Striving for First Nations Economic Sovereignty through a Low-Carbon Indigenous Sovereign Wealth Fund

Project Reconciliation, the Indigenous collective working towards achieving economic sovereignty for First Nations in Western Canada, plans to kickstart its low-carbon Indigenous Sovereign Wealth Fund this summer as an Indigenous/non-Indigenous partnership. 

The low-carbon Indigenous Sovereign Wealth Fund will provide an independent source of income for Indigenous communities for generations. It will address the poverty and social ills affecting Canada’s Indigenous peoples. The natural resource wealth of the traditional territories of Indigenous peoples will form the foundation of financial wealth in the new low-carbon global economy.

ESG investors, low-carbon assets and First Nations

Canadian and international environmental, social and governance (ESG) focused investors aspiring to be part of the energy transition to low-carbon are keen to invest in low-carbon assets alongside First Nations. There are also a growing number of profitable low-carbon assets—from solar and wind farms to utility-scale batteries to carbon capture use and storage projects to ethanol plants—available for investment. The about-to-be-launched low-carbon Indigenous Sovereign Wealth Fund 1 will demonstrate the concept and the potential for other First Nations to work towards economic self-sufficiency through investment in the low-carbon Indigenous Sovereign Wealth Fund 2, a Fund based on Indigenous income from a material equity stake in Trans Mountain Corporation. Trans Mountain is the Western Canadian company, owned by the Government  of Canada, that operates the pipeline built in 1953 to transport oil from Alberta to the British Columbia coast.

Sovereign Wealth Funds helped resource-rich countries achieve prosperity

Sovereign wealth funds were introduced in the 1950s by resource-rich countries that had accumulated substantial foreign exchange reserves from commodity exports. The Kuwait Investment Fund was the first sovereign wealth fund, set up in 1953, to invest the substantial revenues from its oil industry.

Sovereign wealth funds are characterized by ownership and control by a sovereign entity and involve investment, like pension funds, in a diversified portfolio of assets globally. 

Economists describe the aim of a sovereign wealth fund as converting physical natural resource wealth into financial wealth and preserving it in a trust format for the benefit of multiple generations. Of the 70 sovereign wealth funds listed by the Sovereign Wealth Fund Institute, the Top 3 funds, holding assets of US$2.04 trillion, are all associated with oil-exporting countries, including Norway, Saudi Arabia and United Arab Emirates.

Financial returns and diversifying beyond the resource that generated the wealth

Studies show that, like pension funds, the objective for making sovereign wealth fund investments should be strictly commercial, that is to earn high financial returns, rather than investing for political motives, such as promoting industries favoured by government or achieving government policy objectives. Such funds also focus on investment diversification beyond the country or industry from which the initial wealth was earned. Sovereign wealth funds that are subjected to political involvement perform less well.

Investing in profitable ESG

Some pension funds have policy objectives of supporting ESG-focused enterprises when these investment opportunities meet the plan’s profitability requirements. They are increasingly profitable since they are lower risk.

Similarly, the world’s largest and most profitable sovereign wealth fund, Norway’s, is increasingly focusing on renewable energy as renewables become more profitable and Norway seeks to diversify away from fossil fuels, where the country has derived its primary wealth. That means, according to an international study on emerging pathways to the energy transition, pension funds and sovereign wealth funds play an important role in the global energy transition to lower carbon. Canada’s Indigenous sovereign wealth fund intends to be part of this movement.

Low-carbon Indigenous Sovereign Wealth Fund 1 leading to Fund 2

First Nations on whose traditional territories the Indigenous Sovereign Wealth Fund 1’s low-carbon assets are located will receive a ‘carried interest,’ a no-upfront cash, no risk, equity loan paid back from future earnings from Fund 1. It is a concept pioneered in the 1960s by Norwegian and Dutch governments participating in North Sea oil exploration.

Eventually, when Project Reconciliation acquires a material equity stake in Trans Mountain Corporation, some 80% of Project Reconciliation’s Indigenous-owned #TransMountain income will be invested in a low-carbon Indigenous Sovereign Wealth Fund 2. 

Project Reconciliation recently upped its financial bid to the Government of Canada from 51% to 75% of Trans Mountain Corporation’s shares, financed commercially through a syndicated bond issue. Central to Project Reconciliation’s bid is the low-carbon Indigenous Sovereign Wealth Fund that will help First Nations progress to economic sovereignty through pension-like income in perpetuity.