1. Introduction
The past four years have seen a simultaneous occurrence of multiple negative shocks: the COVID-19 pandemic and two devastating conflicts in Europe and the Middle East. Geopolitical risk has disrupted global value chains, causing strains on trade and inflationary pressures that monetary tightening can hardly alleviate. According to the IMF, trade between economies in politically distant blocs has slowed 2.4 per cent more than trade between those within blocs since the start of the war in Ukraine, an alarming sign of geoeconomic fragmentation. Today, globalization seems strained, with governments of all stripes grappling with security concerns on defense, energy, and technology that seemed improbable not long ago. Amid this backdrop of interconnected contingent issues, the looming challenges of climate change and income inequality persist.
Sovereign wealth funds have a fiduciary duty to generate robust risk-adjusted returns on their investments. As universal investors, they also have the incentive and agency to address market failures and global externalities that could affect financial performance in the long run. Nonetheless, today, state ownership necessitates investors to consider policy issues in their strategies, which can limit the investable universe amid heightened geopolitical risk. Sovereign investing in these turbulent times thus requires a balancing act that combines vision and pragmatism.
How are sovereign wealth funds navigating the polycrisis? More specifically, what are the latest trends in their sustainable investments? Has the current turmoil led sovereign wealth funds to focus on short-term domestic challenges, or are they staying committed to investing for long-term sustainability?
Starting from the IFSWF database we classified sovereign wealth fund direct investments from 2020 to 2023 deals as “sustainable” (or aligned with the UN’s Sustainable Development Goals) when they were executed in sectors aligned with the IRIS+ taxonomy, a standard reference in the field. As in the previous years, we used the UN Environment Programme’s broad definition of “sustainability”, which contains both environmental and economic inclusivity dimensions.
2. Trends
Our database sample included 1,402 transactions executed in the 2020-23 period with a total nominal value of $286 billion. We classified 406 transactions (29%) as sustainable deals, representing a total value of $62 billion (21%). Although Sustainable Development Goals (SDG) transactions are a relatively small proportion of the total sovereign wealth fund activity during the timeframe, the latest trend indicates a significant increase in sustainable investment value in 2023, up about 50%, spread across fewer deals (a 8% decline in deal count). The investment value has been gaining momentum over the past year, along with an increase in ticket size, signaling a consolidation of sustainable investment opportunities.
A review of the sectoral distribution of sustainable investments over time appears to demonstrate that sovereign wealth funds’ strategies are becoming more influenced by domestic crises and can respond remarkably quickly in emergencies. For instance, the surge of investments in healthcare during the 2020-21 period contributed to the discovery and large-scale production of COVID-19 vaccines such as BioNTech and Moderna, showcasing sovereign wealth funds’ ability to support governments in the fight against the pandemic. Additionally, 2020 saw a record number (albeit ephemeral) of agriculture investments, possibly reflecting a heightened concern about food security due to the COVID-19-related shock on supply chains.
With 40% of deals and 28% of value, healthcare remained a crucial pillar of sustainable investments throughout the period given the relevance of megatrends such as aging populations in developed markets, and the spread of related chronic conditions. However, healthcare has become a less important sector for sovereign wealth funds in the last two years of the sample in favor of the rise of clean energy as the primary target industry. Sustainable energy deals—including renewables, energy access and efficiency — were valued at $12.8 billion, accounting for 62% of total SDG investment value in 2023. One of the latest transactions in the renewable energy sector was Qatar Investment Authority’s (QIA) $2.4 billion investment in RWE, announced in 2023. This investment will support RWE’s acquisition of Con Edison Clean Energy Businesses, positioning RWE as a major player in the U.S. renewable energy sector.
Further, we have extended the IRIS+ category of clean energy to include energy transition resources, such as the so-called critical metals and minerals that are needed for the deployment of renewable energy technologies. Interestingly, the largest deal by value in 2023 is PIF’s $2.8 billion acquisition in Vale Base Metals, the Brazilian company managing nickel mines in Canada and Indonesia, copper mines in Brazil, and with plans for cobalt and platinum group metals.
Sovereign wealth funds could strategically positioning themselves in the critical raw material space to secure access to resources vital for their economies, capitalize on the burgeoning demand driven by energy transition and digitalization, and diversify their portfolios for long-term returns. Key trends in critical raw materials include investments across the entire value chain, from exploration to processing, a preference for partnerships and joint ventures over passive holdings, and an increasing focus on domestic and regional investments to secure supply chains.
Energy sector data reveals that investments in renewable energy are not only increasing but also expanding their share within the industry. The sample period highlights a growing shift among sovereign wealth funds away from conventional energy sources as they deepen their commitments to combating climate change. However, the 2023 uptick indicates that hydrocarbons still retain a significant, albeit evolving, role in the energy landscape. Geopolitical factors driving up oil prices and elevating oil company valuations highlight the persistent relevance of hydrocarbons, even as the sector transitions toward greener alternatives. Notably, the largest transaction was Abu Dhabi’s ADQ indirect stake in the ADNOC Gas Pipelines for $2.1. billion, underscoring the ongoing strategic value of oil and gas infrastructure amidst the energy transition.
The sectoral analysis shows how sovereign wealth funds are adapting to global challenges like climate change and investing in the energy transition. At the same time, over the past four years, they have balanced sustainable investments with the need to address the most pressing issues in their domestic economies.
The data on sovereign wealth fund sustainable investments also reveal the impact of geopolitical turmoil on the international profile of sovereign wealth fund investments in the wake of recent events. Indeed, the escalation of conflict in Palestine and the continuation of the war in Ukraine undoubtedly add complexity to global investment strategies in 2023.
As highlighted in an op-ed for IFSWF by Udaibir Das, “Buckle Up for the Ride: Sovereign Wealth Funds Grapple with Fragmentation and Conflict”, in times of heightened geopolitical tensions, sovereign wealth funds may seek to diversify their portfolios geographically and across asset classes to mitigate risks associated with specific regions or industries affected by geopolitical instability. This diversification strategy could lead to a shift in investment destinations, favoring economies or sectors less susceptible to geopolitical disruptions, and prioritizing investments that align with broader national interests or diplomatic objectives.
In 2023, we observed a significant increase in the number of domestic and intra-regional sustainable investments, which accounted for nearly two-thirds of the year’s total investment activity. Regional deals stand out, doubling their share compared to the previous year up to 42% of total deals in 2023. The share of genuinely global investments, namely overseas investments that crossed major macro-regions, have dwindled to a historical low of 27 per cent. This trend is less pronounced in the data by value, where global deals still represent the lion’s share. Indeed, there are no domestic investments among the 20 largest deals by value, a clear indication of the scarcity of sizable sustainable investment opportunities at home. The share of intra-regional deals, however, has grown considerably over 2023, reaching 22%.
This data is broadly consistent with the view that as far as sustainable investments are concerned sovereign wealth fund strategies are affected by the “de-globalisation risk” induced by geopolitical crises. As global trade slows down, foreign direct investment follows suit, and it has implications for the pace of foreign asset accumulation by (once) large exporting countries. Transatlantic trade, particularly to North America, is the most negatively affected, leading to the US no longer being the main destination of sovereign wealth fund investments. The share of SWF investment in North America has more than halved over the past year, dropping to just 17 per cent. This decline is partly due to the surge in screening and investigative activity by the Committee on Foreign Investment in the United States (CFIUS), America’s powerful inbound investment watchdog, spurred by heightened national security concerns.
Geopolitical risk appears to be reshaping global trade and investments, with a reallocation of trade capital flows aligning with the beginnings of a new economic order characterized by regional connectivity and interdependence within politically more homogenous coalitions of countries. The rise of regional deals and the increased attractiveness of destinations closer to the source of capital such as Europe are interesting developments to follow.
3. Funds
In recent years, sovereign wealth funds have shown a strong commitment to sustainable investments, despite global uncertainties. This section reviews the investment strategies and activities of major funds, focusing on their investment patterns and sectoral preferences.
Singapore’s Temasek Holdings remains a leading force in SDG investments executing 111 transactions, in 2020-2023, that demonstrate both high activity and broad sectoral diversity. With a particular focus on healthcare, agriculture, and energy, its total investments reached $5.8 billion. A notable transaction in 2023 was its acquisition of an additional 41% stake in India’s Manipal Health Enterprises, boosting its total stake to 59%. This investment, valued at approximately $2 billion, underscores Temasek’s commitment to improving healthcare access and quality in emerging markets. Meanwhile, GIC appears to be the largest investor, deploying over $14 billion across 56 deals, with key investments in healthcare, energy, and infrastructure. Among its most significant deals was a $1.1 billion investment in WHI Holdings, a Japan-based parent company specializing in HR system software and the parent company of Works Human Intelligence.
Mubadala Investment Company significantly bolstered its presence in sustainable sectors, committing $9 billion across 50 deals. Its investments span healthcare, energy, infrastructure, and technology, with a focus on long-term value creation and sustainable growth. For example, in 2023, together with Infracapital, the infrastructure equity investment arm of M&G, Mubadala invested £270 million ($341 million) in Zenobē Energy, a UK-based electric vehicle and battery storage company, to power 4,000 electric buses, trucks, and commercial vehicles by 2026, advancing the global shift to cleaner transportation.
Qatar Investment Authority (QIA) maintained its focus on healthcare and energy, with 35 transactions for approximately $6.8 billion. Notably, QIA acquired a significant stake in Severn Trent, a UK-based water company, for $620 million. In addition, QIA made a $200 million investment in South Korea’s SK On, a leading player in electric vehicle battery manufacturing, and $51 million in ITM Isotope Technologies in Germany, a biotech company specializing in radioisotope production for medical applications.
Saudi Arabia’s Public Investment Fund (PIF) made significant strides in SDG investments, committing $6.1 billion across 16 deals. The focus was predominantly on energy and infrastructure, furthering Saudi Arabia’s broader Vision 2030 strategy.
Emerging players like ADQ and the Kuwait Investment Authority have also ramped up their SDG-related activities, focusing on healthcare and sustainable agriculture, with investments totaling $4 billion and $1.8 billion respectively.
Conclusion
Sovereign wealth fund sustainable investments have been gaining considerable momentum in recent times, and 2023 serves as a clear illustration that sustainability-related themes have taken center stage in sovereign wealth fund investment strategies. The ticket size of SDG-aligned deals is also rapidly converging with conventional investments, perhaps driven by large investments in clean energy projects.
Yet, a growing concentration in clean energy and health underscores a recognition of climate change and health as the most pressing global challenges. Critical areas such as water and sanitation, food security, education, forestry and biodiversity conservation, are so far largely untapped. This discrepancy highlights the importance of a more comprehensive approach to sustainable investing, ensuring that long-term investors can address a broader spectrum of societal and environmental needs.
Our analysis suggests that sovereign wealth funds adapt their investment strategies to geopolitical events, leading to a significant reallocation towards domestic and regional investments. This underscores the significance of what are commonly referred to as “de-globalization risks”. From this standpoint, emerging markets and developing economies of the Global South could represent interesting diversification opportunities. Overall, while geopolitical turmoil can pose challenges for all investors, it also presents opportunities for strategic adaptation and innovation in portfolio management approaches. Monitoring how sovereign wealth funds navigate these turbulent geopolitical waters could offer valuable insights into evolving investment trends and global economic dynamics.