. Why aren’t sovereign wealth funds?

Net-zero initiatives are being established in the banking, investment managementand institutional investorindustries, representing $37 trillion, $43 trillion and $6.6 trillion in assets under management (AUM), respectively. However, no similar initiative is seen amongst SWFs.

The issue is that greenhouse gases are measured at the country level as part of nationally determined commitments to reducing emissions. However, this approach significantly understates the climate impact countries have via SWFs with extensive foreign asset holdings.

For example, the world's largest SWF, the Government Pension Fund of Norway (also known as the Norwegian Oil Fund), holds assets of $1.3 trillion - three times the size of Norway's economy. Its equity portfolio spans 73 countries and 49 currencies, including holdings in over 9,000 companies. Altogether, the carbon footprint is 107.6m tonnes, twice Norway's total annual emissions.

Despite this, the Norwegian Oil Fund does not have specific emissions reduction targets or adopted a climate-adjusted equity benchmark. While the fund has divested 170 companies with high greenhouse gas emissions or that contributed to deforestation, these exclusions were because of climate risk to portfolio value rather than being part of a climate impact strategy.

Norway is far from alone. SWFs are often owned by governments with ambitious climate objectives. However, only eight SWFs from a group of 34 that responded to a recent survey from the International Forum of Sovereign Wealth Funds report having more than 10% of holdings in climate-related strategies, while only 14% of the SWFs have made divestment decisions related to climate or environmental targets. Further, only 12% have an explicit climate-change policy.

It is disingenuous of governments acting domestically on climate commitments to pretend emissions linked to foreign investments of SWFs are somehow separate from the all-encompassing threat we face. Governments should instead be using the financial weight of SWFs to drive climate action internationally.