Transitioning to clean energy is a top priority for the six Gulf Cooperation Council states, which currently rank among the top 20 per capita carbon dioxide emitters in the world. Sovereign wealth funds can play a crucial role in the energy transition as they already hold more than twice as many green assets (investments in renewable energy and electric vehicles) as black assets (investments in carbon fossil fuels and mining). Nearly half of these green assets are held by Gulf funds, which are channeling hydrocarbon revenue into sustainable green investments. However, the gap to reach net zero carbon emissions by 2050 remains significant, and the United Nations and International Finance Corporation, among others, are turning to sovereign wealth funds in their efforts to achieve this goal and counter the negative effects of climate change.

Sovereign Wealth Fund Investment in Black vs. Green Assets

Green Investing by Sovereign Wealth Funds

Sovereign wealth funds primarily invest in green assets through stakes in green projects, decarbonization portfolios, and the issuance of green bonds. In 2016, the Abu Dhabi Investment Authority, with $993 billion in assets under management, invested $150 million in Indian renewable energy firm Greenko. In 2018, the Saudi Public Investment Fund, with $925 billion in assets under management, acquired a 15.2% stake in the world’s biggest single-site solar power facility built by ACWA Power, the Saudi energy company. In 2022, the PIF acquired 9.5% of Skyborn Renewables, a leading offshore wind developer and operator, alongside Global Infrastructure Partners, an infrastructure investment fund headquartered in New York. And in 2023, it acquired a 30% stake in Saudi Tabreed, a leading district cooling service provider.

Decarbonization presents an enormous global challenge that will require innovative technology and focused government initiatives to be reached. The United Arab Emirates and Saudi Arabia are leading the Gulf region in this regard. Saudi Arabia is taking crucial steps to decarbonize its energy industry with a focus on renewables, by diversifying the local economy away from fossil fuels and cultivating a circular carbon economy, an internationally adopted framework for managing and reducing emissions. The international experience shows nonetheless that more can be done in the region. For example, Gulf sovereign wealth funds can work with international partners to launch large venture capital firms specializing in green technologies, as Singapore-based investment company Temasek did in 2022 jointly with BlackRock when they launched Decarbonization Partners aiming to accelerate the transition to a net-zero economy by 2050.

Finally, sovereign wealth funds can issue impact bonds, including those linked to sustainability, with proceeds invested in environmentally sustainable projects. Impact bonds amounted to $939 billion in 2023, mostly issued by large corporations and governments, including sovereign wealth funds. Internationally, Norway’s Norges Bank Investment Management, with $1.6 trillion under management, has long been an advocate of investments based on environmental, social, and governance factors. A study by Invesco Asset Management indicated that 90% of state-owned funds in the Middle East have embraced environmental, social, and governance policies, and the Saudi PIF is already a pioneer in issuing green bonds.

Gulf Countries’ Strategies for Energy Transition

Historically, Bahrain has been a pioneer in the energy transition in the Gulf due to its relative lack of hydrocarbons, requiring it to look for alternative resources. In 2008, Bahrain launched its Economic Vision 2030, aiming to reduce its dependence on oil and generate 5% of its energy from renewables by 2025 and 10% by 2035.

As part of Vision 2030, Saudi Arabia launched the Saudi National Renewable Energy Program in 2016 with the goal of increasing the contribution of natural gas and renewable energy sources to approximately 50% of the energy mix by 2030. And in January 2023, Saudi Arabia announced a $270 billion investment in low-carbon energy projects to meet its 2030 target and established a Renewable Energy Projects Development Office that offers an online portal providing direct access to domestic suppliers’ data and information.

In 2017, the UAE launched the National Energy Strategy 2050, which aims to meet 50% of the UAE’s energy demand with clean sources (44% from renewables and 6% from nuclear) and reduce its carbon emissions by 70% by 2050.

Similarly, Kuwait and Qatar aim to boost the share of renewables in their energy mixes to 15% and 20%, respectively, by 2030, while Oman has a target of 10% by 2025 and 30% by 2030.

Investments in the Energy Transition

Saudi Arabia’s PIF and the UAE’s leading sovereign wealth fund, the Abu Dhabi Investment Authority, are founding members of the One Planet Sovereign Wealth Fund Coalition, whose aim is to mobilize resources for investments in alternative energy infrastructure projects, demonstrating an alignment of Gulf sovereign wealth funds with their respective government’s strategy for the energy transition.

The PIF is tasked with financing 70% of the Saudi National Renewable Energy Program by 2030. To this end, the PIF published its Green Finance Framework in February 2022, identifying its carbon transition plan to support the kingdom’s ambition to reach net zero by 2060 and develop environmental, social, and governance policies and guidelines for portfolio companies. The framework set out a roadmap for the issuance of green bonds, sukuk (Islamic bonds), loans, and other debt instruments to finance activities that contribute to the circular carbon economy, which Saudi Arabia introduced during its presidency of the G20 in 2020. The circular carbon economy aims to tackle greenhouse gas emissions by following four main principles: reduce, reuse, recycle, and remove. Furthermore, as part of its goal to be a leader in the sovereign wealth fund sustainability and environmental, social, and governance integration, the PIF has developed a strategy and roadmap to embed environmental, social, and governance principles into its processes and portfolios, ensure disclosures according to international standards, attract capital and partners, drive value across the portfolio, and manage environmental, social, and governance-related risks.

Moreover, the PIF has led the way in investing directly in the manufacturing of electric vehicles and the entire automotive value chain. In 2018, it invested $1 billion in Tesla rival Lucid, and it has continued to pump capital into Lucid since its initial public offering in 2021. Lucid will begin producing electric vehicles in Saudi Arabia in 2025, while the PIF launched its own electric vehicle company, Ceer, in 2022 in a joint venture with Taiwan’s Foxconn.

The UAE’s ADIA was the first foreign institutional investor to support the National Investment and Infrastructure Fund of India, which focuses on developing infrastructure that meets high environmental, social, and governance standards. Meanwhile, Mubadala, the second-biggest state fund in the UAE, with $302 billion in assets under management, supports large-scale solar and wind energy projects through its wholly owned subsidiary Masdar. In October 2022, ADIA and Mubadala co-hosted the 5th One Planet Sovereign Wealth Funds annual summit focusing on clean hydrogen as a key component of the energy transition. In December 2023, electric vehicle maker Nio signed a pact for an investment of $2.2 billion from CYVN Holdings, an investment vehicle based in Abu Dhabi.

Gulf sovereign wealth funds are also pioneers in green bonds. The PIF issued six green bonds between October 2022 and February 2023, with a total value of $8.5 billion, with the net proceeds allocated according to its green loan principles. Additionally, Mubadala issued its first green bonds for a total of $750 million in October 2023.

Putting the Pieces Together

Regional sovereign wealth funds’ growing focus on sustainability and the potential for larger green bond issuances can help Gulf states pursue their green agendas. However, long-term planning will be essential to successfully transition to green energy in the Gulf.

First, government strategies targeting precise shares of renewable energy in the energy mix have given a strong impetus to harnessing the power of public funds to advance these efforts. Therefore, Gulf states should review and update their strategies with clear targets, including tasks assigned to sovereign wealth funds. Second, the mandates of sovereign wealth funds should be reviewed to eliminate current hurdles. For example, investment strategies that require high and predictable financial yields are unrealistic when applied to energy transition projects, as these technologies are inherently unpredictable and long term. Third, decarbonization funds should be set up with international partners to support national strategies. For example, New Zealand took this approach in August 2023 when it launched a $1.22 billion climate infrastructure fund with BlackRock.

Finally, the economic rate of return of these projects (i.e., the true value of a project to the entire economy) is generally much higher than the financial rate of return (the profitability of the project), which calls for public support programs. Therefore, governments, as the ultimate owners of sovereign wealth funds, should adopt policies that enhance the energy transition. For example, tax incentives and targeted government support for research institutes and investors are needed to boost innovation and limit costs. And the shortage of skilled labor should be addressed to facilitate the clean energy transition by expanding alternative energy specialties in engineering schools and access to apprenticeships and continuous learning in the field.