* Norway fund to sell oil/gas explorers, producers
* Middle East funds not about to ditch oil, gas plays
* Regulations, reputation risk could change that
* Many funds pile into renewable energy
By Tom Arnold
LONDON, April 1 (Reuters) - Sovereign wealth funds fromoil-rich countries in the Middle East are moving to diversifyinto renewable energy, pushed by regulators and pledges onclimate change, but are stopping short of following Norway inshedding some oil and gas investments.
Total sovereign wealth fund investments within the oil andgas industry have dwarfed those within renewable energy in thepast decade.
But data on private equity investments with sovereign wealthfund participation suggests this balance might be shifting. In2018, $6.36 billion went into hydrocarbons, compared to $5.81billion in renewable energy, one of the narrowest margins in thepast decade, according to PitchBook, a data and research firm.
Data on sovereign wealth fund investments via the stock andbond markets are harder to interpret as many of the funds do notdisclose such information.
For an interactive version of the below chart, click here https://tmsnrt.rs/2WmelIx.
Norway's trillion-dollar sovereign wealth fund, the world'sbiggest, said last month it would sell its stakes in oil and gasexplorers and producers. But the fund also said it would stillinvest in energy firms that have refineries and other downstreamactivities, such as Royal Dutch Shell and ExxonMobil.
The money in Norway's fund comes from the country'shydrocarbon wealth and the fund said its investment plan wouldmake it less vulnerable to a permanent drop in oil prices, whichhave tumbled more then 40 percent between now and there mostrecent peak in June 2014.
For an interactive version of the chart below, click here https://tmsnrt.rs/2WoKejT.
But other sovereign wealth funds from oil-rich countries arenot expected to do the same, sources close to the funds andanalysts said.
"I don't expect many fiduciary bound investors to followsuit until such a time it can be shown that this divestmentactivity does not harm returns," Ashby Monk, executive director,global projects centre at Stanford University, said. "It wouldmake sense from a national balance sheet perspective for some ofthese investors to diversify, but they don't think in terms ofnational balance sheets," he said.
Instead of pursuing a strategic approach to design aportfolio taking into account the country's national wealth,both natural resources and financial, funds are often pushed tofocus only on commercial and financial interests, he said.
Many sovereign funds voluntarily commit to the SantiagoPrinciples, a set of guidelines agreed in 2008 to govern howsovereign wealth funds operate. This includes investing based onthe basis of economic and financial risk and return relatedconsiderations.
While most sovereign wealth funds follow the principles,Norway, one of the few oil funds from a democracy, is consideredan outlier in its approach, operating under ethical guidelinesset by parliament.
"Culturally, they're different," said one person close tothe fund, referencing its relative transparency in comparison toother funds and exclusion of investments in certain companiesfor ethical reasons.
Abu Dhabi Investment Authority (ADIA), the second largestoil-based fund in terms of assets after Norway, invests in oiland gas stocks only in line with their weightings in equityindices, according to people familiar with its strategy.
It has no plans to change its portfolio based on what Norwayhas done, said one of the people.
ADIA declined to comment.
Similarly, Mubadala Investment, another Abu Dhabi investmentvehicle, has no commitment to cut its exposure to oil and gas,which represents roughly 20 percent of its portfolio, said aperson familiar with Mubadala's strategy. Renewable energy formsunder 5 percent of its total portfolio size.
Mubadala declined to comment.
Qatar Investment Authority is an investor in Totaland Glencore, according to its website. It also holds a19 percent stake in Russian hydrocarbon giant Rosneft.
The QIA declined to comment.
In contrast, Saudi Arabia's Public Investment Fund (PIF) hasno oil and gas focus. Last week, PIF sold its only asset withlinks to the industry, Saudi Basic Industries Corp (SABIC), for $69.1 billion in one of the biggest deals in theglobal chemical industry.
"It's about diversification away from oil and gas in sectorand revenue," said a source familiar with PIF's strategy.
PIF declined to comment.
CLIMATE CHANGE, REGULATIONS
In 2018, ADIA, QIA and PIF and Norway's fund were among sixthat agreed to a framework called One Planet, pledging to addclimate change considerations into their investment decisions, asign that the funds are starting to change their approach,
"At that time [of the Santiago Principles], climate riskdidn't even merit a mention as a relevant element of soundlong-term investment practice amongst sovereign wealth funds,"said Javier Capapé, director of sovereign wealth research at IEUniversity. "Now, climate risk is an almost ubiquitous topic."
That is starting to be seen in investments.
ADIA has built a sizeable and growing exposure to renewableenergy through investments in green energy companies such asRenew Power and Greenko, both in India, and Britain's GreenInvestment Bank, said the people familiar with its strategy.
PIF is making a big play on renewable energy and cleantechnology, agreeing to invest more than $1 billion in LucidMotors, an electric vehicle maker, and working with SoftBank andothers on large-scale solar projects.
More sovereign funds may follow suit as regulators in Europeand elsewhere require institutional investors to clean up theirportfolios.
France blazed the trail by bringing in rules in 2016requiring institutional investors to report that they areintegrating environmental, social and governance (ESG) criteriain their portfolios.
"I think more and more sovereign wealth funds willscrutinise their funds and apply some negative screening[exclusion of certain companies]," said Fabiana Fedeli, globalhead of fundamental equities and senior portfolio manager ofemerging markets equities at asset manager Robeco.
"There's increasing consideration that ESG does help thealpha but reputation risk is a consideration, particularly forsovereign wealth funds and finally there's regulatory risk."
(Reporting By Tom Arnold; Graphics by Ritvik Carvalho. Editingby Jane Merriman)
