European sovereign wealth funds remain focused on ESG

By Ilias Georgopoulos, Global Head of Private and Institutional Asset Owners

European sovereign wealth funds (SWFs) remain at the forefront of integrating environmental, social and governance (ESG) criteria into their investment screening and seem unmoved by the political pushback coming from the United States.

Various national and EU regulations require investors to consider a broad range of ESG-related criteria when deploying capital, compelling regional SWFs to often go further than their global peers when screening investments.

It is a trend that other SWFs are also adopting, with Singaporean and some Middle East wealth funds winning plaudits for their reporting transparency and commitment to ESG. Across Europe, regulatory guidance is often linked to government targets to be net zero in greenhouse gas emissions by mid-century.

A drive to better measure ESG metrics is occupying a lot of time within SWFs and continues despite the changing tone in the United States. Mention ESG in the U.S. and managers say they get a less positive reaction, with European SWFs sometimes walking away from deals because the other side could not, or would not, produce the necessary insights needed for ESG compliance checks.

“The term ESG is falling out of favour among some institutions in the U.S.,” said Matthew Berretta, Senior Editor at research group Sovereign Wealth Fund Institute. “What you are seeing is a change in tone, but not necessarily in substance. Institutions are still committed to ESG principles regardless of their use of the term,” he added, citing the example of BlackRock CEO Larry Fink, who said he wouldn’t use the term ‘ESG’ anymore as it had been weaponised for political ends. BlackRock now says it is “transition investing.”

Europe a magnet for green deals

Europe’s SWFs meanwhile continue to deploy additional ESG matrices to screen potential investments, including ever more sophisticated monitoring systems for Scope 3 and 4 emissions that go deeper to understand the environmental cost along a company’s value chain.

Those ambitions for a cleaner environment have made the continent a magnet for SWF investment in the renewables sector. In June, Norges Bank Investment Management (NBIM), which has a mandate to invest up to 2% of its fund in unlisted infrastructure for renewables, bought a 37.5% stake in a UK offshore wind farm for £2.6 billion (US$3.4 billion). Last year, GIC acquired a 5% stake in Spain’s EDP Renovaveis for $1 billion, while South Korean SWF Korea Investment Corporation has plans to invest £9.7 billion ($12.6 billion) in UK renewables and other sectors by 2033.

More generally, SWFs are piling into green assets across the globe with more than $26 billion invested last year across 91 investments.  According to a recent report by TheCityUK, SWFs have invested $21.6bn in ‘green’ assets in 2023.

Increasing transparency, increasing pressure on GPs

Europe’s drive for ever more ESG measurables has spurred public reporting by some SWFs on their voting records and lobbying efforts at portfolio companies. Europe’s handful of SWFs are among the most transparent when sharing information on their operations.

NBIM, the world’s largest SWF with around $1.6 trillion under management, last year voted at 11,468 public shareholder meetings with a 94% support level for board recommendations. Votes against related to issues around board diversity, board independence and efficiency, NBIM reported, adding that the SWF wanted to see a minimum 30% representation of each gender on a board. We can safely say that European SWFs having a heavy hand in driving the ESG agenda within the general partner (GP) community.

European SWFs, with their substantial assets—totaling $11.2 trillion as of 2023—hold significant financial clout and are well-positioned to drive the global ESG agenda. Their continued growth, marked by an impressive 10% increase in assets in recent years, amplifies their ability to shape investment practices and set new standards for ESG considerations.

The importance of SWFs as institutional investors will only continue to grow. If you’re interested in learning more about navigating the complexities of sovereign wealth funds, IQ-EQ can offer tailored, expert insight. Contact us today to learn more.