One of the World’s Biggest Wealth Funds Targets Sustainable Finance

“The process is ongoing with the KIA currently transitioning toward 100% 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-recognized 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 recognized 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 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% last year, while 31% now use climate-scenario analysis compared with just 17% 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.

In Europe, regulations enforced last year mean ESG reporting must now be substantiated. And in the U.S., 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 U.S.

“The consideration of investing in securities of companies that have favorable 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 analyzed 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% 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 — $23 billion, 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.”