Sovereign wealth funds are increasingly taking a front foot in global efforts to measure and ultimately reduce carbon emissions, working with portfolio companies to provide better information and incentivise them to reduce their pollution. Two of the most committed are Abu Dhabi's Mubadala Investment Company and Cofides of Spain.
The need to tackle climate change is rapidly intensifying. The US's Securities and Exchange Commission announced on March 15 various efforts to highlight the issue in corporate disclosures. And investor group Climate Action 100+ this week launched a benchmark assessing corporates' success in reducing greenhouse gas emissions and strengthening climate-related financial disclosures.
Sovereign wealth funds are particularly well placed to help drive such changes, given their size and influence.
The $232 billion Mubadala, for example, is looking to institutionalise what had previously been a “very bespoke approach” to environmental, social and governance (ESG) investing, explained Derek Rozycki, who was appointed head of responsible investing in January, according to his LinkedIn page.
He was speaking at an event* hosted by the London-based International Forum of Sovereign Wealth Funds (IFSWF) and Spain’s IE University’s Center for the Governance of Change, which researches SWFs. While the webinar was held under Chatham House rules the participants consented to be quoted when approached afterwards by AsianInvestor.
“We’re looking to... take the next step in the [ESG investment] journey and bring institutionalisation across our portfolio to ensure that we establish a common nomenclature and a common methodology based on some of the fantastic progress that's been made in establishing standards in the last few years – particularly the last 18 to 24 months,” Rozycki said.
“We’re in the process of establishing a better understanding of our carbon footprint across the group,” he added.
Investors face several obstacles to doing this, but Rozycki said new technologies were being developed to address them.
“One of the largest challenges we’re facing is is pulling the information together in an efficient and practical way and in a timely manner to inform our portfolio decision-making in real-time… and to mitigate risks we see in our in our portfolio,” he said.
Rozycki noted that Mubadala's portfolio companies were "vastly improving" their efforts to provide data, but that there was still a “meaningful time lag” to do so. That “makes it very difficult to be impactful in real-time for their business [as a shareholder]”, he said.
Mubadala is now “trying to create a sense of urgency” among its portfolio companies “in anticipation of [government] policy change”, both to help them mitigate risks and potentially even spot opportunities associated with policy changes, Rozycki said.
He said one example was Mubadala's recent investment in Emirates Global Aluminum, which it said was the world’s first producer of “green aluminium” – produced by solar power. He also highlighted the fund’s move to focus on green hydrogen in partnership with Abu Dhabi National Oil Company and state holding company ADQ.
DO NO HARM
Madrid-based Cofides is arguably even further ahead in progressing its sustainable investing agenda. The development fund finances projects in emerging or developing countries by supporting Spanish companies investing abroad; it launched its ESG internal policy in 2001.
Cofides is now seeking to shift from a responsible investment – or “do no harm” – approach to an impact investment approach, whereby it actively seeks to do good, said managing director Rodrigo Madrazo during the webinar.
The fund already includes clauses in its financial contracts to monitor ESG risk and potentially require remedies. If it uncovers a high environmental risk, the required return on the transaction will need to be higher, Madrazo noted.
To reach the impact investment stage, Cofides is moving to set incentives “to reward the right behaviour” both among its staff and at its portfolio companies, he said.
In 2019 the fund decided to link the variable remuneration of all its employees to key performance indicators (KPIs) related to the United Nations’ sustainable development goals (SDGs).
“Every division of the company got involved,” said Madrazo. “And nowadays, the whole company is very happy with this new metric, [which covers] not only financial performance indicators but also impact indicators.”
TESTING THE WATER
Cofides is also changing its model with respect to transactions it finances by creating a mechanism to affect the price-setting mechanism.
“We identify a specific KPI in every transaction,” said Madrazo. If the KPI is met and verified by an independent auditor, the investee company gets a better price on the loan.
“We are now testing the water and have launched the first sustainability-linked transactions,” he added. “I hope that in the coming months we will be able to launch the whole programme.”
The KPIs are deal-specific. For instance, Cofides has places carbon dioxide emissions on a sustainability-linked loan for an automotive plant in Mexico, while focusing on workplace security conditoins for a transaction related to an industrial plant in Kenya.
“If we want to have a comprehensive approach – and in our case, we focus on SDGs – we need a very big set of indicators,” Madrazo said.
Cofides is also trying to pushing companies to implement the recently introduced European regulation and taxonomy around sustainable finance. ”We have introduced clauses in our financial contracts to incentivise portfolio companies to be aligned with the principles of the European Union taxonomy,” said Madrazo.
The highest scorers on the list tend to be Australasian, Canadian and European funds, and include Australia's Future Fund, Canadian pension fund CDPQ, New Zealand Super Fund and Norway's Norges Bank Investment Management.
*The webinar, 'Tomorrow is now: Sustainability and carbon reporting', can be watched by clicking here.