Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Big investors still pumping gas for black stocks
Fossil fuel investments held by the world’s largest fiduciary funds – sovereign wealth funds and public pension funds – have risen to their highest level since 2011, according to a report by SWF Global.
The State-Owned Investor (SOI) data collected by the US-based organisation for its March quarter report, show fossil fuel assets jumped in value from US$9.5 billion to US$12 billion over 2020. The holdings have remained at more than twice the value of renewable investments during the past two years.
However, a large number of smaller renewable deals have more than kept pace with fossil fuel deals. The number of renewables deals has been above that for fossil fuel projects since 2017, but dipped below it in the last quarter of last year.
The big European funds have tended to be leaders in exclusions policies with fossil fuels, especially the Scandinavian funds. Nevertheless, according to the report, the largest SWF, Norway’s Norges Bank Investment Management, had more than US$25.5 billion invested in ‘black’ (fossil fuel-related) stocks in December last year, which was more than 10 times what it had invested in ‘green’ (renewable) stocks.
The report notes that since 2019 the US$1.2 trillion fund, which was admittedly formed to save the surplus capital from the country’s oil exports, has been able to invest up to 2 per cent of its portfolio in unlisted renewable projects, but has not yet done so.
The report, by Daniel Brett, SWF Global’s head of research and data, and Diego Lopez, the managing director, says: “SOIs are already pushing to both de-carbonize their portfolios and gain exposure to long-term structural trends, using a mix of exclusions, investor activism, and impact investing to achieve environmental goals. Yet, not all SWFs and PPFs have signed up to Paris goals, and the shift from ‘black’ to ‘green’ investment has been varied.”
The authors say that some SOIs are advocates of an “engagement approach” with ‘black’ companies, preferring to stay on board as shareholders as they progress up the renewable chain, which arguably presents more opportunities or upside in the long term.
“One of them is NZ Super, which has managed to reduce its 2016 portfolio’s exposure to potential emissions from fossil fuel reserves by 40 per cent, at the same time as demonstrating that a move towards sustainable investment does not necessarily undermine yield: its low carbon reference portfolio has added about 60bps a year to performance since it was brought in.”
SWF Global estimates that the value in direct (private markets) investments in black energy between 2011-2020 was US$81.0 billion compared with US$37.2 billion allocated to green energy. But the volume of deals in both segments was much closer: 121 for black energy and 94 for green energy, reflecting the smaller initial scale of renewable projects compared with pipelines and oilfield development.
