* 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 from oil-rich countries in the Middle East are moving to diversify into renewable energy, pushed by regulators and pledges on climate change, but are stopping short of following Norway in shedding some oil and gas investments.
Total sovereign wealth fund investments within the oil and gas industry have dwarfed those within renewable energy in the past decade.
But data on private equity investments with sovereign wealth fund participation suggests this balance might be shifting. In 2018, $6.36 billion went into hydrocarbons, compared to $5.81 billion in renewable energy, one of the narrowest margins in the past decade, according to PitchBook, a data and research firm.
Data on sovereign wealth fund investments via the stock and bond markets are harder to interpret as many of the funds do not disclose such information.
For an interactive version of the below chart, click here tmsnrt.rs/2WmelIx.
Norway's trillion-dollar sovereign wealth fund, the world's biggest, said last month it would sell its stakes in oil and gas explorers and producers. But the fund also said it would still invest in energy firms that have refineries and other downstream activities, such as Royal Dutch Shell and ExxonMobil .
The money in Norway's fund comes from the country's hydrocarbon wealth and the fund said its investment plan would make it less vulnerable to a permanent drop in oil prices, which have tumbled more then 40 percent between now and there most recent peak in June 2014.
For an interactive version of the chart below, click here tmsnrt.rs/2WoKejT.
But other sovereign wealth funds from oil-rich countries are not expected to do the same, sources close to the funds and analysts said.
"I don't expect many fiduciary bound investors to follow suit until such a time it can be shown that this divestment activity does not harm returns," Ashby Monk, executive director, global projects centre at Stanford University, said. "It would make sense from a national balance sheet perspective for some of these investors to diversify, but they don't think in terms of national balance sheets," he said.
Instead of pursuing a strategic approach to design a portfolio taking into account the country's national wealth, both natural resources and financial, funds are often pushed to focus only on commercial and financial interests, he said.
Many sovereign funds voluntarily commit to the Santiago Principles, a set of guidelines agreed in 2008 to govern how sovereign wealth funds operate. This includes investing based on the basis of economic and financial risk and return related considerations.
While most sovereign wealth funds follow the principles, Norway, one of the few oil funds from a democracy, is considered an outlier in its approach, operating under ethical guidelines set by parliament.
"Culturally, they're different," said one person close to the fund, referencing its relative transparency in comparison to other funds and exclusion of investments in certain companies for ethical reasons.
Abu Dhabi Investment Authority (ADIA), the second largest oil-based fund in terms of assets after Norway, invests in oil and gas stocks only in line with their weightings in equity indices, according to people familiar with its strategy.
It has no plans to change its portfolio based on what Norway has done, said one of the people.
ADIA declined to comment.
Similarly, Mubadala Investment, another Abu Dhabi investment vehicle, has no commitment to cut its exposure to oil and gas, which represents roughly 20 percent of its portfolio, said a person familiar with Mubadala's strategy. Renewable energy forms under 5 percent of its total portfolio size.
Mubadala declined to comment.
Qatar Investment Authority is an investor in Total and Glencore, according to its website. It also holds a 19 percent stake in Russian hydrocarbon giant Rosneft.
The QIA declined to comment.
In contrast, Saudi Arabia's Public Investment Fund (PIF) has no oil and gas focus. Last week, PIF sold its only asset with links to the industry, Saudi Basic Industries Corp (SABIC) , for $69.1 billion in one of the biggest deals in the global chemical industry.
"It's about diversification away from oil and gas in sector and revenue," said a source familiar with PIF's strategy.
PIF declined to comment.
In 2018, ADIA, QIA and PIF and Norway's fund were among six that agreed to a framework called One Planet, pledging to add climate change considerations into their investment decisions, a sign that the funds are starting to change their approach,
"At that time [of the Santiago Principles], climate risk didn't even merit a mention as a relevant element of sound long-term investment practice amongst sovereign wealth funds," said Javier Capapé, director of sovereign wealth research at IE University. "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 renewable energy through investments in green energy companies such as Renew Power and Greenko, both in India, and Britain's Green Investment Bank, said the people familiar with its strategy.
PIF is making a big play on renewable energy and clean technology, agreeing to invest more than $1 billion in Lucid Motors, an electric vehicle maker, and working with SoftBank and others on large-scale solar projects.
More sovereign funds may follow suit as regulators in Europe and elsewhere require institutional investors to clean up their portfolios.
France blazed the trail by bringing in rules in 2016 requiring institutional investors to report that they are integrating environmental, social and governance (ESG) criteria in their portfolios.
"I think more and more sovereign wealth funds will scrutinise their funds and apply some negative screening [exclusion of certain companies]," said Fabiana Fedeli, global head of fundamental equities and senior portfolio manager of emerging markets equities at asset manager Robeco.
"There's increasing consideration that ESG does help the alpha but reputation risk is a consideration, particularly for sovereign wealth funds and finally there's regulatory risk."
Reporting By Tom Arnold; Graphics by Ritvik Carvalho. Editing by Jane Merriman