The One Planet Sovereign Wealth Fund Framework
"Climate change is both an opportunity, as the development of technology and changes in government policy create new avenues for investment and change the attractiveness of different sectors, as well as a financial risk for long-term investors, like sovereign wealth funds."
Majed Al Romaithi – Executive Director of the Strategy and Planning Department of the Abu Dhabi Investment Authority (ADIA), and Chair of the International Forum of Sovereign Wealth Funds – discusses the One Planet Framework and the latest developments in measuring and reporting on climate change.
The One Planet Summit was held on 12 December 2017, after the 2015 Paris Agreement to collectively mitigate the effects of climate change.
At the event, six government funds – the Abu Dhabi Investment Authority, Kuwait Investment Authority, the New Zealand Superannuation Fund, Norges Bank Investment Management of Norway, the Public Investment Fund of the Kingdom of Saudi Arabia, and the Qatar Investment Authority, – established the “One Planet Sovereign Wealth Fund Working Group”.
The goal of the working group is to develop an Investment Framework to address climate change issues, including the development of methods and indicators that can inform investors’ priorities.
Background & climate change
Can you tell us more about why the One Planet Sovereign Wealth Fund Working Group was set up?
The One Planet Summit was held on 12 December 2017, building upon the success of the 2015 Paris Agreement to collectively mitigate the effects of climate change. The “One Planet Sovereign Wealth Fund Working Group” was established at the event, recognising that SWFs are uniquely positioned to promote long-term value creation and sustainable market outcomes, given both their influence and long-term investment horizons. The goal of the working group is to develop an Investment Framework to address climate change issues, including the development of methods and indicators that can inform investors’ priorities.
Do you see climate change as one of the main material financial risks faced by long-term investors, like sovereign wealth funds, today?
Climate change is both an opportunity, as the development of technology and changes in government policy create new avenues for investment and change the attractiveness of different sectors, as well as a financial risk for long-term investors, like sovereign wealth funds.
What practical steps can institutional investors take to factor climate change into their risk-management models, processes and practices?
In July 2018, the One Planet Sovereign Wealth Fund Working Group published an Investment Framework designed to accelerate efforts to integrate financial risks and opportunities related to climate change in the management of large, long-term asset pools. The third principle in the Investment Framework recognises that SWFs should aim to incorporate climate change considerations to improve investment decision-making. This may include integration into allocation decisions, manager selection and valuation. Indeed the Investment Framework provides a practical roadmap to SWFs who can incorporate climate change considerations into their risk-management models, processes and practices by:
Identifying, assessing and managing portfolio risks generated by the expected transition to a low-emissions economy and from the potential physical impacts of climate change;
Drawing on, and developing, analytical tools to inform portfolio allocation and investment decisions;
Considering investment opportunities that arise from the global effort to address climate change;
Considering approaches to reducing portfolio exposure to climate-related risks;
Promoting research on issues related to the financial implications of climate change.
Do you think institutional investors are doing enough to take advantage of the opportunities arising from new technologies and industries arising from the need to transition to a lower-carbon economy?
SWFs and other institutional investors have embraced new investment opportunities arising from the transition to a lower-carbon economy. These range from infrastructure investments in solar and wind energy provision in both developed and emerging markets, through to early-stage venture-capital investments in new technologies in the battery and transport sectors.
What steps is ADIA taking going forward to enhance its processes in light of the One Planet Investment Framework?
ADIA’s Global Investment Forum (GIF) seeks to stimulate cross-departmental discussion, tackling topics that are expected to influence long-term investment conditions around the world. In 2017, ADIA devoted this internal GIF event to “Climate Change and the Potential Investment Impact”. This involved the creation of eight internal asset class-specific task forces who considered in detail the potential ramifications for ADIA in the following key areas: Climate Data and Potential Economic Impact, Technology and Energy, Markets and Consumers, and Climate Change Policies. ADIA is now implementing the recommendations that emerged from the GIF, thereby evolving its future investment strategy to manage and benefit from changing long-term market dynamics associated with climate change. Furthermore, as a founding member of the One Planet Sovereign Wealth Fund Working Group, ADIA endorses the three core principles of the Investment Framework published in July 2018.
One Planet Investment Framework
What is the aim of the One Planet SWF Working Group Investment Framework?
The purpose of the Investment Framework is to accelerate the integration of climate change analysis into the management of large, long-term and diversified asset pools. To improve the resilience and sustainable growth of these pools, the Investment Framework aims to help SWFs to:
Foster a shared understanding of key principles, methodologies and indicators related to climate change;
Identify climate-related risks and opportunities in their investments;
Enhance their investment decision-making frameworks to better inform their priorities as investors and participants in financial markets.
It has been almost a year since the One Planet initiative was rolled out in Paris in July 2018. Could you comment on progress to date?
Since the Investment Framework’s publication in July 2018, the working group members have been incorporating the principles into their processes and practices. For instance,130 managers have been written to with a request to implement the Investment Framework subject to mandate and conditions.
How are you leveraging the experience of members and external experts in taking further steps towards implementation of the Investment Framework?
The Investment Framework has been warmly greeted by industry participants, and the working group has evolved into a platform for discussing its implementation, and best practice surrounding risk mitigation and opportunity generation linked to climate change.
What are the next steps for the One Planet SWF Working Group?
The working group has established a two track programme:
- Technical/implementation sharing;
Whilst this is a long-term effort, a number of discussions are underway regarding both climate change portfolio risk mitigation and opportunity generation.
Have other SWFs endorsed the Investment Framework?
The adoption of the Investment Framework is voluntary and non-binding. It is designed to promote best practice and a shared mindset among SWFs and their stakeholders. The Investment Framework has been developed to accommodate countries at different levels of economic development. In September 2018, the Investment Framework was presented at the annual meeting of the IFSWF to over 30 attending SWF member delegations.
Discussions are ongoing with the above and other long-term investors.
Do you think that reliable company-level environmental data – particularly relating to carbon emissions – is available today? What’s the quality and consistency of such data?
Whilst there has been considerable progress in this area, industry standards are still evolving. This is why part of Principle 2 of the Investment Framework calls for SWFs to encourage the development and adoption of agreed standards and methods that promote the disclosure of material climate-related data. To make informed investment decisions, SWFs require timely, relevant, accurate and complete climate-related data.