1. Introduction
To say we live in turbulent times is somewhat of an understatement. No sooner had the pandemic eased its grip on the world, increasingly tense geopolitics and recessionary fears began to dominate the headlines. Monetary stimuli during the pandemic were compounded by food and energy crises to spur global inflation to levels that appear hard to tame. Central bankers in developed markets now need to tread carefully between ensuring financial stability and fighting inflation. Climate-change mitigation and adaptation measures are increasing but likely need to be faster to keep global warming within the Paris Agreement targets. Emerging markets, meanwhile, are concurrently battling the energy transition, food security, sovereign (and soon corporate) debt crises, and Bretton Woods international financial architecture is slow in spooling up a comprehensive response. Pre-pandemic development gains in emerging markets have largely been lost. Accomplishing the UN Sustainable Development Goals (SDGs) by 2030 requires annual investments of $4.3 trillion, mostly in sustainable infrastructure.
Against this current polycrisis backdrop, sovereign wealth funds (SWFs) are in a unique position for five reasons.
1. Given the size of their assets, they can make a meaningful contribution toward achieving the SDGs.
2. They are universal asset owners with large stakes in companies across an extensive range of sectors and markets
3. SWFs are well-placed to drive sustainability across the investment cycle through active and responsible ownership, extending their influence to their investees.
4. The inter-generational nature of SWFs’ investment horizon makes it imperative they assess the materiality of long-term risks, such as climate change, in their portfolios.
5. SWFs are part of the public sector, with different mandates ranging from fiscal revenue stabilisation and intergenerational savings to national economic development.
Given these characteristics, SWFs can consider externalities and the need to invest in the broader public good. But they must also invest like private-sector institutions with long investment horizons, securing returns appropriate for the risks taken so that they stay aligned with their organisations’ financial objectives.
Yet, with certain exceptions, SWFs are generally perceived as isolated institutions, shielded from external pressure to change investment policies and help deliver the SDGs. Asked whether their boards and beneficiaries asked about such issues, only 38% of SWFs say that they do, against around two-thirds of central banks, foundations, and endowments, and just over half of pension funds.
In the past, SWFs were often perceived to be lagging behind their peers in sustainable investing (or SDG investing), and their participation in the overall responsible investing movement has remained modest relative to other institutional investors and private-sector counterparts. In 2019, only 13% of SWF interviewed had published a sustainability report, while the share of pension funds doing so was 31% (UNCTAD, 2020). Another survey on global asset owners in the same year revealed that SWFs recorded the highest percentage (52%) of respondents declaring that they do not include ESG in their investment approach (State Street Global Advisors, 2019).
Turning to climate change, most SWFs agreed in an IFSWF 2020 survey that climate change is happening and that it will affect economic growth and financial return, but 60% of respondents then declared that they were not taking climate-related risks and opportunities into consideration in the investment process in any systematic way.4
However, this has started changing. In a similar survey conducted by IFSWF in 2022, and focused more on climate actions than climate beliefs, SWFs had meaningfully increased their engagement and actions on climate change in various ways.
A useful baseline to the analysis in this article is another study performed on the 2000-2020 SWF investment activity and the trends during this period. This previous study, covering a longer period, more transactions, but fewer SWFs, revealed that during the 2000-2020 period, only 16% of the SWFs’ deal count and 7% of their deal value aligned with the SDGs. Still, this study also revealed a noticeable uptick in SDG investing by SWFs from 2018 onwards, particularly in terms of deal values in climate and energy. While the data sets are not directly comparable, the relatively low but growing engagement by SWFs with the SDGs reported in the study culminated in a high point both in terms of deals and investment value in 2020, the single year of overlap between the study and this article.
In this article, we would like to examine whether SWFs are continuing to increase investments that are aligned with the SDGs.
Most of the information on this topic is derived from surveys. We instead took a “revealed preference” approach, sifting SWF orientation (or lack thereof) towards sustainable investing by analysing their investments between 1 January 2020 and 31 December 2022. We adopted UNEP’s broad definition of “sustainability”, which contains both environmental and economic inclusivity dimensions, and labels SWF deals as sustainable (or SDG-aligned) when they are executed in the sectors aligned with the IRIS+ taxonomy, a standard reference in the field.
2. Data description
The sample of the SWF investments originate from the database built by the International Forum of Sovereign Wealth Funds (IFSWF), sourced from publicly available data. It comprises 1,092 direct equity investment transactions made by 77 tracked SWFs or by their investment vehicles from 2020 to 2022 for a total aggregated deal value of just over USD 212 billion. The data includes equity investments in the real estate and infrastructure sectors, in listed and unlisted markets, investments in private equity, and equity investments in joint ventures in which an SWF (either directly or through their financial arms) is an investor. We then put this direct equity investment activity into a different ‘key’, qualifying them as sustainable only when executed in investees’ core businesses that align with the IRIS+ taxonomy.
We should note that the database excludes investments made by SWF portfolio companies. The data also excludes external investment mandates and small open-market transactions as part of a passive equity strategy but includes the acquisition of convertible securities. Not every transaction in the IFSWF database (“database”) could have a deal value attributed to it due to lack of publicly available information. In this sample, 1,021 out of the 1,092 transactions had available deal values.
The sustainability dimension pertains to the core business of the investee company: each company reported in the database was classified according to categories and themes (“subcategories”) based on the IRIS+ taxonomy.
Classifying the sustainability of investee companies was performed by following the detailed guidelines of IRIS+. Being a manual classification based on publicly available sources, there is a certain degree of subjectivity in the classification process. If more than one IRIS+ category could be applied to a specific company, the one that best fitted the largest share of its core activities (according to the information found) was adopted.
The category “Non-SDG” was added to the original IRIS+ taxonomy to account for investee companies in the database whose core activities did not fit with any IRIS+ categories.
3. General Trends
Our sample in the database consisted of 1,092 transactions, of which 310 (28%) were marked as sustainable (SDG) transactions, representing a total of USD 39.3 billion (19%) in deal value. Hence, the SDG transactions only appear to be a relatively minor part of the overall SWF investment activity during the timeframe.
However, when we zoom out to a longer period, we know from another study on SWF investment activity between 2000 and 2020 that the SDG transactions in the 2020-2022 period represent a higher – and growing – percentage of SWF investment activity than in years past. This previous study reported that, overall, during the 2000-2020 period, only 16% of the SWFs’ deal count and 7% of their deal value aligned with the SDGs. However, the study also revealed a noticeable uptick in SDG investing by SWFs since 2018, especially in terms of deal values in climate and energy.
Between 2020 and 2022, we observe a significantly higher SDG deal count materialise in 2021 (165 deals vs 54 deals in 2020) amid higher dealmaking in general (a total of 310 deals in 2021 vs 266 in 2020), to only come down again in 2022 to 91 SDG deals. The overall deal value remained largely flat, but the SDG deal value peaked in 2021 in line with the overall amount invested by SWFs, which was the highest on record in 2021. When we isolate the SDG deal activity in Figure 1.3, we more clearly observe the spike in SDG deal count and value in 2021. The SDG deal count and deal value exploded by nearly three-fold from 2020. There was generally more dealmaking in 2021, but the SDG deals made up slightly over one-third of all deals done, while in 2020, this was only one-fifth. This was, of course, in the middle of the pandemic, and this rapid increase is largely due to the large number of deals done in the healthcare sector.
4. Sectoral Analysis
Looking at the data from a sectoral perspective, it is remarkable that the pandemic catalysed the lion’s share of SWF direct equity investment activity into healthcare, representing 42% of SDG deal count (131 SDG deals) and 34% of SDG deal value (USD 12.8 billion). Several SWFs have backed the research and development efforts of select pharmaceutical firms in hot pursuit of a COVID-19 vaccine. For the winners, these high-risk investments are where the public good and astounding financial returns converged.
One of the most notable deals in this context was Temasek’s investment in NASDAQ-listed BioNTech, based in Germany, which partnered with pharmaceutical giant Pfizer to get their COVID-19 vaccine to the market as fast as possible. The vaccine was developed based on BioNTech’s innovative, proprietary mRNA technology and Pfizer’s antigen expertise.
Meanwhile, in June 2021, Singapore’s GIC invested in Medline Industries at an enterprise value of USD 34 billion. The company is the biggest private US manufacturer and distributor of medical supplies like gloves, gowns and examination tables to hospitals and doctor’s practices. The consortium acquiring Medline Industries included private equity firms Blackstone, Carlyle, and Hellman & Friedman.
In June 2022, Abu Dhabi’s Mubadala Investment Company invested in Envirotainer, a Swedish company that designs, manufactures, and leases active temperature-controlled containers used primarily for airfreighting biopharma products, alongside private equity firm EQT. With a fleet of approximately 6,700 containers globally, it serves many blue-chip global pharmaceutical and biotech companies. It currently enables the safe delivery of approximately 2 million doses of medicines per day around the globe.
Energy follows with 21% of SDG deal count (65 SDG deals) and 31% of SDG deal value (USD 11.9 billion). Compared to healthcare, there are fewer deals with relatively larger deal values, with the energy sector investments relying on well-understood and proven business and revenue models.
One of the noteworthy transactions in the energy sector was the acquisition by the Abu Dhabi Investment Authority in December 2021 of a 10% interest in Sempra Infrastructure Partners. Sempra is a listed NYSE-listed company, one of the largest energy networks in North America, focused on advancing the global energy transition in the markets it serves, including California, Texas, Mexico, and the LNG export market.
The Norwegian Government Pension Fund Global (GPFG) completed only three SDG deals during the period, including, in 2021, a USD 1.63 billion acquisition from Denmark’s’ Orsted of a 50% interest in two offshore wind farms, Borssele 1 and 2, in the Netherlands. This investment was the SWF’s first investment in unlisted renewable infrastructure and part of its strategy to build a portfolio of wind and solar power generation assets. The wind farm can generate 752 MW of clean energy, sufficient to power a million households in the country every year. It must be noted, however, that direct infrastructure represents only a small percentage of GPFG’s investments, as the fund typically implements ESG strategies in its listed equity and fixed-income portfolios, and these are not evident in the direct investment activity described in this paper.
The sectoral investment activity then drops off to agriculture/food security (27 deals worth $3 billion), sustainable infrastructure (21 deals worth USD 6.6 billion), financial services (14 deals worth USD 676 million), and education (14 deals worth USD 845 million). We report only nine deals worth USD 875 million in climate mitigation and adaptation. Interestingly, less than 3% of total SDG investment activity has been targeted at climate action.
While this is a relatively small sample, we can make three observations about these trends. First, while SWFs are generally thought of as large ships that are hard to turn, it is remarkable how several SWFs stepped up very quickly and decisively during the pandemic to help fund the design and scale-up of the manufacturing of the acutely needed vaccines to free the world from COVID-19 lockdowns.
Second, a similar argument might be applied to food security-related investments after the Russia-Ukraine conflict. Third, while there is an obvious investment case for renewable energy, given the cost-competitiveness of wind and solar relative to fossil fuel, SWFs have been less enthusiastic about climate change mitigation, resilience, and adaptation investments. However, as SWFs are investors with long investment horizons, these investments have the potential to have complementary return characteristics, particularly as SWFs increasingly understand the financial impact of climate change on their portfolios.
5. Geographical analysis
Looking at the sample from a target regional perspective, the most popular region for SDG investments by SWFs is North America, leading by far with 44% of the deal count (135 SDG deals). For purposes of this geographical analysis, we combined the Middle East, Africa and Southern Asia into MEASA, which is the key focus region for the Transition Investment Lab (TIL). The MEASA region then takes second place with 21% of the deal count, representing 66 incoming SDG deals. Europe is third, with 18% of the total deal count and 56 SDG deals.
When it comes to deal value, the patterns are consistent. North America still leads with USD 15.5 billion, while MEASA follows with USD 9.3 billion, and Europe comes in next with USD 5.7 billion.
Overall this speaks to the United States market continuing to be a big draw for SDG investments, not in the least because United States healthcare is a very large market, making up 18.3% of United States GDP19 in 2021 and energy has traditionally been a very vibrant investment sector in all of North America. It is encouraging to see MEASA coming in second ahead of Europe, in both deal count and value, in recognition of the region’s abundant investment opportunities and rapidly growing markets. However, sub-regional disparities are apparent, as Southern Asia attracts the lion’s share of the MEASA market, accounting for 75% of deals and 56% of investment value.
The regional data from year to year does not show much variance from overall trends, so we leave it unreported here. However, when we look at an analysis of home regions (i.e., where the SWFs are based) rather than the regions targeted for investment, an unsurprising but nonetheless interesting observation can be made. Across the years, MEASA-based SWFs account for the overwhelming share of SDG investments, both by deal value and deal count, thanks to the UAE-, Saudi-, and Singapore-based SWFs. MEASA is not only a very important target region for investments, second only after North America, it is by far the dominant region from which the SWF capital originates.
6. Funds
The sample also allows us to take a closer look at what specific investment activity, by deal count and deal value, and in what sectors, is undertaken by various SWFs between 2020 and 2022.
Temasek is the most prolific sovereign investor in the SDGs with 92 deals, almost a third of all SDG-related SWF investments, valued at USD 3.3 billion during the period. These deals were concentrated in healthcare, agriculture, and energy. Its sister SWF in Singapore, GIC deployed $8.2 billion over 38 investments, the most of all SWFs in the period. In terms of deal value, its SDG related focus is healthcare, energy, and infrastructure.
Notable deals include GIC’s investment into listed energy platform AC Energy in the Philippines in 2021 for over USD 400 million. AC Energy operates 4.2 GW of clean energy generation assets across several Asia-Pacific markets20. Temasek’s agricultural investment strategy expressed itself through a similar size investment in 2020 for an 85% stake in Rivulis Irrigation in Israel. Rivulis is a global micro-irrigation leader innovating and deploying smart micro and drip irrigation solutions to help growers achieve higher yields, quality, and profitability while safeguarding the sustainability of grower land and livelihood.21
Mubadala’s interest in sustainable investments has grown significantly in recent years. In terms of the number of investments, it is the second most prolific SWF, making 46 investments valued at USD 6.2 billion across a range of sectors, including healthcare, energy, water, infrastructure, education, and climate. In 2021, it invested in US-based Culligan International, a leader in the consumer water treatment and sustainable water solutions market22.
ADIA is also active in sectors linked to the SDGs. It closed 23 deals between 2020 and 2022 in sectors such as energy, healthcare, infrastructure, and climate, deploying USD 4.4 billion. For example, in 2022, ADIA invested alongside Global Infrastructure Partners to acquire a majority stake in VTG AG, a Germany-based leading international railway cars and rail logistics company23. The Qatar Investment Authority was the fourth most prolific SWF investor in SDG-related sectors, making 27 deals worth $3.5 billion, spending most of its firepower on infrastructure, healthcare, and energy.
Both Saudi Arabia’s Public Investment Fund (PIF) and ADQ, a relatively new Abu Dhabi SWF, deployed USD 3.3 billion and USD 3.1 billion, respectively, in SDG deals. PIF concentrated its dealmaking on energy, infrastructure, and healthcare. ADQ made six out of its nine SDG deals during the period in the healthcare sector, valued at USD 854 million, and a significant deal in agriculture, acquiring the Dutch agri-commodities and food company Louis Dreyfus Company in 2021 for USD 1.7 billion.
7. Conclusions
In this article, we have attempted to quantitively document the evolution of SWF sustainable investment during the 2020-2022 period based on the publicly available data on direct equity investments by 77 SWFs. In and of itself, it is hard to draw definitive conclusions from this relatively small and short sample. As highlighted in section 3, our sample from the database consisted of 1,092 transactions, of which 310 were marked as sustainable (SDG) transactions, representing a total of USD 39.3 billion in deal value. This total represented 28% of the deal count and 19% of the total deal value of the SWF transactions during the 2020-2022 period. Hence, the SDG transactions appear to be only a relatively minor part of the overall SWF investment activity during the timeframe.
However, a different reality reveals itself when we zoom out to a longer period. We know from another recent study on SWF investment activity between 2000 and 2020 that SDG transactions now represent a higher –and growing –percentage of SWF investment activity than in years past.24 We should note that the comparability of the two studies is not completely straightforward,25 but the longer-term trends point to SWFs investing more in sustainable investment sectors.
While SWF’s overall engagement in SDGs may still be somewhat limited, it is remarkable, even during the pandemic years, how most of SWFs’ recent direct equity investment activity has gone to healthcare. Several SWFs have backed the R&D efforts of select pharmaceutical firms in hot pursuit of a COVID-19 vaccine. We conclude that the SWFs have played an important role in slowing down the spread of the pandemic and eventually beating it back.
SWFs’ second most popular sector related to the SDGs was renewable energy. The sectoral investment activity then drops significantly to agriculture and food security, sustainable infrastructure, financial services, and education. However, waste and, climate mitigation and adaptation are last. North America is by far the biggest recipient in terms of deal count and value, thanks mainly to attractive and large healthcare and energy markets. The combined MEASA region though is second in terms of target region, with abundant opportunities and fast-growing markets. MEASA is also by far the most important home region where the SWFs are based, thanks to the UAE, Saudi, and Singapore SWFs.
Despite being asset owners with intergenerational investment horizons and formidable financial firepower, SWFs are not the sole answer to the world’s polycrises of the energy transition, food security, and emerging markets debt. But several of them contributed to save the day when it came to funding the development and quickly scaled-up manufacturing of COVID-19 vaccines during the pandemic, which dominated the period under inquiry, reaping material financial (but, in many cases, unrealised) gains in the process.
Their SDG alignment is evolving, and meaningful progress has been achieved recently. As overarching themes such as sustainability, climate change mitigation and adaptation, SDGs and SDG investing become more important for asset owners, one might also expect SWFs to further align their investment strategies with the SDGs. They might move from relative isolation from external pressures to a universal recognition that they should be part of the solution to our planet’s most pressing problems. Granted, it is easier to evolve when desirable developmental returns pair with compelling financial returns that compensate for the risks taken. The litmus test may well determine SWFs’ future levels of investment activity in critical sectors such as regenerative agriculture (in response to food insecurity), water (in response to growing global scarcity), and climate change mitigation and adaptation (in response to the acute climate crisis unfolding everywhere).