Abu Dhabi sovereign fund eyes renewables as returns improve in 2017

Abu Dhabi Investment Authority (ADIA), the world’s third-biggest sovereign wealth fund, said it may invest more in renewable energy, as climate change fears prompt fund managers even in the oil-rich Middle East to look beyond fossil fuels.

“The world’s energy industry is in the early stages of a fundamental shift from fossil fuels to a more sustainable reliance on a range of renewable technologies,” ADIA said in its 2017 annual review on Monday.

The ADIA’s comments show how global sovereign funds are waking up to growing calls from governments to address climate change and to build a low-carbon society in the future.

Two years ago ADIA invested in Greenko Energy Holdings, one of India’s renewable energy companies, with Singapore’s GIC.

ADIA manages the reserves of the emirate of Abu Dhabi, part of the United Arab Emirates and which produces about 3 per cent of the world’s oil output.

The fund manages $828bn in assets, according to the Sovereign Wealth Fund Institute, making it the world’s third- largest sovereign wealth fund.

Norway’s $1 trillion sovereign wealth fund said earlier this year it will step up its assessment of the risks posed by climate change to its investments in power producers, oil firms and basic materials companies.

Read: Saudi’s Public Investment Fund climbs sovereign rankings after active 2017

ADIA said it conducted a review last year of climate change and its potential impact, in order to assess how markets and governments could respond to this impending transition.

Read: Abu Dhabi to combine sovereign funds creating $250bn behemoth

Overall, ADIA’s latest review showed that its long-term returns improved in 2017, helped by rising equity markets.

In US dollar terms, the 20-year and 30-year annualised rates of return for the ADIA portfolio were 6.5 per cent and 7 per cent, respectively.

This compared to 20-year and 30-year annualised rates of return of 6.2 per cent and 6.9 per cent, respectively, in 2016.

ADIA said 55 per cent of assets are managed by external managers.

PRIVATE EQUITY REORGANISATION

ADIA also said it completed a reorganisation of its private equity department last year with a move from a product-focus to regional teams focusing on five industry sectors: financial services, healthcare, industrials, technology and consumer.

During the year, a new head of Asia-Pacific was appointed in addition to sector heads for financial services, healthcare and industrials. Recruiting for the technology and consumer sectors has started, it added.

Read: Abu Dhabi’s $828bn sovereign fund to establish financial zone presence

Late in 2017, the department purchased a significant minority stake in KKR India Financial Services, an alternative credit provider.

This year, the department will continue to deploy capital in line with its strategy of increasing its sector-led investment activity, with a focus on evaluating structured equity opportunities, defensive industries and other private-asset investments, ADIA said.

However, it warned current valuation levels and increasing competition for deals amongst market participants suggests that the industry might enter a period of lower returns than those experienced in recent years.