COP28: how are gulf sovereign wealth funds investing in the energy transition?

In the United Arab Emirates (UAE), extractive industries, including oil and natural gas, have long been the backbone of the domestic economy, contributing over 217bn UAE Dirham (US $59bn) to the country’s gross domestic product (GDP) in 2020.

However, over the past few years, there is some evidence that the UAE is diverging away from non-renewable energy sources, the country says it is working towards using 30% of renewable energy by 2030 and being carbon-neutral by 2050.

So, how are the UAE’s sovereign wealth funds (SWFs) transitioning their investment strategies in line with these targets?

Currently, all state-owned funds in the country have committed to net zero goals or targets, with most of the drive towards being carbon neutral occurring within the past five years.

According to a recent analysis by Invesco Asset Management, since 2017 there has been an increased focus on direct green infrastructure investment and green bond allocation from SWFs in the UAE and more widely the Middle East. The research revealed that in the region, 90% of state-owned funds have embraced environmental, social and governance (ESG) policies, prompting investors to align with their objectives.

Rod Ringrow, head of official institutions at Invesco, tells Net Zero Investor: “The SWFs have been playing a leading role in the region in trying to transform regional economies away from reliance on hydrocarbons, though this cannot be an immediate switch.

“When we first raised ESG in the 2017 Invesco Global Sovereign Asset Management Study it was a peripheral issue, now it’s front and centre, and 2023 has seen a focus on financing the energy transition, the move from brownfield to greenfield infrastructure investments.”

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One Planet coalition

The UAE’s SWFs ramped up focus on climate is also evident through the $850bn Abu Dhabi Investment Authority (ADIA) being one of the six founding members of the One Planet Sovereign Wealth Fund (OPSWF) coalition. The network was established in 2017 and has launched a disclosure guidance for private markets to help implement recommendations by the Task Force on Climate-related Financial Disclosures (TCFD).

In October 2022, $276bn Abu Dhabi sovereign investor Mubadala and ADIA co-hosted the fifth annual OPSWF summit in Abu Dhabi, with one of the focuses of the event being clean hydrogen as a key component of the energy transition.

Following on from this, Mubadala has partnered with the Abu Dhabi National Oil Company (ADNOC) and the Abu Dhabi Development Holding Company (ADQ) (the UAE’s third largest SWF with $110bn in assets) to establish the Abu Dhabi Hydrogen Alliance, which aims to establish the UAE as a leader in hydrogen and build a substantial green hydrogen economy.

According to Mubadala’s annual report, the sovereign wealth fund also has stakes in other forms of green infrastructure, including the US residential solar energy company GoodLeap, offshore wind developer Skyborn Renewables and India’s Tata Power Renewables. The SWF also has shares in the renewable energy company Masdar, which it hopes will become a “national clean energy champion for the UAE”, aiming to grow its current capacity of 20GW to 100GW of renewable energy globally by 2030.

In its journey to decarbonise, ADIA has also focused on green infrastructure investments. As of October 2022, its infrastructure team supported c.22GW of operating renewable energy projects, with a further c.19GW of projects under development.

Leaked documents

Ringrow argues: “The recognition of climate change is now a key element in the strategic framework of the sovereign funds with direct investments in green infrastructure being viewed as an important method for financing the energy transition.

“I think the UAE hosting COP28 is evidence of how important the region is taking climate change in general.”

However, leaked briefing documents by the BBC prior to COP28, have revealed a crucial insight into the UAE's energy ambitions,with them showing that the country plans to use its role as the host of the climate talks as an opportunity to strike oil and gas deals.

The documents included proposed “talking points”, such as one for China which says ADNOC is “willing to jointly evaluate international LNG (liquefied natural gas) opportunities" in Mozambique, Canada and Australia. In addition, the documents suggest telling a Columbian minister that ADNOC “stands ready” to support Columbia to develop its fossil fuel resources.

In contrast to this, the briefing notes also reveal that the UAE has prepared talking points on commercial opportunities for Masdar, ahead of meetings with 20 countries, including the UK, United States, France, Germany, the Netherlands, Brazil, China, Saudi Arabia, Egypt and Kenya. 

The notes state that Masdar is in discussion with Indian petrochemical company SPIC and China Energy to acquire up to 5GW of renewable energy projects in China, with a memorandum of understanding expected to be signed by these companies during COP28.

In addition, the proposed “talking points” for the Netherlands suggest asking the country to “explore potential opportunities for Masdar to invest in Dutch upcoming offshore wind tenders”.

So, even though these leaked documents do show that the UAE’s main investment focus is centred around fossil fuels, they also prove some degree of the country’s efforts to gain influence in the renewable energy markets. Overall, indicating some direction of travel towards a sustainable energy transition. 

Carbon credits

SWFs’ in the region are still heavily reliant on fossil fuels, in order to meet their net zero targets, there also appears to be some interest in carbon credits.

In comparison to the Mubadala, ADIA and ADQ, the $320bn Investment Cooperation of Dubai’s net zero transition focuses more heavily on an ESG framework. Also in 2022, following the first carbon footprint calculation of its operations, the SWF adopted several measures to minimise its energy consumption.

One of these measures included offsetting its 2021 emissions from its operations through the purchase of carbon credits from the Climate Action Reserve.

Also, just over the border to the UAE, carbon credits are a focus for $778bn Saudi Arabia’s Public Investment Fund (PIF). In 2022, PIF launched the Regional Voluntary Carbon Market Company, a business that will support firms around the world in offsetting their emissions through the trading of carbon credits. So far, it has facilitated the successful auction of 1.4m tons of carbon credits. Alongside this, in 2022, PIF issued the first-ever green bond by a sovereign wealth fund, raising $3bn. 

Looking ahead, the UAE doesn't seem to be ditching fossil fuels in a hurry, but its renewable ambitions do seem promising and how COP28 plays out over the next two weeks may give greater clarity on its direction of travel on these goals.