Clean tech: can sovereign wealth help?

DAVOS, Switzerland (Reuters) - It may seem like a perfect match. If sovereign wealth funds, which manage assets of $3 trillion, invested in clean tech, they could help plug the chronic shortage of funding to tackle climate change.

Since two-thirds of their wealth comes from oil and gas interests, the funds set up by nations from Norway to the Middle East and China would be burnishing their image by helping finance clean energy projects.

The world faces an annual funding gap of around $150 billion on projects to cut carbon dioxide emissions. A failure by world leaders to agree on a deadline for a new legally binding climate pact in Copenhagen in December gave no help in boosting the momentum.

Sovereign wealth funds (SWFs) may have a key role. With around $1.5 trillion in equity investments, SWFs -- which invest nations’ windfall surpluses for future generations -- already hold about 4 percent of the world’s listed companies, industry estimates show.

They are expected to see their assets more than double to $7 trillion in less than 10 years.

Already some funds, particularly Norway’s $400 billion reserve, are raising their profile as socially responsible investors.

But for them to fund the clean-tech future is not so simple.

So far, as for other institutional investors, the main hurdle has been poor returns. In a young market largely dominated by venture funds and lacking depth of liquidity, there’s been no convincing evidence that clean tech outperforms other asset classes. There’s no single benchmark to measure industry performance.

“We’re not going to do this as a subsidy,” Jin Liqun, chairman of the board of supervisors at China Investment Corp, told Reuters last year. “We do this only when we see there is a profit to be made. We would exercise our social responsibility by making profits and give the money to our people.”


Nonetheless with so much cash to invest, evidence is mounting of increasing interest. Abu Dhabi’s Future Energy Company has long supported small investments in the sector through its Masdar clean tech funds, and China’s fund has recently moved into larger clean energy projects.

The $300 billion China Investment Corp last year alone invested an estimated $400 million in China Longyuan Power Group, Asia’s largest wind power generator and the world’s No.5. It also spent over $700 million to buy stakes in Chinese power plant operator GCL-Poly Energy: GCL-Poly and CIC aim to set up a joint venture on solar power development early this year.

Some sovereign funds are already active in promoting cleaner business across the range of their investments.

Norway’s fund, which holds 8,000 companies, is the leading force in environmentally responsible investing: together with New Zealand’s Superannuation fund, it is a founding signatory to the Principles for Responsible Investment, a United Nations-led framework subscribed by nearly 600 institutional investors representing a total of $18 billion.

Norges Bank Investment Management (NBIM), which oversees the fund, has detailed its thinking on climate change management by any company whose stock it may hold.

It has said, for instance, that it expects companies to analyze the commercial effects of regulatory responses to climate change, measure quantified greenhouse gas emissions in relevant formats and set clear targets for emissions.

Beyond this, New Zealand’s fund tallies the greenhouse emissions of its guardians using power bills, taxi receipts and travel data, and the waste at its Auckland office (90 percent of it is paper).


But when it comes to direct investment, the onus is on avoiding giving out what are effectively state subsidies.

The Norwegian government is in the process of establishing a new investment program for its fund, focusing on environmental investment such as climate-friendly energy, improving energy efficiency, carbon capture and storage, water technology, and the management of waste and pollution.

It has said it may invest some 20 billion Norwegian crowns ($3.45 billion) on green energy over a number of years.

But the Norwegian central bank, which runs the fund, has been skeptical, saying its hitherto clear mandate to pursue sustainable profits could be compromised if its role was effectively reduced to supplying state subsidies to green energy plans liked by the Norwegian government.


Clean tech or other socially responsible investment (SRI) projects could serve a multitude of purposes for the burgeoning sovereign wealth fund industry.

First, is the overall image boost in taking into account what it calls environmental, social and governance (ESG) risks. Being seen to invest responsibly can help the funds that have come under pressure from Western politicians who suspect they may be a threat to national security.

In 2008 French President Nicolas Sarkozy hit out at SWFs, saying France must protect its industries from foreign “predators” who would like to benefit from undervalued stocks.

“One of the defining factors in the influence of SWFs in the capital markets is their stance on ESG issues,” said the Investor Responsibility Research Center (IRRC) Institute, a New York based organization which conducts environmental, social and corporate governance research, in a recent report.

There are also potential financial benefits.

Moving into more socially responsible areas is a way to diversify portfolios into alternative assets that can deliver returns uncorrelated to such traditional classes as stocks and bonds.

It also offers a “macro hedge,” or a way to offset the risk of volatility in state finances stemming from any fall in the price of oil or other traditional energy.

“There is a case to be made that SWFs whose funding source is tied to natural resources have an opportunity to diversify ... through investments in alternative energy companies, thereby reducing their sponsor countries’ risk due to a revenue stream linked to oil or gas production,” the IRRC Institute said.

Whatever the objectives, the funds’ impact on the clean sector could be huge.

An allocation of even 1 percent of capital from sovereign wealth funds would amount to $30 billion, or around a fifth of the present annual funding gap to cut emissions. And their participation would create a virtuous cycle for the industry: as more money flows in, the performance of the assets would improve, attracting more investors.

SWFs have been proven to have a positive impact on the stocks they invest in. A study led by Washington University showed that SWF acquisition announcements generate statistically important, positive abnormal returns averaging 1.5 percent. Divestments led to a loss of 1.4 percent.

Additional reporting by Wojciech Moskwa; Editing by Sara Ledwith