LONDON (Reuters) - Sovereign wealth funds have the potential to play an integral role in the transition to a low-carbon economy, but they have so far made little use of their financial muscle, the OECD Development Centre wrote in a report.
Sovereign funds have total assets valued at around $8.2 trillion (£6.6 trillion) and hold about 8% of all listed global equities.
But sovereign fund initiatives to address climate impact remain largely “aspirational” and only a minority systematically address climate risk in their portfolios, the Organisation for Economic Cooperation and Development (OECD) Development Centre said in the report.
Few funds have adopted climate-focused active ownership policies to reduce the carbon footprints of their portfolios, it said. Less than 1% of sovereign funds’ investments go to low–carbon solutions.
The centre noted that as sovereign funds receive their mandates from their governments, they were unlikely to take climate-related action on their own, unless they were provided with the finances to meet the associated costs.
It suggested that sovereign funds engage on climate-related issues with their portfolio companies, either directly or through their asset managers. Funds should select and monitor asset managers based on their climate-related performance, it said, while stronger sovereign funds should invest directly in low-carbon infrastructure.
Strategic investment funds may be better placed to play an important role in the low-carbon transition as they had “double bottom line” objectives of financial returns combined with the achievement of policy goals, it said.
Sovereign funds could benefit from collaborating more closely with those strategic funds that already had many of the skills required for playing an important role in climate finance, as well as with pension funds that have built the capacity for direct infrastructure investment, the OECD added.
Reporting by Tom Arnold; Editing by Hugh Lawson