Sustainable investments by sovereign wealth funds in the Middle East have been gaining considerable momentum in recent years. In 2023, sustainability-related themes took center stage in sovereign wealth fund investment strategies. The ticket size of SDG-aligned deals is also rapidly converging with conventional investments, driven by large investments in clean energy projects.
A growing concentration on clean energy and health underscores a recognition of climate change and health as the most pressing global challenges. Sustainable energy deals, including renewables, energy access, and efficiency, were valued at $12.8 billion, accounting for 62 percent of total SDG investment value in 2023. One of the latest transactions in the renewable energy sector was Qatar Investment Authority’s (QIA) $2.4 billion investment in RWE, announced in 2023.
Global South offers diversification opportunities
NYUAD’s Transition Investment Lab (TIL) third annual report revealed that the financial gap in the Middle East, Africa, and Southern Asia (MEASA) region needed to meet the UN’s Sustainable Development Goals (SDGs) by 2030 has expanded to nearly $5 trillion annually, up from last year’s $4.3 trillion.
“There is a burgeoning investable universe that offers the opportunity for investors to make progress on the SDGs while generating positive risk-adjusted returns,” stated Bernardo Bortolotti, executive director of the Transition Investment Lab.
The report cites the convergence of economic, environmental, and geopolitical challenges as a key contributing factor. However, the report also finds multiple ways that Middle East and UAE sovereign wealth funds can use ‘transition investment’, to reduce this gap, capitalizing on their unique access to emerging markets.
The report suggests that Middle East sovereign wealth funds must adapt their investment strategies to geopolitical events, leading to a significant reallocation towards domestic and regional investments. This underscores the significance of what is commonly referred to as ‘de-globalization risks’. Therefore, emerging markets and developing economies of the Global South could represent interesting diversification opportunities.
In the Global South, critical areas such as water and sanitation, food security, education, forestry, and biodiversity conservation, remain largely untapped. This gap in sustainable investing highlights the importance of a more comprehensive approach to investments, ensuring that long-term investors can address a broader spectrum of societal and environmental needs.
SDG financing gap expands
According to the United Nations, the world is severely off track in implementing the SDGs, with 35 percent of the targets stagnating or even regressing. The recent geopolitical events have widened the financial gap needed to meet the SDGs by 2030 to nearly $5 trillion annually. The context for SDG investment has deteriorated also as a result of the decline of foreign direct investments into emerging and developing economies, caused by the slowing down of globalization, also driven by geopolitical rivalries.
“We stand at halftime and progress towards more than a third of SDG targets is stagnating or regressing. Transition investing can help reverse this trend and enable private market investors to seize attractive investment opportunities in MEASA,” noted Antonio Miguel Ribeiro, head of investment risk, Mubadala.
Sustainable investments lose steam
Sustainable investments have also lost momentum in public and private markets. Global net inflows into ESG funds have been shrinking since 2021, entering negative territory in Q4 2023, reflecting growing investor skepticism and waning enthusiasm for sustainable investments. A similar trend is observed this year in private markets, with an 18 percent decline in the number of ESG-aligned funds managed across asset classes including private equity, infrastructure, and real estate.
While geopolitical turmoil can pose challenges for all investors, it also presents opportunities for strategic adaptation and innovation in portfolio management approaches.
“We firmly believe that the population and economic growth of the MEASA region provides for compelling financial risk-adjusted investment opportunities. However, the current underweight investment allocation to the region could easily result in significant social and environmental risks that will have global consequences. Accordingly, we see the need to find new ways to attract capital from long-term institutional investors to the region,” added Peter Lejre, SEO MEASA Partners.
Read: DEWA achieves record revenue of $6.4 billion, $3.2 billion in EBITDA during first nine months
Middle East sovereign wealth funds ramp up sustainable investments
Sovereign wealth funds could strategically position themselves in the critical raw material space to secure access to resources vital for their economies, capitalize on the burgeoning demand driven by energy transition and digitalization, and diversify their portfolios for long-term returns.
Among the most notable Middle East sovereign wealth funds investing in the sustainable transition is Mubadala Investment Company, which significantly bolstered its presence in sustainable sectors, committing $9 billion across 50 deals. Its investments span healthcare, energy, infrastructure, and technology, with a focus on long-term value creation and sustainable growth.
Qatar Investment Authority (QIA) also maintained its focus on healthcare and energy, with 35 transactions for approximately $6.8 billion. Meanwhile, Saudi Arabia’s Public Investment Fund (PIF) made significant strides in SDG investments, committing $6.1 billion across 16 deals. The focus was predominantly on energy and infrastructure, furthering Saudi Arabia’s broader Vision 2030 strategy.
Emerging players like ADQ and the Kuwait Investment Authority have also ramped up their SDG-related activities, focusing on healthcare and sustainable agriculture, with investments totaling $4 billion and $1.8 billion, respectively.
For more news on banking & finance, click here.
