Sovereign funds address the green agenda
2022-11-24
Sovereign funds address the green agenda
When the head of the World Food Program David Beasley commented last month that oil-exporting nations had received an undeserved bonus through the spike in oil prices, and should redistribute their surpluses throughout the world, he caused some annoyance in the Gulf. No one expressed sympathy for oil-exporters when the price plummeted below $10 per barrel during the Covid lockdowns in 2020. Food-exporting countries do not receive similar criticism when the global price of grain rises.
Moreover, the recycling of petrodollars is a pattern that has been established for decades, offering benefits to the rest of the economic world. An IMF paper in 2006 reported how the recycling falls into two broad categories: absorption – domestic consumption, which draws in imports; and the capital account – investments in foreign assets.
Absorption helps improve the current account balance of the nations from which businesses and consumers in oil-exporting countries are purchasing. Indeed, the 2006 IMF paper noted that higher expenditure tended to continue after the period of high oil prices came to an end, showing that adjusting to volatility in the price is a challenge for oil exporters and importers alike.
Capital account investments provide economic benefits to oil-importing nations, as they are often recipients of the proceeds of petrodollars. High levels of investment by oil exporters tends to enable interest rates to come down in the rest of the world, the IMF paper noted. In addition, it includes inward investment for productive businesses.
In comparison to the earlier years of oil boom, when portfolios were concentrated in the financial sector and real estate, recent investments have become more diversified and sophisticated. They have also become greener. The Norwegian sovereign wealth fund – which was originally built up through the proceeds of oil exports – has become increasingly well known for its pivot to clean technology and other asset categories considered more ethical. Some funds in the Gulf have moved in a similar direction, though attracting less publicity.
The category ESG (Environmental, Social and Governance) has risen sharply in prominence in recent years as a guide for investors. While there are concerns over how reliable related indicators are, owing to the possibilities of greenwashing, the move towards sustainability is substantial.
Investments in the ESG space by sovereign wealth funds increased from $7.2 billion to $22.7 billion between 2020 and early 2022; sustainability-linked investments are increasingly prioritized throughout the Gulf region. One example of investment in clean technology is the creation of the largest solar power installation in Qatar. The 800MWp Al Kharsaah power plant was connected to the national grid in October this year, and will remove an estimated 26 million tons of CO2 emissions over the course of its lifetime.
According to a study by Invesco, some 75% of sovereign wealth funds globally, and 55% of Middle East funds, have an integrated ESG policy. A United Nations report in 2017 identified sovereign wealth funds as being well suited for helping societies reach the UN’s Sustainable Development Goals (SDGs), because of their long-term perspective. Such investments had begun, the report concluded, and could be accelerated with clearer metrics for SDGs.
Petrodollar surpluses are not inherently bad for the global economy – it depends upon how they are used.