Funds Holding $10 Trillion Are Told Their ESG Goals Fall Short
(Bloomberg) -- The world’s sovereign wealth funds, representing about $10 trillion in combined assets, will end on the wrong side of history if they cling on to strategies that fail to acknowledge how rapidly the planet is overheating, according to the woman who presided over the Paris Agreement.
Christiana Figueres, the former executive secretary of the United Nations Framework Convention on Climate Change, says wealth funds need to update their strategies and stop just looking for ways to “take advantage” of the increase in global temperatures for economic gain.
“Sovereign wealth funds’ concern with climate change has so far focused overwhelmingly on managing climate risk and taking advantage of the opportunities resulting from the low-carbon transition,” Figueres told Bloomberg. “Given the gravity of the climate crisis, this is no longer sufficient.”
The industry’s failure to meet the moment means that trillions of dollars that could be mobilized to fight rising temperatures are still being channeled into strategies designed mostly to maximize economic returns, according to Figueres. Wealth funds “need to take an active role in reducing their portfolio carbon footprints,” she said.
What Is ESG?
Her warning comes amid growing anxiety that the investment management industry is using environmental, social and governance strategies as yet another way to generate more money, without making much of a meaningful impact on climate change or social justice. In Europe alone, fund managers have already had to strip the ESG label off $2 trillion in assets in anticipation of more rigorous regulations. And the wealth management arm of Deutsche Bank AG made headlines earlier this week as it’s probed in the U.S. and Germany amid allegations of greenwashing.
The former UN executive didn’t accuse wealth funds of greenwashing. But she bemoaned what she characterized as the industry’s failure to embrace strategies that commit to a lower carbon footprint. Scientists have made clear that cutting greenhouse gas emissions is the only hope the planet has, if it’s to avoid a climate catastrophe.
ESG Products Are Booming, But What About the Climate?
Based on current trends, we’re on track to run out of emissions budget to stay within 2 degrees of warming in 2044. And as soon as 2028, we will have exhausted the emissions budget to stay within 1.5 degrees. This underlines the need for immediate, concrete policy action to accelerate decarbonization: Achieving mid-century climate goals won’t be sufficient, unless intermediate milestones are also hit. To achieve net zero, every sector of the energy economy needs to cut emissions completely by mid-century. See BNEF’s New Energy Outlook report, which develops three net-zero scenarios.
Like other countries with sovereign investment vehicles, Norway hasn’t signed up its $1.4 trillion fund to the Net-Zero Asset Owner Alliance. Figueres says that if Norges Bank Investment Management, the world’s biggest wealth fund, became a signatory it would be a game changer.
“NBIM is a highly influential investor, and is recognized worldwide as a leader in corporate governance, transparent reporting, and active ownership,” Figueres said. “Its example would be noted all over the world.”
Norway’s finance ministry is currently going over a report commissioned by the government that reassesses the wealth fund’s exposure to climate risk. That report, published earlier this month, recommends aligning portfolio companies with net-zero targets by 2050, in keeping with the timeline set out under the 2015 Paris Agreement. But it doesn’t explicitly advise signing the fund up to the net-zero alliance’s goals.
Finance Minister Jan Tore Sanner has already said he doesn’t want Norway’s wealth fund to stray from its mandate of putting financial returns first. And the government he sits in has repeatedly stressed that it doesn’t want to turn the fund into a climate policy tool.
Figueres says that “choosing not to have emissions targets for the fund is at least as much a political act as adopting such targets.”
Norway’s wealth fund said it had nothing to add to previous statements, in which it has made clear it expects portfolio companies to follow the Paris Agreement. The International Forum of Sovereign Wealth Funds in London suggested too much focus is being placed on net-zero goals.
“The singling out of sovereign wealth funds on climate is rather overplayed,” said Victoria Barbary, a spokeswoman for IFSWF. According to several asset-owner surveys, “sovereign wealth funds are pretty much in line with their peers, as a group -- although of course there is variation between them.”
A 2020 study by the forum showed that just over one-third of wealth funds had a formal climate-change strategy in place. It said Norway’s sovereign investment vehicle was among “early adopters.”
The sense of alarm around global warming rose significantly this month as the UN’s Intergovernmental Panel on Climate Change released its latest assessment, revealing that the globe is heating up much faster than previously thought.
Figueres said the latest evidence of overheating puts even more pressure on the 26th UN Climate Change Conference of the Parties (COP26) in November to come up with meaningful policy steps to fight global warming.
“The importance of this year’s COP cannot be overstated,” she said. “It could be a make or break moment for humanity.”
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