Principles for Sovereign Wealth Funds announced

Those who are reading this blog will know I am a huge fan of Principles as an important first stage to address key areas. We have the principles for responsible investment, the same for banking. We have principles for people first PPPs for the SDGs being developed by the UNECE. They in their latest on their forum call for other regional commissions to develop a similar approach relevant to their specific circumstances. Now we have some for Sovereign Wealth Funds.

For those who can remember this was one of the recommendations form the  Resilient People, Resilient Planet: A future worth choosing The report of the United Nations Secretary-General’s
High-level Panel on Global Sustainability in 2012. The report said:

"174. Sovereign wealth funds are also important in this regard. The total assets of such funds currently stand at nearly $3 trillion and are expected to reach between $6 trillion and $10 trillion by 2013. Twelve new sovereign wealth funds have been established since 2005 alone. Blending commercial and public/national interests, these vehicles have considerable potential to invest for the long-term and so take sustainability issues into account more fully, as well as, in some instances, having sustainability as a distinct policy objective. The Norwegian Government pension
fund is an example of best practice in this area."

"175. These kinds of practices could be advanced through a revision of the current “code of good practice” for sovereign wealth funds — the Santiago Principles — which would be comparable to changes in the governance of national and international public pension funds to enable them to invest responsibly."

Recommendation:
"The boards of sovereign wealth funds and of national and international public pension funds, as well as other major financial institutions, in their investment decisions;"

Scroll forward six years and see 60 investors, policy-makers and diplomats meet at the Elysee Palace on July 6 in Paris for the launch of the Sovereign Wealth Funds (SWFs) One Planet Guidelines.

President Macron’s climate team, the French Treasury, Norge Bank Investment Management (NBIM) and Bloomberg, spoke as the guidelines were launched.

Paul Clements-Hunt former UNEP FI: Head, UNEP Finance Initiative now Founder The Blended Capital Group ( TBCG) commented:

 “ this is the most powerful signal to global markets from the world’s most powerful investors that climate change has mainstreamed as an investor issue.”

“The speed of delivery of these guidelines has been remarkable given that the SWF working group was only created in December 2017. The ultimate Universal Owners have demonstrated that investment beliefs can be aligned with climate risk and reward drivers,” added Clements-Hunt.

Six SWFs, including ADIA, the Kuwait Investment Authority, NBIM, NZ Super, QIA, and the Public Investment Fund of Saudi Arabia, drove the guidelines drafting process. The International Forum of Sovereign Wealth Funds (IFSWF) supported the process alongside President Macron’s team and Bloomberg.

The SWF One Planet Initiative working group was created after President Macron’s December 2017 summit of the same name convened in Paris.

Please find the One Planet SWF Report here

And the One Planet SWF Framework here.

PURPOSE
The purpose of the Framework is to accelerate the integration of climate change analysis into the management of large, long-term and diversified asset pools.
To improve the resilience and sustainable growth of these pools, the Framework aims to help SWFs to:

foster a shared understanding of key principles, methodologies and indicators related to climate change;
identify climate-related risks and opportunities in their investments; and
enhance their investment decision-making frameworks to better inform their priorities as investors and participants in financial markets.

Principle 1: Alignment
Build climate change considerations, which are aligned with the SWFs’ investment horizons, into decision-making.

Principle 1.1
SWFs recognise that climate change will have an impact on financial markets.

As long-term asset owners, it is the responsibility of SWFs to deliver on their mandates through the long-term performance of their investment portfolios. Climate change will have an impact on long-term asset pools. Consequently, the impact of climate change and related governmental and financial responses present investment risks and opportunities for SWFs, whose goals of long-term growth and the protection of intergenerational
wealth coincide with the Paris Agreement’s objective, namely the protection of the planet for future generations.

SWFs make direct investments and/or hire asset managers to invest on their behalf. Whether they invest directly or through asset managers, SWFs can be exposed to potential climate-related risks to their underlying investments. Similarly, they can benefit from the potential returns on the investment opportunities associated with action on climate change.

Principle 1.2
Due to their long-term investment horizon and diverse investment portfolios, SWFsrecognise that climate change presents financial risks and opportunities which should be incorporated into the investment framework.

SWFs are exposed to the risks associated with transitioning to a low-emissions economy and the potential impacts of physical climate change risks.

In general, SWFs hold diversified investments across multiple companies, markets and asset classes. Their investment portfolios potentially contain thousands of underlying individual companies and investments that have broad exposure to climate change-related impacts, including regulatory or policy-related responses. A rise in global temperature in excess of 1.5°C and the resulting impact on the global economy could affect SWFs’ ability to deliver long-term returns.

Principle 1.3
In accordance with their respective mandates, SWFs should report on their approach to climate change.

SWFs may integrate reporting on their approach to climate change into their internal and external communications as relevant.

Principle 2: Ownership
Encourage companies to address material climate change issues in their governance, business strategy and planning, risk management and public reporting to promote value creation.

Principle 2.1
SWFs expect company boards to understand the consequences of their business practices for climate emissions and to set clear priorities for the company to address relevant climate change issues.

The long-term financial objective of SWFs is safeguarding and growing their assets. How companies manage the transition and physical risks and opportunities from climate change may drive long-term returns.

Principle 2.2
SWFs expect companies to plan for relevant climate scenarios and incorporate material climate risks in their strategic planning, risk management and reporting.

SWFs may wish to engage with companies as a shareholder to understand:


  1. the risks and opportunities associated with the climate change issues that the Paris Agreement is seeking to address;
  2. whether companies have devised any related metrics for monitoring such risks and exploring such opportunities; and
  3. how this information is incorporated into their business strategies and planning.
  4. Companies may be at different stages of development depending on their context, market and resources. SWFs should take this into account in their engagement with companies.

Principle 2.3
SWFs encourage public disclosure by companies to understand how climate change may affect their future performance, and what actions they are taking.

SWFs can encourage companies to be transparent about how they manage the impact of climate change. SWFs and the broader market can, in turn, use such information to identify how climate change may affect a company’s financial performance. In addition, SWFs may utilise such information to determine whether companies are taking relevant steps to develop a long- term business strategy to manage the transition to a low-emissions economy.

Principle 2.4
SWFs should encourage the development and adoption of agreed standards and methods that promote the disclosure of material climate-related data.

To make informed investment decisions, SWFs require timely, relevant, accurate and complete climate-related data. SWFs should encourage companies to provide climate-related data based upon standardised methodologies and in a consistent format, for example through the Greenhouse Gas Protocol and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Principle 3: Integration
Integrate the consideration of climate change-related risks and opportunities into investment management to improve the resilience of long-term investment portfolios.

Taking action to address climate change supports SWFs’ investment objectives. The economic impacts of climate change on specific markets and regions are complex, varied and uncertain, making the timing and extent of such impacts difficult to predict. Significant risks to portfolios exist if markets cannot adapt over a reasonable timeframe. At the aggregate portfolio level, diversification still offers protection, but climate change ultimately presents many risks for which investors will not be rewarded.

SWFs aim to incorporate climate change considerations to improve investment decision-making. This may include integration into allocation decisions, manager selection and valuation.

Principle 3.1
SWFs should identify, assess and manage portfolio risks generated by the expected transition to a low-emissions economy and from the potential physical impacts of climate change.

The scale and pace of the transition to a low-emissions economy are uncertain. Enhanced disclosure on how companies are managing this transition will enable SWFs and the broader market to assess risks and opportunities in a more meaningful way. In particular, climate change risks may affect companies and investments in different ways: for example, through technology disruption, regulation, evolving consumer preferences, and changes to supply and demand.

Risks to investors from the physical effects of climate change will become more material if the aims of the Paris Agreement are not met. Physical climate risks can be event-driven (e.g. cyclone, floods, etc.) or chronic (e.g. due to changes in precipitation and temperature).

Physical risk assessment requires more granular information that captures asset-level data and temporal effects, which can then be used to estimate potential financial impacts based on a set of assumptions or climate scenarios. These data are not readily available, but some of the emerging tools to help companies assess the potential impacts of physical climate- related risks include meteorological mapping and the development of asset- level datasets.

Principle 3.2
SWFs can draw on, and develop, analytical tools to inform portfolio allocation and investment decisions.

Scenario analysis on climate change can be useful to complement traditional financial analysis and to inform decision-making. Scenario analysis is useful to illustrate a range of potential climate outcomes and business sensitivities under different assumptions. At the same time, they do not represent accurate climate projections. SWFs can draw on scenario analysis and other tools to guide portfolio allocation and investment priorities.

The practice of integrating climate change information into valuation processes is in the early stages of development.

Principle 3.3
SWFs should consider investment opportunities that arise from the global effort to address climate change.

Given their long-term horizons, SWFs are particularly well positioned to benefit from investment opportunities arising from global efforts to
address climate change. Drivers of opportunities include shifts in demand, technology, policy incentives and the ability to scale climate solutions to mitigate emissions or adapt to climate change.

Consequently, SWFs should consider accelerating investments in companies with clean technologies that enable more efficient resource use, lower emissions and clean energy, according to their financial objectives.

SWFs can develop criteria to identify and filter climate-related opportunities that best fit their investment strategy.

Principle 3.4
SWFs should consider approaches to reducing portfolio exposure to climate-related risks.

Investors may consider options for reducing their exposure to climate- related risks. For example, climate analysis using greenhouse gas emissions data and other climate metrics could be useful in investment selection and weighting across the portfolio with the objective of reducing risk exposures while retaining diversification.

SWFs could consider integrating climate change requirements into manager selection, mandates and investment strategies with the aim of improving resilience to climate risks across the portfolio.

Principle 3.5
SWFs can promote research on issues related to the financial implications of climate change.

SWFs could initiate or support research in areas that can help to increase knowledge and understanding of the financial implications of climate change for markets and investors. Such support could also include
the development of climate data analytics. Building a growing body of theoretical and empirical research related to the financial impact of climate change can contribute to well-functioning markets.

Afterword
Though a huge fan of Principles they are but the first stage to a system that will need some global legally based agreement. It took us six years to get here the enxt stage is to get as many of the SWF's to jon and then we need an effective monitoring and reveiw system set up. Fiannly an international agreement. 

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