Carbon implications of sovereign wealth funds

Abstract

As of May 2022, assets under management of these funds amount to 9.91 trillion USD. Hence, sovereign wealth funds have a significant influence on the financial system due to their substantial economic value. As the current practice of portfolio management is outdated, due to a lack of relevant input factors exploring environmental, social and governance issues, the study explores two commonly used portfolio management models; the Markowitz model and the conditional value‐at‐risk model, and proposes a new model integrating sustainability indicators. Results indicate significant economic and environmental differences between sustainable and conventional investments for sovereign wealth funds. To ensure global progress on emission reduction, these funds should implement climate change strategies to encourage and accelerate the low‐carbon transition while continuing to manage their investment portfolios.