* Norway, NZ, France SWFs leading the way on divestment
* Others looking to increase renewables exposure
* Paris climate agreement adds to pressure on investors
* TABLE-SWFs and climate change risk management:
By Claire Milhench
LONDON, June 19 Some sovereign investors are
reducing their exposure to fossil fuels or seeking clean
alternatives to protect their portfolios from rising
environmental risk.
Norway’s $900 billion sovereign wealth fund (SWF) — itself
financed by oil sales — and the New Zealand Super Fund (NZSF)
are among those adjusting investments in anticipation of tougher
environmental rules or damage from the impact of global warming.
Rising temperatures could lead to more violent storms and
flooding, posing a threat to infrastructure and prime real
estate, both favoured by sovereign investors.
U.N. scientists say greenhouse gases are the main cause of
warming and while the U.S. administration has questioned the
science, many countries are introducing rules to cut emissions.
Norway’s SWF, the world’s largest, is divesting from
companies that derive more than 30 percent of their turnover or
activity from coal, a major source of greenhouse gases. It is
also investing in alternative fuel companies such as NextEra
Energy, a U.S. wind farm developer.
By July the fund’s ethics watchdog is likely to recommend
the fund excludes or puts on a watch list the first of several
firms in the oil, cement and steel industries. The
fund is also pushing companies to disclose carbon emissions and
plans to handle climate change risk.
“In terms of greenhouse gas emissions, we are actually
expecting companies to increase reporting on it,” the fund’s
chief executive Yngve Slyngstad told Reuters.
“We want to have more transparency on investment plans and
how they are affected.”
The NZSF said last year it would set a target by the end of
June to reduce its carbon footprint.
“We should be able to increase our returns for the same
risk, or get the same returns with less risk,” Adrian Orr, chief
executive of NZSF, said in November.
In an update, an NZSF spokeswoman said the fund was looking
at its passive portfolio rules and this would lead to a
reduction in fossil fuel holdings. More details would be given
when the changes have been made, she said.
It has already invested in energy efficient glass
manufacturer View and waste gas-to-fuel firm LanzaTech.
France’s SWF Caisse des Depots (CDC) is also aiming to
reduce the carbon footprint of its equity portfolio by 20
percent by 2020, and is exiting companies that derive more than
20 percent of revenue from coal.
“Coal is a 19th century energy, it is not the energy of the
future,” said Joel Prohin, head of portfolio management at CDC.
COUNTING THE COST
Investors have committed to divesting some $5 trillion from
fossil fuel companies, according to Arabella Advisors, with
pension funds leading the way.
In June, Swedish pension fund, AP7 sold its investments in
six energy-related companies it says violate the 2015 Paris
Agreement, which aims to limit global warming to below 2 degrees
Celsius and has pushed environmental risk up the agenda.
That is despite U.S. President Donald Trump’s decision last
month to take the United States out of the agreement, which
attracted international condemnation.
A 2016 study by the London School of Economics and others
put value at risk at $2.5 trillion in a ‘business as usual’
emissions scenario of 2.5 degrees Celsius of warming by 2100.
“If you believe climate change is happening and there’s
going to be a cost to that, do you pay that cost upfront as a
preventative measure, or wait for the impacts to happen and then
pay the bills?” said Alex Millar, head of EMEA sovereigns at
Invesco.
One SWF official, speaking on condition of anonymity, said
it was steering clear of Miami real estate given the risk of
rising sea levels in the low lying area.
“It’s very likely that in 10 years’ time the parking is
going to be flooded,” he said.
A 2017 Invesco study of sovereign investors found climate
change was the most important environmental, social and
governance (ESG) issue for those that had already incorporated
ESG factors into their investment process. Seventy percent of
ESG adopters perceived an increase in long-term returns.
But it also noted adoption of ESG practices was patchy, with
some investors in the United States and emerging markets
reluctant to commit without harder data on risks and returns.
ENERGY FOR FREE
The International Forum of Sovereign Wealth Funds (IFSWF) is
exploring the investment implications of the global commitment
to curb greenhouse gas emissions and will report back to its
members in September.
“Funds that are primarily funded through fossil fuel
production will feel an accelerated demand to diversify as
quickly as possible,” said NZSF’s Orr, who also chairs the
IFSWF.
Even where fossil fuel divestment is not a priority, more
investors want to capture the upside in the green economy.
The Abu Dhabi Investment Authority has invested in renewable
energy firms Greenko and ReNew Power while Singapore’s GIC has
targeted investments in electric vehicles.
Ithmar Capital, Morocco’s strategic investment fund, wants
to raise $1-2 billion from infrastructure specialists and other
SWFs for its Africa-focused green infrastructure fund.
“Africa is contributing the least to climate change, but it
is suffering the most so it needs a specific action plan,” Tarik
Senhaji, chief executive of Ithmar Capital, said.
Mahmood Alkooheji, chief executive of Bahrain’s SWF
Mumtalakat, also described renewables as “the way forward”.
“We can’t not be thinking of the environment,” he told
Reuters. “For Bahrain it’s a very promising area, we have
sunshine 366 days in a year … so that’s a lot of energy being
wasted. It’s energy for free so why not invest in it?”
(Additional reporting by Gwladys Fouche and Sujata Rao; editing
by Anna Willard)
