With days to go before the COP26 summit on climate change in Scotland, several state-owned investors have pledged commitments to decarbonise their portfolios with stronger sustainability policies and divestment from fossil fuels.

The Netherlands’ national civil pension fund ABP – Europe’s largest public pension fund with US$606 billion AUM – has today pledged to divest EUR15 billion (US$17.4 billion) fossil fuel assets by Q1 2023. Confident the move will have no negative effect on long-term returns, the fund is planning to introduce further carbon reduction measures in 2022.

In research commission by Dutch environmental campaign group Fossielvrij, Global SWF found that ABP has paid a heavy opportunity cost by maintaining exposures to fossil fuels instead diverting capital into green energy. Fossielvrij has used the research to back its campaign for divestment in recent months, leading to today’s divestment announcement.

The opportunity cost of the failure to redeploy fossil assets into green investments at end-2016 totals nearly EUR26 billion, based on returns in the period to date. The need to boost returns, which averaged 6.6% over the past six years, is pressing due to the decline in the funding ratio from 104% in 2018 to 88% in 2020.

Finding a consistent and massive out-performance of its green investments over its fossil fuel portfolio, Global SWF said: “Financial returns have stopped and must stop being an excuse, as evidenced by the present analysis on returns. If the fund had divested all of its black stocks and re-invested that capital into green stocks instead in December 2016, its balance sheet would have been 5.2% larger today.”

The move by ABP to phase out its fossil fuel assets includes EUR12 billion in listed equities and bonds and EUR3.5 billion in “black” assets such as oil pipelines, but will not cover commodity derivatives worth EUR19.4 billion. The divestments help align the fund towards the objective of carbon neutrality by 2050.

ABP’s asset manager APG has not stopped at divestment and exclusion but is also seeking out green assets. Earlier this month, it participated in the inaugural NextGeneration EU (NGEU) green bond, which comprises 30% of the EU’s EUR800 billion post-Covid-19 economic recovery package. Green bonds enable investors like PPFs and sovereign wealth funds (SWF) to pursue ESG objectives in fixed income, supporting the green transition across all asset classes. In August, it joined with CalSTRS and ADIA to create a US clean energy firm, Arevon, which includes 4.5GW of operating and under construction renewables, including solar farms and battery storage; a further 3.0GW of capacity is planned.

Over the pond in Canada, Canada’s Caisse de dépôt et placement du Québec (CDPQ) announced today that it has exceeded climate strategy targets set in 2017, doubling the value of its green assets to C$36 billion while reducing the carbon intensity of the portfolio by 38%. Under a new climate strategy, the public pension fund will raise its green portfolio to C$54 billion by 2025, including renewables and sustainable applications in transportation and real estate, and reduce carbon intensity by a further 60%. CDPQ says green and low carbon assets have risen to 80% of its portfolio is made up of green or low-carbon emissions assets.

Speaking to Asian Investor this week, Global SWF’s managing director Diego López said, “CDPQ is the world’s seventh largest PPF and therefore any percentage of the allocation will be very high in absolute terms but increasing its investment to C$54 billion in green assets in three more years is unparalleled - and commendable.”

CDPQ is also making a C$10 billion commitment to decarbonising the real economy and exiting oil by end-2022. López added, “On the one hand, oil listed equities have been traditionally perceived as value stocks important for a portfolio CDPQ had, as of June 2021, at least USD 1.3 billion invested in oil stocks.

“On the other hand, there may be significant private stakes that may be illiquid and undervalued at the moment — in the case of CDPQ these include Belgium’s Fluxys, US’ Southern Star Central and, more importantly, 35% of Brazil’s TAG which was acquired only two years ago for US$3 billion. I would imagine Brazil's political environment; currency considerations and liquidity make TAG a very difficult asset to be sold now,” he said.

Other public pension funds have also set ambitious net zero targets, including OTPP by 2050, AP4 by 2040 and QIC by 2028/2030.

Other funds have also set out plans for tighter environmental sustainability policies, although without firming up their net zero targets. Russia’s Ministry of Finance has today set out plans for sustainable development investment policies for the country’s National Wealth Fund. With the sovereign wealth fund’s portfolio containing significant oil, gas and petrochemical assets, alignment with the global energy transition could mark a significant turning point and could cut off finance for politically important yet carbon intensive projects. Most of the NWF’s portfolio is comprised of liquid assets generated by oil and gas revenue, which is now climbing as energy prices recover sharply as the global economy eases its way out of the pandemic. Yet, the Ministry of Finance has warned that energy revenues will diminish in the long-term as the world undergoes a transition to lower carbon economy.

At present, the NWF’s non-liquid holdings are almost entirely domestic and comprised of infrastructure assets and stakes in banks and industrial companies, but there have been growing demands for the fund to be used to stimulate the flagging economy, potentially to support the National Projects package and National Recovery Plan, which are lagging targets. These projects, including the Ust-Luga chemical complex, would complicate any effort to “green” the portfolio and could meet with resistance from President Vladimir Putin.

Abu Dhabi’s infrastructure-led ADQ sovereign wealth fund also announced today its first Environmental, Social and Governance (ESG) policy to support its efforts as a sustainable investor, prioritizing clean energy technology and encouraging portfolio companies to move towards more environmentally sustainable and socially responsible growth. While the policy sets out its values and a direction of travel, it stops short of setting measurable reduction targets and timescales.

Without targets and metrics, it will be impossible to judge the performance of ADQ and NWF against the more ambitious net zero targets Canadian and European public pension funds have set themselves.

Photo by Singkham from Pexels

Related funds ADQ APG CDPQ NWF