The world’s shift
away from carbon-based energies in favour of renewable or green energy
threatens to turn fossil-fuel-rich economies into “stranded nations” unable to
realize the economic value of their carbon wealth. The world’s sovereign wealth
funds, which collectively own $8 trillion in assets but currently invest just
0.19% of this figure in green energy, have a powerful role to play in helping
governments implement policies and investments to prepare for this transition.
These are the findings of a World Economic Forum white paper, Thinking
Strategically: Using Resource Revenues to Invest in a Sustainable Future,
published today.
According to the report, economies where the value of the carbon wealth
outweighs the value of human capital or financial assets are particularly
vulnerable to the energy transition. This applies to more than a dozen
countries that remain heavily dependent on fossil-fuel resources. The report
goes further by saying that economies that have over 10% of their total wealth
based in carbon assets could become “stranded” and must act now to develop the
human capital and economic diversification to thrive in a world that is less
dependent on carbon energies.
Adding urgency, the
report points out, is that the shift to green energy is likely to occur sooner
than expected. Estimates predict between two-thirds to three-fourths of energy
will come from green sources by 2050. These estimates are much higher than a
decade ago, when just 15% of energy was expected to be green by 2050. This
means countries with high carbon wealth may have even less time than
anticipated to avoid being stranded as the pace of the green energy shift
continues to beat predictions.
While some fossil-fuel-dependent countries have already begun to diversify
their economies and increase investment in human capital in preparation for
impending energy changes, such changes are rarely adequate for the size and
speed of these economic shifts, the report finds.
Sovereign wealth funds, as some of the largest investors in the world, have
been an extraordinarily powerful tool for stabilizing resource-rich economies
and securing wealth for future generations. By closely aligning their private
investment acumen with public policy under a “strategic mandate”, these funds
can deliver even more value to society. This can be achieved by adopting a
“strategic investment fund” model whereby funds act as an additional tool for
policy-makers to support local development goals.
“To protect their economic futures, countries whose economies rely on fossil
fuels need to prepare now for the impending global shift away from these
resources,” said Maha Eltobgy, Head of Shaping the Future of Long-Term
Investing, Infrastructure and Development at the World Economic Forum. “The
resource dependent, fossil-fuel-rich nations that have diligently built large
sovereign wealth funds to manage the economic challenges of the Age of Oil must
now consider how to use this vast wealth to prepare for the Age of Green
Energy.”
The potential for sovereign wealth funds to play a transformational role in
driving diversification and sustainable growth is underpinned by the number of
new funds that have come into existence in recent times. In 2000, there were
just 26 sovereign wealth funds in the world; 10 years later, 57 existed; and
today, more than 75 sovereign wealth funds collectively hold over $8 trillion
in total assets. Only one-third of these funds operate under a strategic
mandate, yet the report identifies 41 funds from commodity producers with
nearly $4 trillion in assets that could do so.
As the impacts of
climate change, demographic shifts and the transition towards green energy
become more acute, economic policy-makers should more aggressively apply the
strategic investment model to address these challenges head-on. “Increasing the
number ‘strategic investment funds’ is the first step to ensuring economies are
prepared for the impending global energy shift,” Eltobgy said.
“Rather than waiting for the economic and social impacts, countries must use
the investment acumen and wealth they have accumulated to diversify their
economies,” said Patrick Schena, Co-Head of the Sovereign Wealth Fund
Initiative at the Fletcher School of Law and Diplomacy at Tufts University.
“While domestic investment is difficult, and political and financial risk must
be diligently managed, fossil-fuel economies must use every available tool to
sufficiently respond to the impending global economic shift.”
With this change, the authors say, sovereign funds can be more closely
integrated with public policy, giving them the ability to actually drive,
rather than react, to the global energy transition. Their direct investing
approach can create wealth rather than merely manage it, bringing new sources
of prosperity while preparing for the challenges of tomorrow.
