Sovereign Wealth increasing their energy transition investments

Sovereign wealth funds are increasing their energy transition investments. According to a study released on Tuesday by the International Forum of Sovereign Wealth Funds, a network of sovereign funds from Abu Dhabi to Singapore, custodians of national wealth spent $2.3 billion in sectors relevant to mitigating climate change in 2020, including forestry, clean energy, and so-called agritech. According to IFSWF numbers, this is more than double the $1.1 billion spent in 2019.

If the worst consequences of global warming are to be stopped, a move to a low-carbon future is a must, and investors of all types are under increasing pressure to play a role in channeling the trillions of dollars of investment needed to allow a transition away from fossil fuels. So far, sovereign funds have been lagging behind, with the IFSWF reporting in February that only 30% of a group of 34 responding institutions have spent more than 10% of their portfolios in climate-related strategies.

Although sovereign wealth funds "rarely set trends," innovations that help mitigate carbon emissions or help economies adapt to the impact of climate change are "becoming a clear investment trend" for the funds, according to the IFSWF. Even though $2 billion is a small portion of the assets held by sovereign funds, it represents a four-fold rise from the $734 million invested in 2016.

“Over the next 10 years, the best investment opportunities will be in climate change and related technologies,” said Heenam Choi, chief executive of the Korea Investment Corp. “The pandemic highlighted the importance of sustainability. We will continue to expand our ESG investments.”

Since the technology has evolved and renewable energy assets have become viable in the short to medium term without needing government incentives, sovereign investors are increasingly eager to invest in them, according to the IFSWF. Furthermore, as a result of the energy transition and the electrification of transportation, global electricity demand is expected to rise, bringing more money into the market and driving down prices.

According to the IFSWF, investments that minimize environmental effects of food production are becoming more common as part of climate change investment strategies. Investors are looking at agritech businesses that are creating alternative ways of nutrition or food processing because agriculture and food production currently account for about a fifth of global carbon emissions, and the world's population is expected to rise ever further.