What Approach to Green Investing Suits SWFs Best?

May 28, 2015 by David Turner

There’s more than one way to save the planet. Just look at some sovereign wealth funds.
Some sovereign wealth funds are focusing on so-called environmentally-responsible investing. The question is figuring out the best course of action.
  • Print
  • Please login

Some sovereign wealth funds are focusing on so-called environmentally-responsible investing. The question is figuring out the best course of action.

There’s more than one way to save the planet. Just look at some sovereign wealth funds.

Masdar , the alternative energy company owned by Abu Dhabi’s $60.9 billion Mubadala Development Co. , typifies one approach toward environmentally-responsible, or green, investing. It seeks to advance an earth-friendly agenda by directly supporting green projects while delivering strong financial performance. Mubadala’s mandate includes diversifying Abu Dhabi’s economy away from oil.

"Every single investment decision we take, we take not only with the view of supporting the diversification of the Abu Dhabi economy and furthering Abu Dhabi as a global leader in renewables, but also of delivering a commercial return to our shareholders," says Niall Hannigan, the company’s chief financial officer, based in Dubai.

Example: Alriyada, a joint venture between Masdar and the Abu Dhabi National Oil Company , which captures carbon from Emirates Steel , compresses it, and then injects it into oil fields to boost hydrocarbon recovery. "It’s a commercially viable project that only delivers long-term strategic social and economic benefits to Abu Dhabi because it is pioneering carbon capture storage in the region, reducing carbon emissions, and reducing the amount of expensive natural gas that’s used for oil recovery", says Hannigan. "You have that balance between commercial return and strategic, social and economic benefits to the wider Emirates." Hannigan declines to describe what he regards as a commercially acceptable return.

Excluded Companies

Sovereign wealth funds that seek to protect the environment tend to fall into two camps. There are those, like Mubadala, that take what some call a "proactive" approach. They bankroll companies that they expect to have a direct, positive impact on the environment through their business activities — like wind and solar projects. And there are those others that take what might be called the "proscriptive" tack — banning or reducing investments in stocks or other securities of companies that they believe damage the environment.

Masdar has two funds that have invested in renewable energy, including solar, hydroelectric and wind around the world. Indeed, the company owns 20 percent of the 630 MW London Array Limited in the outer Thames estuary, the largest operational offshore wind farm in the world, which opened in 2013.

By contrast, Norges Bank Investment Management (NBIM), which oversees Norway’s $870.3 billion Government Pension Fund Global (GPFG),  takes the proscriptive road. Norway faces strong public pressure to avoid certain types of investments .

While there are a variety of reasons to exclude companies from the sovereign wealth fund’s giant portfolio, ranging from human rights violations to tobacco to nuclear weapons production, one of the more oft cited reasons is the likelihood of a company taking actions that result in "severe environmental damage".  NBIM and the fund’s Council on Ethics can each make the recommendation for exclusion. "That point has been used to exclude companies which are really sub-standard", says Ola Mestad, who finished his term as chair of the Council on Ethics at the end of 2014.

Mestad says proactive investments to engage in environmentally salutary activities is a poor idea for the general fund. "I actually advise against that," he says.  "If you should ever try to identify positive companies, that should be a separate fund."

"Dairy Farms"

The danger lies in expecting management to perform a function for which it may not be particularly suited. "I think it's important that you don't try to focus on too many different topics within the same organization," Mestad says.  "So I think it would be better, then, if you split out part of the sovereign wealth fund to do that, and established it as another fund under other management rules." That’s not far from Abu Dhabi’s approach, since the emirate owns several other sovereign wealth funds, including the $589 billion Abu Dhabi Investment Authority (ADIA) and the $90 billion Abu Dhabi Investment Council .

For its part, GPFG removed 32 coal mining companies from its portfolio in 2014. The divestment was disclosed earlier this year. A Norwegian parliamentary committee yesterday unanimously voted in favour of a law that prohibits the fund from investing in firms that generate 30 percent of their revenues from coal. The law still needs approval from Norway’s parliament, with the final vote due to be held on June 5.

Another prominent fund going down the proactive route is the $21.5 billion New Zealand Superannuation Fund . According to the Responsible Investment Framework published in September 2014 by the Guardians of New Zealand Superannuation, the organization that manages the fund, its principles include consideration of positive "social returns" in addition to financial ones when making investments. The framework also says the fund will be an active owner by exercising its voting rights.

"Ownership is about the monitoring and ongoing oversight of RI [responsible investment] requirements across our portfolio post-investment," says Matt Whineray , NZ Super’s Chief Investment Officer, in an online video. And the fund scrutinizes investments both domestically and abroad. One area Whineray cites:  "Effluent management within our dairy farms".

Stranded Assets

NZ Super goes further than other sovereign wealth funds by characterizing its environmental initiative as one of three key investment "themes" —  which it says will have a long-lasting impact on economies and hence returns. "That [theme] will normally be fairly immune to the ups and downs of the business cycle," the fund’s website says.

The so-called green theme is dubbed "Resource Sustainability". NZ Super cites scientific consensus as the basis for its policy. "Many existing resource usage patterns are not sustainable,"  the fund says. Certain sectors lend themselves more readily to the proactive approach than others. The website says the fund focuses on energy, rural land and timber, for example.

Saving the planet is not necessarily an "either, or" proposition. For example, Towers Watson , the UK investment consulting firm, sees scope for proactive- and proscriptive-based approaches. Both, however, generate challenges that may have profound effects on future returns.  

Proscribing investments in hydrocarbon producing companies will change the outlook for oil and gas producers, as reserves become "stranded", in industry argot, because production becomes environmentally undesirable. "If, at some point, you can’t even touch 30 percent of a company’s assets, that company will need to be revalued," says Emma Hunt, co-head of sustainable and responsible investment at Towers Watson in London.


Public and private pensions as well as sovereign wealth funds, given their time horizons, are the leaders in assessing this risk. "The long term funds are the big movers in thinking about stranded assets", says Hunt. "This is because it’s unlikely that stranded asset arguments will play out within a one to three-year period, but it’s likely that they will play out over a longer time period."

Boom and Bust

There are equally important considerations too. Hunt, for example, sees green technology as a great opportunity. The big question for proactive green investing, however, is identifying the best asset class through which sovereign wealth funds, in particular, should pursue investments. "Probably the easiest way to benefit from this theme is through infrastructure", says Hunt. "This is partly because of the scale and the quantity of the projects."

Potential sovereign wealth fund investments include water-efficient sewage systems, smart electricity grids and carbon capture initiatives, like Alriyada’s. Such projects can absorb billions of dollars and have a useful life of decades. Private equity is limited in the amount of money it can put to work and typically returns money to investors after a decade or less.

Private and listed equities generally mean outcomes are riskier. "We still don’t know which of the clean technologies is going to play out most strongly," says Hunt. "In energy production, is it going to be wind or solar that plays out? When it looks as if solar tech is winning, the value of those assets goes way up to the point where there is potentially a bubble, so I probably wouldn’t touch those assets for a while till they came down again." Ditto for wind power projects.

The boom and bust of public alternative energy companies over the past decade is illustrated by Vestas Wind Systems , the Danish wind turbine maker, and Tempe, Arizona-based First Solar , both of which witnessed their shares climb precipitously only to lose more than 90 percent of their value peak to trough before rebounding, at least in part. Other companies, like Germany-based Q-Cells , filed for bankruptcy before being bought.  Long story told short: Infrastructure projects are likely to carry less risk than either private equity or publicly-traded green investments.

Policy Problems

State investors are willing to leverage their scale and long-term investment horizons to invest in early-stage green energy companies. ADIA, NZ Super and the Alberta Investment Management Co. (AIMCo), which oversees 28 pension and endowment funds based in the Canadian province, including sovereign wealth vehicle Alberta Heritage Savings Trust Fund, have teamed up to form the so-called Innovation Alliance , which works with private equity firms to identify opportunities to invest in creative start-up companies, including those working on new clean energy technologies.

Through the alliance AIMCo and NZ Super have invested in California-based Bloom Energy, which develops high-tech fuel cells.

Hunt thinks sovereign wealth funds’ interest in green investing will grow if the United Nations Climate Change Conference, to be held in Paris beginning in November, succeeds in producing a successor to the 1997 Kyoto Protocol, which requires countries to limit their greenhouse gas emissions.  "At the moment there’s not enough policy certainty to make an informed and accurate investment response to climate change", says Hunt. "Without an international policy framework, companies affected by climate change will probably err on the side of doing nothing."

One way to deal with the problem of policy uncertainty is to circumvent it by finding green investments that do not depend on policy, says Michael Schneider, who heads environmental, social and governance investing at Deutsche Bank AG ’s asset and wealth management division in Frankfurt. "Decentralized power could be a bit of a trend", he says. "Some emerging market countries may say, 'We’re creating pockets of infrastructure rather than a whole grid.’"  Some U.S. analysts are already warning investors to steer clear of traditional utilities to avoid the impact of home-generated energy.

Open Questions

Sovereign wealth funds could consider renewable projects in swaths of Africa or Latin America, where solar and wind power is the most cost-effective option, regardless of any green investment agenda that a particular government may or may not adopt. Masdar, for instance, is backing a huge wind farm project in the Seychelles in the Indian Ocean. "Ultimately investors are betting on the competitiveness of green power," says Schneider. "That’s your best bet, because you no longer have to rely on government policy if you are the cheapest provider of power."

Lately, some European governments have not been especially reliable in their support for green power. Spain cut subsidies for renewable energy in 2013, putting many wind farms in trouble, and Bulgaria scrapped preferential prices for new renewable energy projects in February 2015.

With their scale, state-owned investors could be a major force in pushing a green agenda forward. "Many large investors, such as sovereign wealth funds, can play an instrumental role in using all the money behind them to improve environmental policies on a broad scale", says Edith Siermann, senior executive vice president of governance and active ownership at Robeco in Rotterdam, where she is also global chief investment officer for fixed income.

Whether sovereign wealth funds do so in large numbers, and how, remain just two open questions.

Updated Fund Profiles

Our market-leading fund profile library provides unrivalled analysis of more than 90 government and sovereign funds.

Register to read fund profiles

Recent SWF Investments

Search the database of direct investments and mandates by fund, industry and target market to identify past deals that match your requirements. Access over $1 trillion worth of transactions dating back to the 1960s.

Register to explore our data

Latest SWF News

Sovereign Wealth Center makes staying abreast of the most recent government and sovereign fund events easy. Our team undertakes a thorough review of global news feeds every morning and distills salient points.

Register for the latest SWF news
Join the discussion:

To be able to print this content,
you must be a subscriber

For details on your subscription options,
please contact: