The ongoing focus on climate change is pushing different investors to increasingly embrace funds with more sustainable stocks under Environmental, Social, and Governance (ESG) instead of funding fossil fuel activities. Sovereign wealth funds (SWF) are now the latest class of investors betting on sustainable funds.
SWFs refer to state-owned investment funds that invest in real and financial assets like stocks, bonds, real estate, and precious metals. SWFs investments are driven by financial returns entailing a diverse set of institutions.
According to data acquired by Finbold, sovereign wealth fund investments in the ESG space surged 215.27% between 2020 and 2021 from $7.2 billion to $22.7 billion. Over the same period, the number of deals increased from 19 to 37. In 2019, the investment stood at $5.2 billion. The investments remained relatively low over the last six years before 2021’s spike, with 2016 registering the lowest value at $3.7 billion.
Elsewhere, while investments in ESGs gained prominence in 2021, SWF involvement in the oil and gas space plunged 46.92% to $6.9 billion from 2020’s figure of $13 billion. Last year also recorded the lowest deals in oil and gas at 8. Notably, between 2016 and 2020, SWFs spent more money in the oil sector than ESGs. Data on SWF investments in ESG is provided by Global SWF.
Why ESGs are attractive to SWFs
ESG investing has grown exponentially in recent years, and 2021 emerged as a breakout year amid the pandemic, and climate-friendly policies helped boost the momentum.
Several factors have driven the SWF’s involvement in ESG investment which has morphed over the years amid growing pressure from clients, shareholders, and regulators to take climate change into account. Notably, sovereign funds have been among the slowest movers, with governments reluctant to set greener investment mandates.
Last year’s growth indicates that the ESG space has a financial appeal for investors, and SWFs play a crucial role. In general, the SWFs are uniquely positioned to promote the global environmental, ESG agenda, and investing in certain products is the first step.
ESGs come with the idea that investors who integrate corporate environmental, social, and governance risks can attract better returns. This concept is now rapidly spreading across capital markets globally.
The SWFs activity also raises awareness about ESGs, sending a message to investment markets and the asset management industry. In this line, inventors build up expectations for their asset managers to comply and transition to a sustainable future.
With an increasing focus on ESGs, regulators are also getting involved in the sector. For instance, the United States regulator, the Securities Exchange Commission, is pushing investment managers to make ESG disclosures a priority. Notably, the agency reportedly called on money managers to explain their standards for classifying ESG focused funds.
Furthermore, the growth of ESGs is gaining traction in stock indices. In 2021, S&P Dow Jones CEO Dan Draper noted that the index was targeting ESG as one of its biggest growth opportunities.
In recent years, besides ESG funds, SWFs have continued to invest in emerging products like Special Purpose Acquisition Companies (SPACs). According to our previous report, direct investments in SPACs by SWFs spiked by a staggering 2,532.35% on a year-over-year basis between November 2019 and November 2020 from $68 million to $1.79 billion.
Focus on the oil and gas sector
Worth noting is that ESG investments by SWFs also put focus on the oil sector, which cannot ignore the trend. There is a general perception that the focus to reduce carbon emissions which have resulted in the popularity of ESG-based funds will eventually reduce demand for fossil fuels alongside investments.
Based on this threat, oil and gas producers have responded by minimizing spending on new drilling projects and allocating more capital towards decarbonization and low-carbon energy