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Mena wealth funds sharpen up on sustainability 

PIF governor Yasir Othman al Rumayyan. The issue would be PIF's second this year after it raised $5.5bn from green bonds in February Reuters
PIF governor Yasir Othman al Rumayyan. The issue would be PIF's second this year after it raised $5.5bn from green bonds in February
  • Region ‘best improver’ in Global SWF study
  • Pressure to demonstrate ethical investment practices
  • Assets under management grew to $3.7trn this year

Mena sovereign wealth funds’ efforts to improve their governance and sustainability practices to meet global standards appear to be bearing fruit, as they recorded the biggest improvement of all regions in a new analysis.  

Data platform Global SWF assessed the performance of 100 sovereign wealth funds and public pension funds on their governance, sustainability and resilience (GSR) policies. 

It considers aspects such as transparency, responsible investing and long-term outlook.

The 29 Mena-based funds assessed by Global SWF scored an average of 52 percent, up from 32 percent in 2020, according to its fourth annual report on GSR.

But there was a mixed picture when it comes to individual funds. 

The report said institutions such as the Saudi Public Investment Fund (PIF), Abu Dhabi’s Mubadala and ADQ, the Qatar Investment Authority, and Bahrain’s Mumtalakat had used the Global SWF rating tool “and taken the opportunity to improve practices and achieve a stronger alignment with international standards”.

It added that the Abu Dhabi Investment Authority and Kuwait Investment Authority had not engaged with its metrics and maintained their scores of three years ago, of 56 percent and 48 percent, respectively.

PIF scored the highest of the Mena wealth funds, ranking seventh globally with a score of 92 percent, while Mubadala was ninth with a score of 88 percent.

Kuwait Investment Authority was 63rd in the ranking and Abu Dhabi Investment Authority was 50th. 

Total assets under management by Middle East sovereign wealth funds

Global SWF calculated the scores by assessing each fund’s performance in areas such as internal and external governance; external manager reputation; audited external accounts; investment strategy and criteria; clarity on capital flows; ethical standards, economic mission and impact; whether it produces an annual environmental, social and governance (ESG) report; and its role in the domestic economy.

“Overall, the improvement reflects learning and evolution, especially among some of the newer Mena funds," Rachel Ziemba, founder of geo-economic advisory firm Ziemba Insights, told AGBI.

"Also, transparency and some other governance indicators were relatively low in the past so there was more room to improve.

“Sustainability – especially environmental – and governance, are now key priorities for most global investors.

"Strategic funds often borrow on global markets as well as investing domestic capital – and receiving this debt, liquidity or equity investment requires more governance and transparency, for example auditing.”

It also “makes sense” that GCC funds are increasingly considering sustainability in their investments, “as they are a key tool for helping their sponsor governments achieve net-zero goals”, Ziemba added. 

Sustainable goals

The ranking was topped by Singapore’s Temasek, “which continues to be used as a model for governments across the world”, Global SWF noted.

But there was a significant increase in GSR scores across the board when compared with the past three years, it added. 

This is expected to continue in line with the growing importance of investment policies such as ESG, and heightened scrutiny of global monetary flows. 

For example, the pressure on achieving top-level sustainability goals is impacting fund’s investment preferences, Global SWF said.

Investments in “green assets” such as renewable energy beat investments in the “black assets” category of fossil fuels for the first time in 2021 and 2022’s study, and the trend continued in 2023.  

Middle East SWFs have “long been seen as slow ESG adopters compared to other major regions" a separate study earlier this month by research firm Preqin reported. "However, there are signs that circumstances are shifting."

Allocations of Middle East wealth funds' investments

Oil-rich nations are seeking to diversify their economies away from hydrocarbons to prepare for a possible drop in demand arising from the increased penetration of renewable energy and the global transition to low-carbon alternatives. 

Gulf countries have committed to achieving net zero emissions by 2050 or, for some, by 2060, and the UAE is hosting Cop28 in November. 

Yet, with Mena wealth fund assets focused on ESG accounting for only a quarter (27 percent) of the total assets under management, “the runway potential for the region to mobilise capital for ESG is significant”, Preqin said.