The Kuwait Investment Authority (KIA) has set itself a big task: making it 100% compliant with environmental, social and governance (ESG) standards.
KIA’s managing director Ghanem Al-Ghunaiman told Bloomberg News this week: “The process is ongoing with the KIA currently transitioning toward 100 per cent ESG compliance for the entire portfolio while currently focusing on the E part of ESG."
But Global SWF asks: what will it take the oil-backed US$693 billion sovereign wealth fund to reach this goal? The biggest obstacle is lack of transparency.
In our 2021 Governance, Sustainability and Resilience Report, KIA scored a relatively mediocre 32% - down 4% on 2020 – and it only scored positively in five of the 10 elements covering sustainability. Our assessments focus heavily on public disclosures and in this respect, KIA falls well behind the sovereign investor universe – although in comparison with regional peers, who are renowned for their opacity, its score is unexceptional.
KIA could significantly improve its sustainability score with five simple improvements: the publication of its ethical standards; the appointment of a dedicated team for responsible investing; greater clarity on its economic mission; disclosure of ESG metrics and reporting of appropriate KPIs; and the publication of an annual ESG report. Many of these measures may already be in place as internal exercises, but without disclosure there is no way of scrutinising KIA’s current position and what steps it needs to take to take its ESG agenda forward.
There are no easy answers when it comes to assessing ESG, because there are no agreed standards to meet. Kuwait itself has not set a net zero carbon emissions target, even as the Gulf state struggles in record-breaking temperatures as the world heats up.
Transparency is problem area for many sovereign wealth funds. KIA claims that two-thirds of its portfolio is “ESG compliant”, but without divulging what this means it is impossible to independently ascertain its level of progress and to demonstrate tangible gains – as opposed to the “greenwashing” accusations faced by many institutional investors. KIA says it has taken on an independent ESG benchmark provider (which is unnamed), but there is little visibility into its starting point – the carbon footprint of its portfolio, for instance – and how far it must go to reach its soaring ambition.
In Europe and North America, there is growing wariness of puffed up ESG reporting. To avoid this criticism, funds like KIA will be expected to show the methodology behind their evaluations. KIA’s membership of the One Planet SWF Initiative, on its own, may not pass muster with analysts as some of the underlying guidelines are not enforceable and can result in diversion or greenwashing.
A key task for the Kuwaiti fund, which currently does not publish its AUM, annual returns or strategic asset allocation, will be opening itself up to scrutiny – something that many legislators in the country’s vibrant parliamentary democracy eagerly anticipate.
Unlike its regional peers, the fund lacks significant investment in renewables, which is a starting point for state-owned investors seeking to green their portfolio. At the same time, it possesses weighty stakes in oil and gas, including ownership of the Kuwait Petroleum Corporation (KPC), a majority stake in British pipeline operator North Sea Midstream Partners and a significant minority stake in the Suez-Mediterranean Pipeline. The greatest challenge KIA will face is how to address the “E” in ESG without a net-zero target, KPIs, transparent reporting and an overweight in oil and gas assets.
While disclosure does not come naturally to Middle Eastern states, a culture of greater transparency could deliver significant advantages to KIA. Demonstrating sustainability generates confidence, especially as SWFs in the region largely exist to offset oil price volatility and prepare economies for a post-oil future. ESG can future-proof a fund from exposure to long-term risks associated with climate change, poor governance and poor labour standards.
While KIA has stressed that its core mission is striving to improve returns and expand AUM, Global SWF’s research finds that this goal does not conflict with ESG. Indeed, as we made clear in our 2022 Annual Report, we have found a “moderate positive relationship”, with a correlation coefficient of 0.52, between the 2021 GSR scores and the average investment returns over the period 2015-2020, based on a sample of 60 different State-Owned Investors from all continents. In other words, those funds that do not look after proper governance, sustainability and resilience, do not generally perform very well.
Interestingly, the strongest correlation is found between the “S” component and the financial returns – i.e., increasing efforts when it comes to Sustainability, including investing in green companies, pays off in the long term. We can clearly see this effect with the “best in class” category, which includes NZ Super, Future Fund and NBIM (as sovereign wealth funds), and AP Funds, CPP and CDPQ (as public pension funds), and have all shown superior performances over the past six years. When it comes to sovereign investors, doing good is good for business.