Understanding the green investment choices of SWFs

Purpose This study examines how Sovereign Wealth Funds (SWFs) investment choices affect green investments for the period 2013-2022. The assets that these funds manage amount to around $25,880bn, which makes them significant. Design/methodology/approach Apart from the Univariate analysis, this study uses two types of regression analysis for obtaining estimates to address the two questions: Whether the climate change policy drives investment choices of SWFs? and whether the market uncertainty influences the asset allocation choices of SWFs. The two regression techniques are ordinary least square regression and probit regression given the dichotomous nature of the dependent variable i.e., green investment types: renewables, non-renewables and alternate investments of the asset classes. Findings This study finds that sovereign wealth funds give priority to green investments and that their investment strategies remain unaffected by stock market risk. This analysis indicates that sovereign wealth funds serve as investment vehicles for controlling and diversifying revenues from fossil fuels in governments that are largely reliant on such income. This study also concludes that sovereign wealth funds provide a crucial impetus for the fuel-intensive sector to adopt innovative solutions that mitigate carbon emissions. Research limitations/implications This study uses regression analysis, univariate analysis and propensity score matching for obtaining estimates to address the two questions. First, Whether the climate change policy drives investment choices of SWFs? and second, whether the market uncertainty influences the asset allocation choices of SWFs. Practical implications The findings of this research have economic and social implications. This study shows that SWFs prioritize stability and invest in infrastructure, and services over renewables and non-renewables. Therefore, SWFs help build efficient infrastructure that moves commodities and people, lowers transaction costs and boosts productivity. Infrastructure also provides clean water, sanitation, health care and education, improving society. This study has practical and wider implications as it covers SDGs 7, 11 and 13. Social implications Furthermore, investing in emerging markets also allows sovereign wealth funds to diversify their portfolios geographically. This diversification helps reduce risk to the resource rich countries by spreading investments across different regions and economies. The results also confirms that the SWFs investment strategies are not affected by market risk. Their long-term orientation and inclination toward alternate investment strategies, specifically in the infrastructure and diversification strategy of investment across the regions is making SWFs more resilient thereby reducing the market risk exposure. This study confirms that the SWFs are exercising responsibility by filling the financing gap in the alternate investments that includes development of infrastructure. The statistically significant relationship between SWFs and infrastructure are evident in this study. This analysis reveals that sovereign wealth funds do not impede macroeconomic management or serve as a mechanism for politically influenced “investments.” Instead, ensure that their choices support long-term, stable efforts, such as infrastructure investments. By making infrastructure investments, SWFs may mitigate the risks connected to these projects. Their prudent and stable funds can help to mitigate the risks associated with uncertain regulations, unpredictable market conditions and project schedules. Originality/value SWFs along with other institutional investors in aggregate prefer more dollars to fewer and less risk to more. Evidently, transitioning toward a low-carbon technologies is systemic in nature and therefore we expect differential effects on the role of SWFs choices is related to the characteristics of the companies in terms of their exposure to exogenous occurrences, performance, costs of financing and so on. Our purpose is to investigate the role of fund institutions, specifically, SWFs in dealing with climate risk mitigation.