The age of oil and gas dominance is slowly coming to an end. It will probably not be the dramatic collapse fearfully predicted just 40 years ago, but it will surely affect those who are not prepared. As the rise of renewables and changing patterns of energy use shift the global energy landscape at a breakneck pace, the risk for economies dependent on fossil fuel revenues continues to climb. Without an energy transition roadmap, these nations could be left stranded with natural resources, infrastructure, institutions and human capital altogether unfit for a new world in which renewable energy, knowledge workers, smart grids and autonomous, electric vehicles drive global growth.
This is an age of transformational change. The Fourth Industrial Revolution promises to fuse together the physical, digital and biological worlds, presenting opportunities for extraordinary growth and improved living standards, accompanied by deep disruptions.1 This technological revolution is also sparking an energy revolution in renewables, energy efficiency, smart cities and storage. These innovations are paving the way for a more sustainable and inclusive future for those with the capacity to take advantage of change, while creating ever more uncertainty for those unwilling or unable to adapt.
The capacity for fossil-fuel-rich, resource-dependent economies to adapt to future changes is often limited by a narrow growth model and inflexible institutions. For these countries, the time to act is now. Though the effects of an “energy revolution” may not be felt for decades, the necessary policy changes and investment decisions will need to be made well in advance of the moment they are felt by citizens, investors and policy-makers. Already, the twin strains of demographic and climate change are putting increasing political pressure on many fossil-fuel-rich economies to invest in new sources of economic opportunity and growth, while neither of these megatrends is likely to slow down or wait for societies to catch up.
Transformational changes do not come only from the outside, however. Governments and societies can choose their fate through the institutional structures with which they organize themselves. They must mobilize all the resources at their disposal, including coordination between economic policy, investment decisions and business actions. The World Economic Forum has worked to align the roles and responsibilities of the public and private spheres since its inception in 1971, and its flagship publications, such as The Global Competitiveness Report, provide a compass for policy-makers and stakeholders to shape economic strategies in this fashion.
A clear candidate for public-private synthesis when facing transformational changes is the national and global investment landscape, and many fossil-fuel-exporting countries are already adept at applying private-sector investment techniques in coordination with economic policy goals. Funded through windfall commodity revenues, these countries have accumulated trillions of dollars in sovereign wealth funds, which invest to achieve policy objectives including economic stabilization and saving for future generations. In the face of new challenges, can this unique group of investors evolve to respond directly to the economic, climate and social implications of the impending global energy transition?
There is already a long history of government, investor and civil society attempts to use private-sector investment techniques to achieve both financial and non-financial outcomes. Terms such as “public private cooperation”, “blended finance” and “impact investing” have all become commonly cited solutions to global challenges. Yet these options may not be feasible or sufficiently impactful responses to the dramatic changes the global energy revolution portends. They have often lacked the scale, human capital, time horizon and local market integration necessary to mitigate the impact of dramatic global challenges. What’s more, they largely envisage government as a secondary player unable to take advantage of the sizeable resource revenues at its disposal.
An alternative approach, therefore, is to combine the ambitions of impact-style investing with the scale, economic policy integration and private-sector techniques of the sovereign fund sector. Strategic investment funds (SIFs), politically independent yet state-owned funds capitalized with surplus commodity revenues and mandated through government policy to confront these challenges head-on, are one such promising synthesis for adapting to transformational change. With the potential to combine the strategic, long-term vision of their host countries and the best practices and market discipline of institutional investors, a sector of SIFs could help catalyse the necessary investment for a diverse, sustainable and inclusive economic future in these countries. In doing so, such funds would convert current, finite resource wealth into a new era of prosperity.
This White Paper, produced as part of the World Economic Forum System Initiative on Shaping the Future of Long-Term Investing, Infrastructure and Development, envisions how policy-makers, particularly those from fossil-fuel-rich economies, can apply private-sector investment techniques to transform their economies in preparation for a sustainable future. It draws on the multi-decade history of the sovereign fund model, which aligns private-sector investment with economic policy objectives, and combines it with the ambitions of sustainable investment approaches, such as blended finance and impact investing.
This paper is the first step in what is expected to be a multi-stage process to explore new investment models and to provide leaders with the tools and network to scale them to match the challenges societies must confront. Fortunately, the wealth produced by fossil fuel production is vast and can serve as the foundation for new, diversified economies.