Sustainable investing can pay off for sovereign wealth funds

Sovereign wealth funds could and should focus more attention on the investment risks as well as opportunities of the carbon-constrained economies of the future, an Innovest report commissioned by WWF-Norway has found.

Fund management in the 21st century was submitted to the Norwegian government as recommendations for future governance of the world’s second largest sovereign wealth fund, the $US 381 billion Norway Global Pension Fund.

“Sovereign wealth funds can incorporate climate risk considerations directly and systematically into their actual stock selection and portfolio construction processes,” the study said.

“It is at this level that investors can send the strongest message to companies, produce significantly changed company behaviour, and, most importantly, improve their long-term, risk-adjusted returns.”

The analysis found that funds using socially responsible investment through positive screening strategies and using their influence as large investors to encourage improved company behavior enhanced investor returns, risk management and reputation. Report lead-author Karina Wong, senior consultant at Innovest, said “Socially responsible investment can no longer be seen as a purely ethical exercise that reduces profit while doing good.

“Rather, in an increasingly resource restricted world sustainable business models are a crucial indicator for long-term profitability and risk reduction.” In particular, Innovest’s analysis showed that better company management of carbon issues translates into better investment performance globally (more than 3 per cent greater return annually). This relationship was even more pronounced for Scandinavian companies, which are seen as leaders in dealing with carbon issues, where the difference in investment performance between leading and lagging companies was more than 11 per cent annually.

The report found that sovereign wealth funds including Norway’s Global Pension Fund lagged behind public pension funds such as ABP in the Netherlands and CalPERS in the United States, primarily because they do not apply best practices for positive screening and pursue targeted environmental investments.

“Loaded with petroleum cash, Norway has a special responsibility to invest in low carbon development and help mitigate impacts from global warming on hundreds of millions of the world’s poor,” said Rasmus Hansson, CEO of WWF-Norway “The Norwegian Government is currently revising the ethical guidelines for the fund and now has a unique opportunity to introduce more progressive instruments for sustainable investment, such as positive screening and a climate technology investment fund.”

Dennis Pamlin, global policy advisor in WWF, said “Institutional asset managers today control more than 80% of investments in the world and must play a proactive role in supporting companies that can become winners in a low-carbon economy, not just disinvesting from those that are unsustainable.” But he said there were promising signs, for instance with China’s sovereign wealth fund CIC’s recently announcment that it will invest in environment-friendly technologies.

“WWF will now explore the possibilities for the world’s largest sovereign wealth fund’s, Norway, UAE, Saudi Arabia, Singapore, Kuwait and China, to take a lead in implementing and developing further the investment practices and tools needed for low carbon development in the 21st Century.”