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Sovereign wealth funds: the future of ESG investing?
Attacked for political investing, could sovereign wealth funds actually be the most important future trend in ESG finance?
Abu Dhabi, the new front for ESG?
In the face of credit crisis write-downs and scarce liquidity, Sovereign Wealth Funds (SWFs) especially from China, Singapore and Middle East have taken huge stakes in several western financial institutions such as Barclays, UBS, Citigroup, and Merrill Lynch. Such large and visible transactions, while being very helpful to the cash constrained western financial sector, have raised concerns about the lack of transparency at SWFs and the possibility that their investments are being made for political reasons. One key area, however, which has received less coverage, is the environmental, social and governance (ESG) implications of SWF investments. Given their scale and scope, the policies of SWFs will increasingly be one of the key defining factors in the ESG behaviour of the companies they invest in.
Already by the end of 2007, the total money in SWFs was estimated at $3 trillion. This is forecast to reach $10-12 trillion by 2012, or over 15% of the global equity market capitalisation.
Sovereign wealth funds (SWFs) are predominantly defined as funds controlled by national governments invested in international securities, against which the government does not have any liability.
This is their key differentiator from pension funds. SWFs are usually sourced from commodity exports especially oil (e.g. Middle East SWFs and Russia) and non-commodity trade surplus (e.g. China and Singapore SWFs). Some SWFs such as Kuwait Investment Authority (KIA) and Abu Dhabi Investment Authority (ADIA) were launched a few decades ago.
By contrast, several countries with large reserves that were historically invested only in foreign currencies and sovereign debt have recently announced their interest in launching SWFs (e.g. Japan, Saudi Arabia, China and Russia).
As demonstrated in the table (see downloads – left hand column), SWFs are emerging global players and at very different stages of adoption of ESG policies. The leader in this area is the Norwegian Global Pension Fund which actively engages in improvement of the ESG behavior of its investees. In addition it has a negative screening and divestment policy, which, for example, led to its divestment from Wal-Mart, the US supermarket giant, due to labour issues. Funds such as the Norwegian and New Zealand SWFs cite both higher returns and national values as the reasons for their ESG focus.
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