One of the world’s biggest wealth funds targets sustainable finance

Kuwait Investment Authority wants to make its entire portfolio compliant with environmental, social and governance standards, its managing director said, as Gulf nations reliant on crude move toward life after oil.

Kuwait has built up its riches thanks to vast crude exports — something which puts the engine of its economy at odds with ESG principles. Unlike regional neighbours the UAE and Saudi Arabia, Kuwait hasn’t set a net-zero carbon emissions goal despite recording some of the planet’s hottest temperatures.

Yet the KIA, which manages $700bn according to the Sovereign Wealth Fund Institute and has its own governance structure, says ESG has become central to its outlook. The world’s oldest sovereign fund, and its third-largest, has long sought to guard itself from the nation’s tumultuous politics with a mandate to prepare the OPEC member state for a post-oil future.

“The process is ongoing with the KIA currently transitioning toward 100 per cent ESG compliance for the entire portfolio while currently focusing on the E part of ESG,” Ghanem Al-Ghunaiman told Bloomberg News in an emailed reply to questions, offering a rare glimpse inside the fund.

The authority has applied the ESG standard set by an independent globally-recognised ESG benchmark provider, according to Al-Ghunaiman, who was appointed in August. He didn’t disclose the provider’s name. It has also started issuing ESG quarterly reports for stakeholders.

KIA’s target includes all asset classes and regions under management, and may include companies “that have recognised and adapted to long-term financial risks and opportunities presented by climate change and resource depletion.”

The KIA rarely comments on its strategy, keeping even the size of its portfolio and its distribution largely under wraps.

In line with the fund’s policy, Al-Ghunaiman did not disclose how many of the KIA’s assets under management are ESG-compliant. However, a person familiar with the matter, speaking on condition of anonymity to discuss confidential information, said at least two-thirds of the authority’s assets comply.

Globally, sovereign investors are taking environmental, social and governance principles more seriously despite criticism they cling to strategies that fail to acknowledge how rapidly the planet is overheating. The ESG market is on track to exceed $50 trillion by 2025, according to Bloomberg Intelligence, as the giants of global finance come up with increasingly inventive ways to apply the acronym.

Critics warn ESG’s soaring popularity has led to widespread greenwashing, whereby claims of sustainability are exaggerated or even false.

Sovereign wealth funds dramatically step up their focus on ESG

Sovereign funds, most of which were set up by petrostates, have been among the slowest movers. A survey of sovereign funds last year said just over a third have calculated the carbon footprint of their portfolios, up from 23 per cent last year, while 31 per cent now use climate-scenario analysis compared with just 17 per cent in 2020.

Post-oil hedge

The KIA’s secrecy is common across big funds in the region and elsewhere. Last year a study of sovereign investors singled out several of the Gulf’s largest entities for insufficient disclosure and their lack of transparency. It ranked them against funds in Australia, Norway and New Zealand.

ESG investing is mostly about sustaining corporations

In Europe, regulations enforced last year mean ESG reporting must now be substantiated. And in the US, the Securities and Exchange Commission has signaled it will no longer tolerate puffed up ESG statements. But there are still plenty of questions around methodologies, especially outside Europe and the US.

“The consideration of investing in securities of companies that have favourable environmental, social and governance attributes has become a core part of the investment decision-making process at the KIA,” Al-Ghunaiman said.

While evaluating such ESG assets, exposure to risks which may impede long-term returns are also analysed and assessed, he added. The fund’s primary objective of profitable commercial objectives still applies, he added.

The KIA has stakes in ports, airports and power distribution systems around the world. It manages the Future Generations Fund, which is designed to reduce dependence on oil-related investments, as well as the General Reserve Fund — the government’s main source of budget financing.

According to its mission statement, the FGF is an alternative to oil — and essentially a hedge against the sector that provides about 90 per cent of state income.

KIA is a founding member of the One Planet Sovereign Wealth Fund Initiative, whose mission is to invest in the smooth transition to a low emissions economy and its external asset managers are implementing the One Planet SWF framework “whenever and wherever possible,” Al-Ghunaiman said.

“The objective for KIA is harmonizing ESG investments with KIA’s long-term focus of profitability, stability and growth,” Al-Ghunaiman said. “The KIA continues to evolve and has responded responsibly and proactively.”

For the first time, sovereign investors plowed more capital into renewable energy in 2021 than oil and gas — $23bn, or more than three times the total value, according to Global SWF, which tracks all the world’s sovereign wealth funds.

“This milestone was a few years in the making and has concluded a trend that has been driven by social pressure and financial returns, and accelerated by the Covid-19 pandemic,” Global SWF wrote in a report. “Sovereign investors are hungry – and pressured – to access and to deploy capital in high-quality, sustainable initiatives.”