Download Sovereign Wealth Fund Strategies following the financial and the oil

Sovereign Wealth Fund Strategies following the financial and the oil crisis
Roberto Pasca di Magliano*
Daniele Terriaca^
Nabylah abo Dehaman°
JEL code: G230
Abstract
Sovereign Wealth Funds (SWF) are acting as agencies supporting mergers and acquisition
operations (M&A) in the international capital market with particular interest to Western companies
that are “hungry” for new capital. Indirectly they also act as investment actors in fields like
renewable and development projects.
On the international capital market more than 70 Sovereign Funds are acting, having a financial
power estimated at 7 trillion dollars. Relevant financial power if compared with the hedge funds
that count for 1,9 trillion dollars (in decline), the pension funds for 18 trillion, the private equity
funds and the merchant banking for 21 trillion1. Unlike major investment companies, the capital of
SWFs is owned and controlled by governmental agencies. They act in investment’s market as
private groups/actors even if their resources are publicly owned.
Sovereign Funds multiplied themselves in recent years by receiving increasing financial resources
from rich emerging countries aimed at gaining higher yields than from the conservative investments
on State bonds. There are funds of very high dimensions and with widespread holdings: The
Government Pension Fund of Norway and the Abu Dhabi Investment Authority are the largest
respectively with activities/assets under management of 838 and 773 billion dollars. In 2007, a
Chinese fund was established and has since reached 575 billion dollars. One year later, in 2008, the
Russian Federation also created two sovereign funds that amount to 170 billion dollars. Global
investments are significantly influenced by Sovereign Funds: it is estimated that for each additional
unit of the allocated fund, foreign direct investments (FDI) increase by 12%.
Other than stabilization, savings and pension, macroeconomic stabilization, SWFs started by
investing in low-risk assets (such as bonds), then gradually diversified into equities before focusing
on alternative asset classes (real estate, hedge funds, private equity, or infrastructure) and more
recently moving towards sustainable and renewable allocation. These new strategies following the
oil crisis are seeming to influence positively their investment allocation policy towards responsible
and development projects.
Some SWFs are pursuing responsible and development goals by allocating resources in long-term
socio-economic projects with a strategic importance for the local economy or even for
strategic foreign countries. This is the case of the Norwegian fund, the UAE (Mubadala), the Iran
National Development Fund, the New Zeland, Australian and Singapore funds that manage a part
of the national wealth and seeks to encourage responsible investment in the absence of a
developed local financial market. Increasing interest for financial allocation in development project
is increasing in other SWFs, both at national and international level.
------------------The paper’s aim is to investigate the increasing influence of the SWFs policy in international
investment, with particular concern to questions as follows:
1. Impact of the financial crisis on international markets;
2. Evaluation of variables influencing the creation of a SWF, by an econometric estimation
model based on sensible data sets;
3. Strategies motivation following the post oil crisis and governance impact;
4. New allocation strategies: responsible and development projects.
1
Deutche Bank
*professor Growth Economics, Sapienza University of Rome
^Phd in Cooperation and Development, Sapienza University of Rome
°Phd student in Cooperation and Development, Sapienza University of Rome
1
1. Impact of the financial crisis on international markets
Since 2008 the advanced world experienced two interrelated crises:
i. a banking crisis, stemming from losses in capital market securities (including US subprime
mortgages and other structured products), as well as home-grown, boom-bust problems in
the property markets of some countries;
ii. a sovereign debt crisis exacerbated by recession, transfers to help banks, and in some cases
very poor fiscal management.
Due to this global financial crisis, the sovereign debt has become a problem for a broad range of
countries – from European high-income countries to the emerging and poorest states on earth –
even after they had obtained debt relief through existing multilateral initiatives.
Some advanced industrialized countries (among them also France and Germany) that are still
considered to be in reasonable fiscal-financial condition are so not in absolute terms, but only when
compared to the truly difficult conditions experienced by the their less “virtuous” peers.
Nevertheless, in France, the banking system was recently downgraded and Germany (as well as
other smaller European economy such as the Netherlands), with its current public fiscal position,
would not have been able to join the Euro back in 1999.
The dramatic truth is that almost all the countries of the Eurozone do not comply with the
requirements laid down by the Maastricht Treaty: a debt ratio ceiling of 60% and an annual deficit
of 3% both over Gdp figure.
2
Table 1 – Gross National Debt in % to Gdp in the EU Member
Source: Eurostat, 2015
3
Five major issues have been identified as the root of this profound fiscal problem:
i. As already mentioned, it derives from the banking crisis. The change from the bailouts
system to the bail in ad well other budgetary rescue measures directed at propping up the
financial system have had direct financial costs that overheated the financial system
triggering the sovereign debt crisis. A clear example of this vicious process is the role
played by the cost of bank bailouts in starting the Irish sovereign debt crisis.
ii. The second one is an inheritance of the worldwide recession that started in 2008 and lasted
in most of the advanced industrial countries until 2011. The recession weakened many
government revenue sources and boosted certain public expenditure categories (like
unemployment benefits) for the usual cyclical or automatic fiscal stabilizer reasons.
iii. The third is an in an increase in the structural primary (non-interest) deficit. The long leg of
the recession combined with the ending of assets bubbles (mainly the real estate one) and the
decrease/normalization of revenues and profits is expected to produce a lasting reduction in
the buoyancy of government revenues with respect to GDP.
iv. The fourth is the increasing dependence of sovereign debts on the international financial
markets.
v. The last one is the lack of needed reforms affecting States’ credibility.
All these four conditions are worsening the public financial structure globally and not only in the
Euro Area where the media and academia focus on most of their attention.
Unless the advanced countries, or at least the “best of the bunch” (the US, the UK, France, Japan
and even Germany) are able to properly address the above mentioned root-causes to cope with the
fiscal crisis, the sovereign debt will continue to be an emergency for AAA-rated countries as well in
a few years from now.
Up to now the fiscal debt crisis seemed to be managed as a ‘pass the baby’ game of excessive
sectorial debt or leverage:
i. Excessively indebted households passed part of their debt back to their creditors – the banks.
ii. Banks, excessively leveraged and at risk of default, passed part of their debt to the sovereign
debt.
iii. Finally, the now overly-indebted sovereign States are passing the debt back to the
households, through higher taxes, lower public spending, the risk of default or the threat of
monetization and inflation.
In most of the industrialized countries, this attitude leads to a spectacular deterioration in the fiscal
positions, even more so when set against the remarkable fiscal restraint demonstrated by most
emerging markets over the same period.
Table 2 - Fiscal deficit as % of Gdp in selected Advanced Countries
source: IMF, 2015
4
As seen above in the graph most of the developed countries are in deficit and the United States had
a fiscal deficit of more than 11 percent of its Gdp during 2015. One reason for this huge deficit is
the global financial crisis that started in the US back in 2008. Other developed countries are also in
deficit except for South Korea who has experienced both deficit and surplus during the period 20082015.
The emerging countries are better off not only with regards to deficit but also in terms of the overall
public debt according to IMF forecasts.
Table 3 - Fiscal Deficit as % of Gdp in the BRICS Countries
source: IMF, 2015
In terms of fiscal deficit, the developing countries are experiencing a trend similar to that of the
developed countries however most of the developing countries have taken measures to reduce their
fiscal deficit. As shown in the figure above, the fiscal deficit of India in 2008 was around 10 percent
of total Gdp, and it has gone down to less than 7 percent in 2015. The Russian Federation alone was
enjoying surplus except for the year 2009 but in 2016 official forecasts will set the deficit to 12 per
cent.
There is no unique view regarding the role played by fiscal deficit in an economy. On the one hand,
the Keynesian view sustains that large fiscal expenditure by the government through deficit
financing will improve the economic condition of any country (Lee 2012). On the other hand, the
Ricardian approach argues that it doesn’t make a difference as consumers cut expenditure in
anticipation of higher tax, which the government will impose on the consumers to pay the
borrowings. Similarly the neo-classical economist argues that the increase in the government
expenditure negatively affect the saving and hence affects growth (Nickel & Vansteenkiste 2008).
Increasing fiscal deficit is one of the major problems faced by growing economies. As already
discussed in the previous section, there is no unique view on whether the deficit run by the
government is good for the country or not. In the case of developing countries, a study by Terrones
& Catão (2005) shows the relationship between fiscal deficit and inflation in developing countries
and there has not been any significant relation in advanced countries.
1.1. Reasons for fiscal deficit ad its impact
The main motivations for increasing fiscal deficit are either a decrease in revenue collection or an
increase in government expenditure. The major expenditure of both the developing and developed
countries is shown below with some elements of comparative analysis.
5
 Health: The global share of the developing countries (BRICS) in the total health
expenditure is increasing. Since 1995 the total share in global health expenditure of these
countries increased from 4 % to 12% of their total expenditures. Among the developing
nations, Brazil is the leading country in health expenditure, currently 9.31 % of its GDP,
whereas the total health expenditure by India is 4 % of its GDP. In the case of developed
countries, the global share in healthcare expenditure by developed countries (OECD) is still
higher than that of the BRICS countries. However, the ratio of the health expenditure
measured by OECD/BRICS fell from 22 times in 1995 to 7 times in 2012. This shows that
the health expenditure by the developed countries is declining whereas the expenditure by
the developing countries is increasing.
 Defense: Defense is one of the leading sectors in terms of government spending. According
to Frost & Sullivan, the total defense expenditures of BRICS countries was 21.4 percent of
the global defense expenditure in 2014 as compared to 13 percent in 2008. Among the
developed countries, the US has the highest defense expenditure, which comprises of 34
percent of the global defense expenditure in 2014, which equals 3.5 percent of the US Gross
Domestic Product (GDP). However, the defense expenditure of the US has been declining
over the time period as a percent of GDP.
 Subsidies: Subsidies are the benefits provided by the government to individuals or groups of
individual in the form of cash or through tax reduction. Subsidies are usually given either to
promote a certain industry or to protect the welfare of the people in the industry. With an
increase in the provision of subsidies the expenditure of the government increase which is
one of the contributor to the deficit in the budget. Subsidies in developed countries such as
the US and the UK have declined over the period and have remained the same for some, like
South Korea. In case of the BRICS countries there is a mix trend. Countries like India and
Brazil have reduced subsidies as a percent of the GDP, while in Russia and China it has
increased. China is expected to increase subsidies in various sectors to boost the economy
after the recent slowdown of its economy.
There has not been any conclusion about whether the fiscal deficit is good or bad for any economy;
some economists argued that it is essential for the economic growth of a country because only
domestic savings is not enough for investment. And others argue that a huge deficit may lead to an
increase in the tax rate and decrease in savings. However it can be concluded that some amount of
fiscal deficit is good for economic growth as long as the borrowed money is used for productive
purposes and the rate of return from that investment is higher than the interest rate paid.
The different number of ways to deal with the national debt crisis are suggested by looking at the
simple mathematic of the fiscal adjustment dynamics.
A country’s public debt will grow continually higher as a percentage of Gdp (i.e. will be
unsustainable) whenever the primary budget surplus as a share of Gdp does not offset the burden of
debt service as the economy grows.
In formal writing:
where:
 “d” is public debt
(D) as a share of Gdp;
 “pb” is the primary budget balance as a share of Gdp (i.e. it excludes debt service);
 “i” is the effective interest rate on the public debt;
 “g” is the rate of nominal economic growth and “t” refers to time.
This to say that the reduction of the public dept depends on the capacity both to experience a Gdp
rate exceeding the dept-service rate and generating a positive primary balance.
6
It is clear from the above equation that there are a set of options available to manage the debt crisis
by tuning the preferred variable:
 Draconian fiscal policy (at the end of the day, they are still the cradle of the Western
culture): increase in taxes and reduction of public spending to bring the budget balance to
the point where it offsets the debt-service burden, after allowing for the growth of the
economy.
 Inflation (unexpected and hateful surprise): the “g” of the equation is the nominal growth of
Gdp (i.e. the sum of real growth and inflation). Here is the trick then inflation essentially
reduces the real burden of the debt.
 Growth: increase the real growth of the Gdp via structural reforms for a sustainable
economy in the long run (recent Italian experience).
 Restructuring the level of outstanding debt: the effective interest rate can be reduced by
renegotiating the terms and conditions of the outstanding debt with the holders or
alternatively a haircut to the outstanding stock of debt can be performed so to reduce the
debt service burden.
 Bail-out: payments to banks in difficulties that can be interpreted either as a current transfer
payment from abroad or a capital transfer from abroad as an equivalent public dept must be
emitted. Bail-outs occur when outside investors, such as a government, rescue a borrower by
injecting money to help make debt payments. This help save the companies from
bankruptcy, with taxpayers assuming the risks associated with their inability to repay the
loans. Bail-outs are designed to keep creditors happy and interest rates low. Bail-outs of
failing banks in Greece, Portugal and Iceland were primarily financed by taxpayers.
 Bail-in: payments to banks in difficulties from outside investors who rescue a borrower by
injecting money to help service a debt. It imply a devaluation of shares and bonds to cope
for bank’s losses and insure fresh capital to the recovery bank. Bail-in occurs when the
borrower's creditors are forced to bear some of the burden by having a portion of their debt
written off. This approach eliminates some of the risk for taxpayers by forcing other
creditors to share in the pain and suffering. Bail-ins are ideal in situations where bail-outs
are politically difficult or impossible, and creditors aren't keen on the idea of a liquidation
event. Bail-in is ruled by the 2015 UE Directive BRRD (Bank Recovery and Resolution
Directive) to manage the sovereign bank’s crisis in Europe as taxpayers cannot be called to
pay for banks bankrupt (bail-out). For example, in June 2013 bondholders in Cyprus banks
and depositors with more than 100,000 euros in their accounts were forced to write-off a
portion of their holdings.
 Transformation of short term depth in long term ones through a mix of loans and guarantee
from other authorities (i.e. ECB or ESFS in the EU).
Unfortunately whereas the available “paths to debt sustainability” are mathematically determinate
and easy to be find, their implementation is politically driven and managed.
Therefore, in the real world, the decision on which is the best path will be the outcome of a
mediation between different interests. It is interesting to try to give an overview on which are the
pre-conditions or determinants that will make choose each of the above mention options.
Let’s start with inflation. As EU monetary policy is in the hands of the European Central Bank
(ECB), the possibility of initiating an inflationary policy is not an option for the Euro area. Were the
ECB to carry out quantitative easing to the point where EU-wide inflation accelerated, this would
benefit all European debt-service burdens; but it is not an immediate option for the crisis countries
within Europe now.
Generally speaking, inflation is a more realistic option where the Central Bank is a weak and not
independent authority. Moreover the inflation has to be unexpected in order to have impact on the
debt burden and it will have a negative effect on the future credibility (ie level of the interest rate
and capability of placing the new debt issues abroad) towards financial markets.
7
The growth rate of real Gdp is not, unfortunately, a policy instrument.
With respect to structural reform, the largest preferences go to:
i. policies to improve the functioning of labour markets, and the requirement that labour
mobility play a key competitiveness adjustment role;
ii. the reform of pension systems, to ensure they are fully funded, which is essential to reduce
the fiscal burden on future generations;
iii.
addressing the structure of competition and the consistency of regulations and
governance for improving efficiency. However, structural reform is likely to be a process
the success of which will be measured in decades. The market tolerance for sovereign debt
is unlikely to be improved by promises, also because the past behavior suggests that
psychologically and politically higher growth also raises the pressures for increased public
spending;
iv. liberalization and privatization of public services in order to improve efficiency and
increase the competition;
v. more in general reforms are well addressed whether they are designed to improve
institution’s credibility (i.e. Government and Parliament rules, efficiency and rapidity of
justice, etc.)
For the near term, therefore, the market is focused on budget consolidation: the plausibility of its
success, on the one hand, and the temptation to default on the other.
The projection of the IMF suggest that all advanced countries can restore its fiscal sustainability
through a long-term fiscal tightening worth less than 14% of Gdp annually, in the worst case for the
most fiscally unbalanced country.
The EU Commission are proposing that member States not respecting the Maastrict rules (dept
stock < 60% Gdp and annual deficit < 3% Gdp) should have to reduce their own dept at the annual
rate of 5% for the exceeding part.
Table 4 - Advanced economies, Fiscal Tightening (% of Gdp) needed between 2010-2020 to
achieve 60% of Gdp public debt ratio by 2030
This evidence suggests that there is a political inability in identifying a national social choice
mechanisms to come up with a fiscal burden sharing scheme that is both fair and efficient.
The common political practice shows that (in some country more than in others) assigning blame
and trying to shift the burden of the fiscal correction (tax increases and public spending cuts) to
8
other groups or individuals takes precedence over searching for timely, fair and efficient
retrenchment measures. The result is that fiscal adjustment is delayed and postponed, making the
eventual burden even greater.
The lack of less polarized policy, strong institutions and effective leadership will avoid the budget
consolidation but also the following economic growth effect as indicated by general economic
theory.
Expectation on the credibility of government action is a key element of the so called non-Keynesian
fiscal effects: for example, a significant and sustained reduction of government expenditures may
lead consumers to assume that this will create room in the medium term for a permanent tax
reduction. In that case, an expected increase in permanent income may lead to a rise in private
consumption, also generating a better environment for private investment. Moreover, Blanchard
(1990) and Sutherland (1997) demonstrate that a fiscal consolidation that credibly attempts to
reduce public sector spending may produce an induced positive wealth effect, leading to an increase
in private consumption also through the reduction of the risk premium associated with government
debt issuance, which reduces real interest rates and allows the crowding-in of private investment.
And finally, from an historic point of view (Giudice, 2007) around half of the fiscal consolidations
in the EU in the last 30 years have been followed by higher growth.
1.2. Default consequences and risk of contagion
Default is not an unrealistic option during national debt crisis (Reinahart and Rogoff 2009): it has
been common phenomena in many part of the world such as Central and East European Nations and
the CIS after the fall of the Berlin wall in 1989.
When there is a default (a single business as a nation) there is a redistribution of wealth between
creditors and debtors. The first ones are mainly banks and private savers, debtors are the States and
ultimately taxpayers, public employees and retired people. The beneficiaries of a sovereign default
are future tax payers and future beneficiaries of public spending, who would, in the absence of
default, bear the burden of servicing the public debt.
But there are some side effects that can offset the immediate benefit:
 The main sanction against defaulting sovereign is temporary exclusion from capital markets.
This means that the more a country will need additional funds in the near future the less
probable is it will force a default.
 More important when the State itself defaults on its obligations, the rule of law inevitably is
harmed. Social capital and trust are destroyed. This is why sovereign defaults tend to occur
only in countries that have either been shocked by extraordinary events, often beyond their
control, or that are have little social capital, weak and corrupt political institutions and
ineffective political leadership.
The recent default of Argentina is a good example: besides the economic crisis, characterized by an
increasing inflation, the social costs of the default have been enormous.
The recovery figure of today is deceptive: economic growth is driven by the price of commodities
(agricultural and natural resources) that are determined by international demand (from China and
India) and not by high productivity and competiveness of the Argentinean economy and business
sectors.
The probability of default for a sovereign bond can be calculated from yield spreads and a fixed
rate of recovery assumption, according the following formula:
Where the market-implied probability of default (PD) for a sovereign bond can be calculated from
the yield on the bond (i), the yield on a risk-free benchmark bond (i*) (here the German 10-year
Bund) and a fixed recovery rate assumption (RR).
9
The calculation of the default/restructuring probability is tricky exercises due to multiple issues:
recovery rates cannot be measured in the same way as for a corporate bond because they depend on
the ability to tax citizens and service the loans and there is a high political/social cost related to
default that makes actual sovereign defaults much fewer than market-driven default probability
calculations would indicate.
There are two situations that make sovereign-debt default/restructuring more likely:
1. A relatively small primary deficit indicates the government has already taken significant
steps to eliminate most or all of the primary deficit – it is living within its means – and going
any further is likely to produce unpopular economic hardship.
2. The larger the initial dept share,
a. the more likely that the debt service burden in perpetuity will be too high; this is a
permanent burden on taxpayers, and when a significant amount of debt is held by
foreigners, this represents a real transfer abroad (and a widening gap between GDP
and GNP);
b. the lower the chances of the government getting a bailout from other countries,
c. the lower the possibility for the government to return to the capital markets for
funding (when support packages are in place), since the markets may refuse to roll
over and fund new debt;
d. the lower the amount of sovereign debt held by domestic banks, since the losses on
such debt could add to banking-sector problems.
The risk of contagion is well represented by the following picture, dated 2014, that is very
powerful in visualizing the possible spreading effect of the debt crisis.
10
Figure 1 - Where is the sovereign debt?
In the absence of mitigating policies, a sovereign default or disorderly bank failures could threaten
Europe’s financial sector and cause liquidity shock with potentially negative global contagion.
Recent empirical studies (Arghyrou and Kontonikas, 2010; Norbert Metiu, 2011) have highlighted
how the countries of the Euro Area have been vulnerable to the cross-border contagion of sovereign
debt crisis, being the main exporters of sovereign risk were Greece, Ireland, Portugal, and Spain.
The contagion could spread through the following channels:
i. Financial contagion: direct exposure to sovereigns and banks at risk of default. According
to BIS data, banks are constantly reducing their cross border exposure to sovereign debt.
This contagion would hurt the banking system of solid country (Germany and France)
because they hold a large share of the debt at risk as well as the financial system and the
overall economy of the smaller counties that have tight economic relationship with the
country at risk. An example of this last situation is that if Greek banks lost access to funding
that might encourage them to shrink their balance sheets in those countries (Bulgaria and
Romania) where they own a large segment of banking sector, putting downward pressure on
growth there rather than home.
ii. Fiscal contagion: maybe investors will search for other countries with a fiscal stress similar
to the one of Greece, Portugal, Spain and Ireland in other region. An obvious target for deep
investigation would be new EU countries coming from the former Warsaw pact (Hungary
already had its debt crisis in 2009). But such a contagion might reach also Japan the highest
indebtedness country in the world and USA, both countries were recently downgraded by
rating agencies.
11
iii. Real contagion: the debt crisis of the Euro Area may negatively affect the neighborhood noUE countries that might be deprived of a export-led growth in UE.
There is a general consensus both at EU and IMF level (Euro Area Policies: 2011, IMF Staff
Report; The EMU sovereign-debt crisis: Fundamentals, expectations and contagion, (Economic
papers n.463, European Commission, 2011, Arghyroua and Kontonikas 2011) in looking at the
evolution of the bond pricing mechanism: in the pre-crisis period the bond risk was priced
according to the ‘convergence trade’ hypothesis (all Euro countries took advantage of the German
low risk profile) in the post-crisis period markets have been pricing both the international risk factor
and individual macro-fundamentals on a country-by-country basis.
These consideration suggest that to find a solution to the sovereign debt crisis, the focus should be
on strong program implementation, with sufficient proceeds from privatization, adequate financing
from other official sources on terms supporting debt sustainability, and private sector based
solutions to banking problems on a per county base. Moreover there is the need for governments to
maintain, or regain, the confidence of markets that they are fully committed to a permanent
improvement in macro-fundamentals.
Such a result can only be achieved through clear evidence of its determined implementation of the
necessary reforms, even in the face of significant short-term welfare losses, otherwise it is very
likely that markets will continue to doubt the sustainability of these countries’ long-term
participation in the Euro Area, and the risk that these expectations will become self-fulfilling will
remain.
At the European Union level, the crisis has highlighted the necessity of quickly scale up the
capacity of fiscal supervision and policy co-ordination and flexibility of the European institutions in
order to prevent future debt crises and to prevent its escalation in the affected country and its
contagion to other countries, in particular emerging and developing ones.
12
2. SWF in the World Capital Market
The extreme volatility of the financial markets due to the expansive monetary policies pursued by
the major world’s central banks give the SWFs greater opportunities in moving capitals towards
most profitable investments. Their role in the international financial market is increasing,
particularly regarding both merger and acquisitions (M&A) and foreign direct investments (Fdi).
The rapid growth of the emerging economies and of the oil producer countries give up to an
extraordinary accumulation of financial resources that would need to be managed in most profitable
way. SWFs became the better instrument to manage the excess capital in searching investment
opportunities in the global market.
While in the last century capital accumulation characterize the Western industrialized countries, the
emerging phenomena shifts the location and the ownership but not the allocation that are still
preferring the more secure and stable advanced markets.
The expression Sovereign Wealth Fund was declined first by Rozanov in 2005 even if the creation
of the first fund, Kuwait Investment Authority (KIA), dates in 1953 with the aim of finding
alternative use to the estreme domestic liquidity as well to accumulate saving for future generation
by diverfying the economy. The International Working Group of Sovereign Wealth Funds (Iwg) has
given a more precise definition: “investment State vehicles using capital flows in excess to be
managed sepparately by the central banks”.
Large part of the SWFs have been created since the begining of the third Millennium due to the
increasing surplus of the balance of payments (Ocampo e Griffith-Jones, 2010).
Table 5 - Sovereign wealth funds by year of establishment (%)
source: Preqin
At the end of 2015 they were surveyed about 80 active funds worldwide, whose main ones are listed
in the Annex 1, who manage equity of more than $ 7 billion.
SWFs are then operating as private agencies in searching profitable allocation; not only as they are
searching for diversification opportunities that could open new roots to the mono-sector economies
(oil producers) or even to the poor technology producing systems. They are confronted with both
opportunities and concerns that can be synthesize as follows:
• The depth of the financial crisis and the increasing State debts emphasized the lack of fresh
capitals in the advanced countries by inducing their companies to open the door to new actors.
13
•
New actors (investors) are attracted by stable institutional and legal framework, efficient public
administration, high technology industries, modern services, infrastructure, etc..
• Nevertheless, the State-owned structure of the SWFs do not always fit with the private nature of
the market economy, i.e. SWF capital participation strategy could be influenced by political
choice.
• Moreover, great part of SWFs agencies are run by countries often ruled by undemocratic
regimes.
Thus, the OCDE countries are attempting to find a proper balance between the need for capitals and
the risk of political influence or management control.
In a context characterized by the deep structural financial instability, the SWF, as "silent" investors,
are attracting the interest of private and public companies as well of policy makers, who are all
seeking new sources of funding to compensate for the domestic lack of capital. Questions such as
that of transparency, accountability and reciprocity emerge as the main issues for governance rules.
Capital flows need balanced international regulations to promote investments and at the same time
prevent from the risk of political pressure.
2.1.The macroeconomic power
Despite repeated financial crises and recent tensions in European markets, the assets under
management (AuM) of these instruments recorded a steady growth path since 2009, after suffering
losses of an average of between 5 and 15% ( with upcoming tips to 30%) for those with a riskier
portfolio (Jen, 2010), whose values have increased significantly between 2013 and 2014.
XX The table shows also that the assets under management do not appear to be equally distributed.
The first five sovereign wealth funds hold more than 50% of the total, with up to 76% even when
you consider the top ten.
Since the years 2000, due to the commodity boom and the rise of emerging market economies,
SWFs have become increasingly relevant on the global economic and financial scenes as their
assets under management have grown exponentially even in spite of the economic crisis and of the
plunge of oil prices. These projections suggest that the trend is likely to persist in the coming years.
With reference to the strategic objectives identified by Kunzel et all. (2011) and Chiarlone and
Miceli (2013) 2, it is possible to identify eleven Savings funds (about 25% of the total of AuM) and,
albeit with a lower abundance, are the Reserve investment funds that hold most of the wealth3.
In addition, in a selected list of 20 funds classified as commodity (or that derive their financing
from natural resources, oil and otherwise) the total assets reach of about 3.7 trillion dollars. Given
this particular composition, it is evident that the evolution of AuM is strongly related to the
evolution of oil prices.
2
Gli autori arrivano a delineare cinque categorie di riferimento: Saving funds (distribuire la ricchezza tra le generazioni
diversificando i propri asset verso attività più remunerative), Stabilization funds (perseguono la finalità di isolare le
economie domestiche dalle fluttuazioni cicliche del prezzo delle commmodities), Pension reserve funds (finalità
pensionistiche), Reserve investment funds (utilizzano gli eccessi di liquidità per massimizzare i profitti) e Development funds
(allocano le risorse in attività destinate allo sviluppo socio-economico nazionale).
3 Tali classificazioni non devono essere però utilizzata in modo particolarmente rigido, infatti molti Swf possono
perseguire contemporaneamente più obiettivi oppure modificarli nel tempo a seconda delle esigenze nazionali. Secondo
quanto evidenziato da Kimmitt (2008) sono solitamente i fondi commodity ad essere maggiormente caratterizzati da
cambiamenti strategici nel tempo.
14
Table 6 – Top 20 Commodity SWFs
n°
Country
Fund
Billion $
Date of
creation
Source
1
Norway
Government Pension Fund – Global
838
1990
Oil
2
UAE – Abu
Dhabi
Abu Dhabi Investment Authority
773
1976
Oil
3
Saudi Arabia
SAMA Foreign Holdings
675.9
n/a
Oil
4
Kuwait
Kuwait Investment Authority
410
1953
Oil
5
Qatar
Qatar Investment Authority
170
2005
Oil & Gas
6
Russia
National Welfare Fund
88
2008
Oil
7
Russia
Reserve Fund
86.4
2008
Oil
8
Algeria
Revenue Regulation Fund
77.2
2000
Oil & Gas
9
UAE – Dubai
Investment Corporation of Dubai
70
2006
Oil
10
Kazakhstan
Kazakhstan National Fund
68.9
2000
Oil
11
Libya
Libyan Investment Authority
66
2006
Oil
12
UAE – Abu
Dhabi
International Petroleum Investment Company
65.3
1984
Oil
13
Iran
National Development Fund of Iran
58.6
2011
Oil & Gas
14
UAE – Abu
Dhabi
Mubadala Development Company
55.5
2002
Oil
15
US – Alaska
Alaska Permanent Fund
49.5
1976
Oil
16
Brunei
Brunei Investment Agency
40
1983
Oil
17
Azerbaijan
State Oil Fund
34.1
1999
Oil
18
US – Texas
Texas Permanent School Fund
30.3
1854
Oil & Other
19
Iraq
Development Fund for Iraq
$18
2003
Oil
20
US – New
Mexico
New Mexico State Investment Council
17.3
1958
Oil & Gas
TOTAL
3.692
Oil & Gas
The following table suggests that in the seven years that followed the financial and economic crisis
of 2007-08, the assets under management of SWFs have more than doubled.
The graph also reveals that while in 2008, SWFs funded through hydrocarbon-exports revenues
managed more than two thirds of SWFs’ total assets under management (AuM), the non-commodity
SWFs now account for a greater share of these assets, that is roughly 40% of the 7.0 trillion dollars
in AuM.
15
Table 7 – SWFs asset under management ($bn)
source: SWF Institute; The City UK estimates
The forecast for the next two years indicate the maintenance of this expansion trend, while the only
uncertainties could be linked to the future evolution of crude oil prices. If the sharp decline in crude
oil , which began towards the end of 2014 , should also continue in the long -term holders of these
countries funds they would be more oriented to use part of the AuM to compensate for the reduction
of state revenues avoiding and, consequently , pressure on debt exposure.
2.2.Regulatory framework
Just this AuM bias over the years has triggered a broad debate, academic and empirical, on the
potential impacts of such investors and their portfolio management so as to stimulate a protectionist
approach by the major vessels of the operations conducted by the SWF. According to Beck and
Fidora (2008; 2009), most of these fears stem from the fact that the objectives could not be
exclusively economic in nature, or simply maximizing the value of investments, but are directed to
the possession of advanced technologies or supported by "political” reasons. These elements of
concern are further amplified by the fact that, as previously indicated, the most SWFs are active
within non-OECD countries, managed by non-democratic regimes and with a reduced institutional
development.
Referring to the first 10 countries of SWFs holders, in Table 8 related information was collected not
only the amount of the AuM managed (over 85% of the total) but also to the so-called Rule of Law4
(proxy of the degree of institutional development), the ability of the State to ensure the efficiency of
its regulatory framework (summarized by the Freedom from Corruption and Property Rights) 5.
4
Elaborate dall’Heritage Foundation e raccolte nel c.d. Index of Economic Freedom (2015). Secondo quanto indicato dal
centro di ricerca, valori più alti sono associati allo sviluppo di un sistema democratico.
5 L’asse orizzontale e quello verticale rappresentano rispettivamente il Freedom from Corruption (FC) e il Property Rights
(PR) mentre la dimensione della bolla e’ proporzionale all’ammontare degli Aum.
16
Table 8 - Swf and Rule of Law
source: elaboration on SWF Institute data
Just 3 countries that are located in the upper part of the dial (Norway, Singapore and Hong Kong),
jointly presenting significant values for the indicators considered to demonstrate high efficiency of
the State apparatus. The rest of the audience of the countries where the assets reaches a value close
to $ 3 trillion, are characterized by a weak governance structure. In particular, in 3 cases (China,
Russian Federation and Kazakhstan) there is a widespread state control of economic management.
The assumptions that derive from this simple descriptive analysis might corroborate the thesis of the
opacity behavior of such financial instruments although there are no confirmations regarding the
danger of financial transactions they conduct on the markets. On the contrary, some empirical
investigations (Chiarlone, 2010) come to demonstrate how the acquisitions made by these
instruments could generate greater liquidity in financial markets and, given the nature of long-term
investors, it would seem very low probability that they can achieve massive divestment transactions
that may impact adversely on stock prices.
Despite widespread concerns, studies (Bortolotti and Fotak, 2009; Balding, 2009) have shown that
it is not yet revealed no evidence of any tampering on the strategies of the investee companies and
investment decisions of the funds from the reference countries.
In support of SWFs is possible to find some positive aspects related mainly to the greater liquidity
they manage in supporting the growth of target enterprises, helping to lower the cost of risk capital
and reducing financial market volatility in bad times (Lesmond, 2005).
Furthermore, it could be argued that SWFs constitute an opportunity for States to regain some
power and authority over financial markets. A power that financial globalization seemingly had
taken away from theses sovereign actors in its ascent leaving them at the mercy of the risks and
volatility that characterize financial markets. So SWFs represent in a way the return of the State and
of politics within the financial world. The crisis has made this ever more evident and has prompted
reactions on the part of States that have sought ways to reassert their sovereignty within the global
17
financial realm. SWFs, if well conceived and properly managed, have proven to be efficient
instruments to preserve local economies from the vicissitudes of financial markets.
More precisely, because of their sovereign character and because most of them originate from
countries that still face important infrastructure gaps and glaring inequalities, it can reasonably
expected them to be more than simple stabilizing or saving funds and to aspire to bring about not
only protection but also positive change from a developmental standpoint.
It has been argued, in effect, that SWFs have been and could be increasingly relevant in financing
development as they dispose of significant resources and because their investment horizon tends to
be much longer than that of other investment vehicles. Increasingly confronted with a lack of capital
and funding, companies have for instance expressed a growing interest for SWFs’ investments as
the latter presents multiple advantages as they are stable shareholders with a long-term investment
horizon that can accompany the firms in their development and open up new commercial alleys for
them. Therewith, many studies have demonstrated that most development projects require
investments over the long term in order to induce positive outcomes and impact development in
meaningful ways.
Notwithstanding the suspicions with regards to the motives behind SWFs’ investment choices and
the overall lack of transparency that characterize their governance – as most SWFs are owned by
non-democratic States – there is a growing sense that these long-term investors could be key
instrument in financing development both in their home country and abroad. While the objectives
behind their set up are multifold, one of them is indeed developmental and some have even referred
to them as Sovereign Development Funds.
The need for a regulatory framework that meets the requirement of free capital movement and
transparency of foreign investors pushed main players in the international financial system to look
for a common proposal. The recent setting-up of the International Working Group on Swf, which
brings together the representatives of the Sovereign Wealth Funds and of the main multilateral
financial institutions (IMF, OECD, EU), is the concrete demonstration of this necessity. The
working group, directed by Jaime Caruana, Director of the Money Markets and Capital of the
International Monetary Fund Department, and Hamad al Suwaid, Chairman of the powerful
sovereign fund of Abu Dhabi and Undersecretary of State, has launched a proposal for a voluntary
code of conduct in 24 principles, which China has already adopted.
Within the members of the EU, there are different attitudes: from the liberal position of the United
Kingdom down to the more conservative and protectionist view of France and Germany, even if
there are some differences between them as well. The Italian attitude would seem to be more open
to capital inflows as the need to attract Fdi is greater.
2.3. Reason to create an SWF
Behind the creation of a sovereign fund, then lies the remarkable availability currency that can not
be absorbed immediately into the economic system and / or that the same policy makers decide to
use in order to get returns for future generations diversifying national economies.
The relevant economic literature identifies, essentially, two reasons that lead the States holders to
efficiently use this surplus:
1. The first is defined as "competitive" (or new mercantilism), mainly adopted in type
export-led countries, it aims to balance the costs arising from a massive current account
surplus while keeping the exchange rate depreciated and promoting better competitiveness
of goods in international markets.
2. The second is identified as "self-insurance", ie on the need to stabilize the domestic
economy in the face of financial turmoil, more and more frequent resulting from
significant economic integration post globalization.
The work of Jeanne and Rancière (2006) also showed that if the level of reserves held appears
optimal for some countries, for example those of Latin America, for those in Asia is witnessing a
18
particularly large accumulation process that could be justifiable only in the case of a financial crisis
of international dimensions.
Theoretical Model
Even if there are no theoretical models to identify completeness motivations that underlie the
creation of a sovereign fund (Das et all. 2009), a part of the academic literature focuses on variables
as follows:

the accumulation of capital (Aizenman and Glick , 2008) or on national saving,

or even on the wealth of the resident population (Zilinsky, 2009) identified from time to
time as the most significant macroeconomic variables on the decision to create such
investment vehicles.

In addition to these, the creation of a SWF is often influenced by the will to assert its role
in the international markets (Clark and Monk, 2011; Hatton and Pistor, 2011).

On the contrary, it is possible to identify impediments elements such as lack of human
capital and / or the presence of non-viable institutions (Kauffman et al. 2010).
In order to verify the validity of the assumptions described above and highlight any other reasons it
was decided to create a separate dataset dividing the countries on the basis of the presence or
absence of a sovereign fund, using the World Development Indicator Data Bank (2013).
The observations cover a very wide span of time, from 1960 to 2012, during which were identified
48 countries with an active SWF, associating a dummy that identify their presence at a given date.
Preliminary statistics contained in Table 9 allow to obtain some initial information.
Table 9 - Summary statistics
without Swf
N.
Mean
with Swf
Std. Deviation
N.
Mean
Std. Deviat.
Reserve
4.046 50,35
216,42
223
218,34
485,22
Fuel export
4.974 13,04
30,20
532
42,02
38,90
Goods export
6.861 33,83
223,36
614
56,29
46,31
Current account
892
10,42
239
10,63
36,20
Fdi in
5.439 3,09
8,18
627
4,50
6,86
Gdp growth
7.161 3,81
6,26
667
4,70
6,41
Gdp p.c. growth
7.126 2,05
6,06
664
2,01
6,35
Gross saving
4.130 18,73
10,00
489
30,28
18,21
Inflation
5.866 36,64
510,26
565
4,86
5,35
External debt
4.011 66,63
84,35
229
38,00
34,84
-5,60
source: estimates, World Development Indicator, 2013
In the entire period observed, for example, holders of a SWF countries on average have an
incidence of reserves to total external debt greater than about 4 times than the other those economic
systems, confirming the thesis of Jeanne and Rancière ( 2006) and Aizenman and Jaewoo (2007),
namely that once exceeded a threshold defined as a functional, high availability of foreign exchange
resources tend to be used for alternative purposes to the traditional ones (such as the
macroeconomic requirements of the holder country) and oriented delivering more profitable
activities.
19
To this evidence contributed significantly also the accumulation process took place in the countries
oil exporter thanks to an increase in crude oil prices. Suffice it to say that in no SWF countries the
weight of petroleum goods in total output goods (fue exports) is about four times lower than the
remainder of the sample.
Next to the energy component, is also observed the different relevance of outgoing goods, in
countries with SWF the ratio of exports to GDP (goods exports), an average stands at 56% while for
others is reduced to 40%.
Items of interest also derive from the analysis of the current account than the national wealth
(current account) The countries with a sovereign investment fund have a surplus of 10%, totally
opposite value to the deficit reported for the remaining part of the sample. While remaining within
the framework of Balance of Payments, the focus can be moved on capital inflows. As for the
passive internationalization processes, the impact of Fdi entry in the gross domestic product (fdi in)
is slightly lower than for countries without a sovereign fund.
Finally, looking to the macroeconomic environment, the defending countries denote values
significantly higher than the growth rate , both national (gdp growth) is per capita (gdp growth pc) ,
and the level of national savings (gross saving); by contrast assume lower values considering the
level of inflation (inflation) and external debt (external debt).
Variables influencing the creation of a SWF: base line model
Compared to the approaches presented in the literature (Aizenman and Glick, 2008; Zylinski, 2009)
we built a data bank more extensive and detailed data in terms of time horizon and countries to get
a more precise verification of the thesis first described through an econometric model.
The model, considering the presence or not of a SWF as the dependent variable, unable to isolate
those macroeconomic variables that most affect the probability of creating such investment
vehicles.
The econometric model was built using one logit estimator6 that is applied on a panel data structure
and does not cross -section
Swfi,t = αi + βi Indicatori Basei,t + γ xi,t + εi,t (1)
where:
 Swfi,t assume value 1 when the country i decide to create a SWF at time t;
 Indicatori Base is a macro variables set representing relevant forecast predictor for the
creation of a SWF;
 xi,t is a controll vector strictly interdependent as the value at time t will impact on it self at
time t+1;
 εi,t i the error component.
The baseline model has been subsequently integrated with additional control variables that may
intervene on the probability of realization of a SWF and whose expected results are presented in the
Table 10. The variable column includes the additional variables we take into consideration.
6
Il modello descritto dalla (1) prevede che la variabile dipendente assume un numero finito di realizzazioni, espresse
come [0, 1], alle quali si associa con p la probabilità che si verifichi l’evento osservato e con p-1 la situazione opposta. Per
quanto riguarda la selezione dello stimatore, la scelta di uno stimatore logit appare appropriata sia perché restituisce dei
coefficienti più efficienti rispetto a un probit sia perché più adatto nel trattamento di un dataset di natura panel,
particolarmente ampio, con variabili qualitative dipendenti (Maddala, 1987).
20
Table 10 - Expected results according the literature (base line 1 and 2)
and our estimation (model 3)
Model
Variables
Direction
Details for Swf creation
+
Impact over the current account balance and
additional source of assets
+
More efficient management of reserve
goods_exp
+
Impact over the current account balance and
additional source of assets
gross_sav
+
National saving as new source of assets
gdp_pc_gro
+
Economic growth as proxy of new capitals injection
fdi_in
+
Impact over the capital account balance
New hypothesis (model 3) ext_debt
-
Inefficient management of capital and more external
exposure
Inflation
-
Inefficient management of liquidity
fuel_exp
Base line (model 1)
res_ed
(Aizenman e Glick, 2008)
Saving and growth
(model 2)
(Zilinsky, 2009)
In addition to the development of the baseline model, the observed sample was subject to a series of
hypotheses of robustness (robustness check) by carrying out various restrictions in level in terms of
both time horizon (pre or post globalization) both of countries observed.
Model I - The first test has been done on the entire sample taken into consideration aiming to offer
only a general view on the elements influencing a SWF’s creation.
Looking at the first column, where is described the baseline model, we reach the same conclusions
as those observed by Aizenman and Glick (2008). Concerning the variable fuel export the obtained
positive coefficients coincide with expectations. Many of the SWF were in fact created in order to
limit the national dependence on non-renewable sources and use the revenue to cushion any
negative cycles in prices.
Even for the variable goods exports the result obtained is as expected; most of the funds set up in
the new millennium are born with the need to manage the huge current account surpluses.
Particularly for export-led countries, the positive dynamics of this entry has a positive impact on the
current account balance can result in an accumulation of resources.
A similar argument can be made with regard reserve accumulation. In this case, the positive and
significant sign is consistent with the literature in that, after passing the optimal threshold, for a
country appears efficiently use these resources to more profitable purposes than ordinary operations
being carried out by the central bank.
However, as shown by the low value of r2, the starting hypothesis reveal a fable explanatory
power7.
The columns 2 and 3 show a further deepening of the starting hypotheses, taking into account the
hypothesis that has been introduced by Zilinsky (2009). However, while presenting a positive sign,
the coefficients obtained are not significant for both the gross national savings (gross savings) for
both growth per capita (gdp p.c. growth).
Column 4 shows, finally, the further implementations of the basic model. The first control variable
takes into account is foreign direct investment input (fdi in). In line with expectations, we will show
positive and significant coefficients, as such flows produce an improvement in the capital side of
the balance of payments. This report should also be read with reference to the trends that Fdi have
Non deve essere interpretato come il tradizionale R2 utilizzato nei modelli lineari, l’indice di Mac Fadden confronta la
bontà del modello rispetto ad un altro calcolato esclusivamente con l’intercetta; il suo valore è compreso tra 0 e 1.
7
21
had in the last years: taking into account the first 20 receivers investments economies, in more than
half there is the presence of a SWF.
Concerning external debt (external debt) and the level of consumer prices (inflation) it has
experimented the negative coefficients accompanied by a strong relevance of the p-value.
The negative impact from the estimates is justified by the fact that greater debt exposure towards
foreign countries is correlated with a decreased availability of resources for a SWF; on the same
way, the presence of a spiral on consumer prices could be symptomatic of the inability to efficiently
manage excess liquidity.
Table 11 - Model I (without restrictions)
(1)
Fuel export
Reserve
Goods export
(2)
(3)
(4)
0,037***
0,019
0,037***
0,037*
(0,01)
(0,01)
(0,01)
(0,01)
0,017***
0,020***
0,017***
0,01
(0,00)
(0,01)
(0,00)
(0,01)
0,177***
0,153***
0,177***
0,279***
(0,02)
(0,03)
(0,02)
(0,05)
Gross saving
0,004
(0,04)
Gdp p.c.
growth
0,013
(0,03)
Fdi in
0,280**
(0,10)
External debt
-0,028**
(0,01)
Inflation
-0,394***
(0,06)
N
596
411
595
472
0,384
0,385
0,385
0,728
aic
340,880
248,681
340,847
135,343
bic
354,051
264,755
358,401
160,285
-167,440
-120,341
-166,424
-61,671
208,642
150,799
208,005
330,331
0,0000
0,0000
0,0000
0,0000
r2_p
ll
chi2
p
In parenthesis t-statistics based on standard errors;
***indicates significance at the 1%level; **indicates significance
at the 5%, level; * indicates significance at the 10% level.
22
Model II – From these first considerations, the second step of the analysis will be addressed to the
segmentation of the sample observed by referring exclusively horizon post globalization time.
The reasons for this approach are derived essentially from the fact that most of the SWFs have been
created at the turn of the 90s and the new millennium; then this sample design allows not only to
check the stability of the previously tested hypothesis but also to check for any new assumptions
linked to a limited historical period.
The analysis of the coefficients confirms the hypothesis comprehensive treaty. The estimate is of
significance in terms of sign, pointing out that, even under the pressure of globalization, the
variables of interest have maintained consistent with expectations.
The only major difference is observed in column 2 where, replicating the model Zilinsky (2009),
with the introduction of domestic savings. The fuel export variable improves its significance while
keeping the positive sign.
Model II – Finally, shifting the focus on the institutional characteristics of the countries, the
reference literature shows that generally the presence of a SWF is associated with greater
transparency and government efficiency (less relevance to the so-called fuel-export countries) and
as indicated by Avendano and Santiso (2009) these tools, mainly used for purposes of
macroeconomic analysis, pursue investment strategies only financial and not political ones.
Based on this information, the last experiment is done by restricting the observations which
differentiates between countries on the basis of their governmental status, as identified by the
Economist Intelligence Unit (so-called Democracy Index) and do not belong to the OECD group.
The aim is to verify weather the previously observed stylized facts can be confirmed or not.
As it concerns the exports of manufactured goods, the result remains stable in the various partitions
as observed in the baseline model. Instead, they are in contrast to what is observed for the incidence
of those oil (significant only for non-OECD countries) and for the foreign reserves (valid results
you only maintain for non-democratic countries).
Moving on to the complete model (as described in column 2), the results observed for the level of
inflation do not change in different partitions while for foreign direct investment the significance is
not verified only in the case of non-democratic countries.
Finally, the high debt exposure would tend to negatively impact on the probability of realization of
a SWF only in non-democratic economies and not belonging to the OECD group.
23
3. Responsible investment
It comes as quite an intuitive concept that investing in a company not only has an impact on that
business but also on society at large. Suffice it to mention that investing in a company that produces
cluster munitions or anti-personnel mines seriously undermines and infringes upon the principle laid
down in international law of civilians’ protection in armed conflict as it has been repeatedly proven
that the use of these specific weapons indiscriminately harm civilian populations. The principle of
socially responsible investment stems from the very observation that investment activities are not
innocuous and points out to the necessity – nay, the moral obligation – for investors to seek
investments that provide financial returns but that also entail positive social, environmental and
governance impact or that at least refrain from having deleterious societal repercussions.
Historically, socially responsible investment has tended to reflect the political and social climate of
the times. The 1960s for instance saw a growing awareness with regards to issues such as social
inequalities, women rights, civil rights more generally and these concerns soon translated into calls
for more socially responsible behaviors on the part of actors across all sectors of society, including
financial investors. The weight and power of investors was fully grasped and appreciated when
public and private investors alike pressured the South-African white minority government in the
1980s into giving up the racist apartheid regime that had been tearing the country apart for decades.
The use of investment and disinvestment as means of moral pressure proved to be an efficient
instrument into triggering social and political change. The climate crisis has since put the
environment at the top of the agenda of the international community and socially responsible
investors have thus followed up on the necessity to finance forms of sustainable development
through what has come to be known as green investments. Today, socially responsible investors
encourage an array of corporate practices that promote consumer and worker protection, human
rights, and environmental stewardship among other things.
Following the financial and economic crises, the financial world has come under greater scrutiny
and irresponsible behaviors on the part of financial agents were blamed for having led to the
collapse of the financial system. Responsible investment is not merely about being morally and
ethically righteous, it has also demonstrated to be more sound financially speaking. Indeed,
investing in a company that has a mediocre relationship with its employees or that carries out
operations that negatively impact the environment might prove financially unsustainable over the
medium to long term. The financial performance of the firm might eventually be affected by these
shortcomings and the result for the investor might end up being nothing short of disappointing.
Furthermore, beyond the situation of single firms, it is the health and the stability of the market as a
whole that is at stake and that socially responsible investors seek to actively preserve.
So, the socially responsible investment strategy that considers successful returns on investment and
responsible corporate behavior as indivisible has inevitably gained momentum and is being adopted
by an increasing number of actors among which some of the sovereign wealth funds. It makes
perfect sense for sovereign investors to seek both financial returns and positive societal impact, as
their ultimate shareholders could be considered to be the citizens of their countries. Besides, many
SWFs share the common objective of providing for future generations. This commitment entails a
greater sense of responsibility when deciding upon portfolio strategy and evaluating the various
investment opportunities. With assets under management of $7 trillion and counting, SWFs have a
say in the corporate practices of the companies they invest in. Furthermore, as sizeable investors,
they can set the ethical bar high and inspire best practices on the part of other investors.
3.1. Propensity for responsible investments on the part of SWFs
We will attempt to construe the propensity of SWFs to adopt responsible practices in terms of
investment. Such tendency will be analyzed according to whether SWFs include in their investment
decision-making process environmental, social and governance (ESG) criteria and if not whether
and why it would make sense for them to do so from both a commercial and ethical standpoint. The
24
ESG criteria are not set in stone and they continuously evolve so as to include new factors in order
to better tailor responsible investment strategies to ever-changing conditions. Examples of ESG
factors can be found in the table below.
Table 12 - Examples of ESG factors8
Environmental
Social
Governance
- Climate change
- Working conditions, - Executive pay
- Greenhouse gas (GHG) including slavery and - Bribery and corruption
emissions
child labor
- Political lobbying and
- Resource depletion, - Local communities, donations
including water
including
indigenous - Board diversity and
- Waste and pollution
communities
structure
- Deforestation
- Conflict
- Tax strategy
- Health and safety
- Employee relations and
diversity
Indeed, while at the inception of the socially responsible investing movement in the 1960s, the latter
was considered a marginal segment in the investment world as it appeared to be rather a valuebased approach rather than a properly thought out and sound financial strategy, it became an object
of interest and study and recent developments have shown that it might be in some cases shielding
more yields than unsustainable approaches have so far – at least on the longer term9. We will solely
consider responsible investment as defined by the Principles for Responsible Investment (PRI), a
global network of investors who created in 2006 a list of six principles for responsible investment10
that investors around the world can voluntarily choose to adhere to. The list of signatories has
grown considerably since 2006 and now counts over 1,500 entities from over 50 countries with
assets amounting to more than $60 trillion11. Therein, RI is defined as “an approach to investing that
aims to incorporate environmental, social and governance (ESG) factors into investment decisions,
to better manage risk and generate sustainable, long-term returns.”12 RI is to be distinguished from
other value-based investing approaches such as socially responsible investment (SRI), green,
sustainable or impact investment for instance. These approaches might intersect with RI but the
main point of rupture is that the said approaches aim at promoting dual return structures on
investments: both financial and social/green etc. Conversely, RI does not advocate for social returns
per se. Rather it insists on the importance of having a holistic approach to investment by including
ESG factors in the evaluation process of returns and risks insofar as not doing so would eventually
affect the investments’ financial performance.
The example of Norway’s Government Pension Fund Global (GPFG) will be put forward as it
stands out from both the literature and among its peers as the clear leader in terms of responsible
investment practices but other funds will be mentioned and looked into to try and understand the
different factors that may influence a fund to take upon such endeavors and those that might bring it
to refrain from doing so. While the ethical argument for the adoption of a responsible investment
8
What is Responsible Investment?
https://www.unpri.org/about/what-is-responsible-investment
9 See Kempf, A. and Osthoff, P. :“The Effect of Socially Responsible Investing on Portfolio Performance”
https://drupal.financite.be/sites/default/files/references/files/2184.pdf
10 The list of the six principles can be found in annex I
11 About the PRI – Principles for Responsible Investment
https://www.unpri.org/about
12 What is responsible investment?
https://www.unpri.org/about/what-is-responsible-investment
25
strategy for SWFs is rather clear but needs to be restated – considering its liabilities, its lack of
direct and legally binding fiduciary responsibility, its public character etc. – the hypothesis we
depart from is that it is also sound from a financial point of view and that returns over the long-term
could only be improved by integrating ESG criteria into investment choices.
As institutional investors, SWFs evolve in a world that is in constant mutation and where new
challenges come forth every day. They are required, like other institutions and other investors, to
adapt to these changes and to meet these challenges to remain relevant and to insure they are able to
meet the mandates they were set up for. In this light, it is interesting to look into whether SWFs
behave rather as trend-setters in terms of investment practices or whether they follow on the trends
set by other investing vehicles: be them of other public investors (pension funds) or private
investors (hedge funds) as a SWF is considered to be a public institution behaving like a private
entity on the market. It is also relevant to ponder upon the influence that norms-setting international
institutions might have on the behavior of SWFs and to what extent SWFs might act hand in hand
with these institutions and assist them in setting up new principles and standards by which to abide
in terms of responsible investment. We will attempt to fathom where SWFs stand in terms of
putting responsible investment on the agenda of other investors and whether they can act as leaders
in making the financial world more responsible and more acutely aware of the problems that stem
from inconsiderate investment practices be it at the environmental, social or governance level.
Inversely we will look at how other institutions’ or entities’ evolving practices with regards to
responsible investment may infer upon those of SWFs.
Subsequently, in the following chapter, the potential inclination of SWFs towards financing
domestic and foreign development projects will be scrutinized in order to fathom whether they may
or may not play an active role in financing development along with fulfilling their other mandates
(intergenerational redistribution of resources’ revenues – macroeconomic stability and so forth) or
whether these different mandates might clash or supersede/impede one another. In particular, we
will attempt to figure out in which case setting up a SWF may be of help for a country whose
economy is still developing and what are the challenges that may impair the proper functioning of
the said SWF. We will address the optimistic view put forth by Javier Santiso and the sympathetic
critic brought forward by Clark and Monk while taking into consideration the calls of international
institutions (UNCTAD- FAO- UNGA-…) for a greater involvement in financing development on
the part of institutional investors. On the other hand we will try to construe the challenges and
barriers encountered by foreign investors – such as SWFs – when trying to invest in assets based in
developing countries and the financing partnership schemes that may be engineered in order to
overcome these difficulties and find new alleys for financing development.
Both the integration of ESG criteria in the investment choices of SWFs in this chapter and the
latters’ potential participation in financing development at home and abroad in the next, will be
addressed in light of the megatrends put forward by PwC13 that have been at play in the global
economy and that will continue to disrupt and shape the global economic landscape for decades to
come, as they surely influence the investment decisions of all investors, and not least of sovereign
investors among which the SWFs find themselves.
1. The reshaping of the global economic order: the shift of economic power towards the
East/South is crucial for sovereign investors insofar as they must therefore now grant greater
importance to developing markets that tend to be more dynamic all the while offering more
numerous investment opportunities as they often still suffer from a lack of infrastructures
and services. Javier Santiso insists on the necessity to “reload our cognitive maps”14 in the
sense that “not only is the center of gravity of the world shifting but traditional concepts also
13
“Global megatrends”: PwC, http://www.pwc.com/gx/en/issues/megatrends.html
Santiso, Javier: “Sovereign Wealth Funds and the shifting wealth of nations”, in Sovereign Wealth Funds and Long-term investing,
edited by P. Bolton, F. Samama and J. E. Stiglitz, p.127
14
26
need to be reset”15. There is indeed a blatant need to rethink the world in other terms that the
traditional center/periphery and developed/emerging dichotomies as the latter no longer
reflect the current state of affairs. Indeed according to the IMF, while during the 1980s,
emerging and developing economies accounted for around 36 percent of global GDP
(measured in purchasing power parity, or PPP, terms) and some 43 percent of global GDP
growth (with PPP weights), for the 2010-2015 period, the numbers were 56 percent and 79
percent, respectively16. This trend was surely enough accentuated by the financial and
economic crises that have also discouraged many institutional investors to risk investing in
what used to be known as safe securities in developed markets, bringing them to start
considering other alternative assets to diversify their portfolio and alleviate their risk level.
Also worth mentioning is that most SWFs originate from the East and the South as
evidenced by the graph below. This contributes to reinforce their inclination towards
investing their assets in countries that are closer to them. This can be justified by direct
geographical proximity as the latter presents clear advantages in terms of information
networks in the sense that countries have a greater historical knowledge of their neighbors
thus bearing lesser costs in dealing with these markets and optimizing the positive
externalities.
Table 13 - Number of SWFs by region17
2. A demographic shift: the shift in demographics with some countries having to cope with
ageing population and others doted of a large, growing young active workforce will
inevitably draw a line between SWFs and pension funds whose fiduciary responsibility will
become more significant and pressing in the coming years. Unless open migration policies
are enacted to overcome the shortage in workers, pension funds of States with ageing
populations like Canada or Japan will face much heavier pension obligations that may force
them to revise their investment decisions and risk aversions levels. This might sharply
modify the sovereign investing landscape of these institutions, affecting their traditional
long-term span and shifting the priority to investment in more liquid assets (you might want
to back that with a quote).
15
Ibid.
“IMF Survey: The Global Economy in 2016”, http://www.imf.org/external/pubs/ft/survey/so/2016/INT010416A.htm
17 Institutional Investor Profiles, SWFs, Sovereign Wealth Funds Institute,
http://www.swfinstitute.org/sovereign-wealth-fund-profiles/
16
27
Figure 2 - Level of concern about ageing of the population18
Another phenomenon of importance for the sovereign investing landscape in terms of
demographic shifts is the growth of the middle class in the said emerging economies as in
Asia for instance where it now accounts for over 60% of the total population19. This should
contribute to emphasize an already ongoing phenomenon: that of the emerging markets
capturing a growing share of the totality of global foreign direct investments. There is no
reason why SWFs should derogate from the rule and sulk these investment opportunities as
the expansion of the middle class and sustained growth in emerging countries seem to be
trends that will persist over the long-term while the recovery in the so-called advanced
countries is still lagging behind.
3. Accelerating urbanization: the accelerated urbanization of the BRICS countries among
others which has been characterized by the appearance of megalopolis in India or China for
instance will surely call for large infrastructure needs and thus for significantly increased
financing. Needless to say that this rapid urbanization phenomenon will contribute to put the
issues of sustainability and responsible investment even higher on the agenda. Urbanization
is often accompanied by the rise of a middle class that quickly translates into a higher
demand for goods and services along with an overall increase in per capita purchasing
power. As mentioned above, this will surely only reinforce the attraction of foreign
sovereign investors for these new markets. It might also fuel the temptation for developing
countries with resource revenues or exceeding commercial balance to set up a SWF in order
to manage these extra earnings to cope with the infrastructure-financing gap. Indeed, this
last decade has been characterized by a decrease in available funds from international
organizations and developed countries through the traditional aid channels forcing
developing countries to find other sources of financing. Apart from more traditional private
investors, sovereign ones might be the right ones to point at given their long-term
investment span. The phenomenon of rapid urbanization also represents a challenge in terms
of urban-planning. Every year, the world’s urban population grows of an extra 75 million
people: between 2005 and 2015, the urban population swelled by around 750 million people,
four fifth of which in Asia and Africa. Most cities in the developing world are already very
densely populated and there are real and lingering problems regarding urban infrastructures
18
United Nations, World Population Policies Database, https://esa.un.org/PopPolicy/charting/worldmaps.aspx
Santiso, Javier: “Sovereign Wealth Funds and the shifting wealth of nations”, in Sovereign Wealth Funds and Long-term investing,
edited by P. Bolton, F. Samama and J. E. Stiglitz, p.128
19
28
such as roads and public spaces. Indeed cities are expanding without letting the adequate
space for road construction for instance20. The questions raised by this rapid growth should
be addressed by adequate funding but most importantly by sound planning and a securing of
property rights that would entice otherwise reluctant professional developers to step in21.
4. Climate change and resource scarcity: while climate change stands out as one of the biggest
challenges of our times and that it is expected to have dramatic consequences in particular
for populations of the least developed countries, the international community has been
failing to address it with the urgency and commitment necessary. To tackle climate change
requires an effort that involves both mitigation – to avoid the unmanageable – and
adaptation – to manage the unavoidable. So far, the steps taken by the international
community fall short in the face of the gravity of the current situation. Moreover, the issue
of food scarcity and the prediction of a growth in population worldwide are inherently
intertwined with the challenges posed by climate change. These developments have been
inspiring a number of cross-border acquisitions in a move by import-dependent countries to
insure their own food security. Concerns over food security thus drives foreign arable land
acquisitions and investments in agribusinesses abroad (China and the Gulf Cooperation
Council – GCC – countries have already set in motion such investment schemes) in order to
rely ever less on imports and to be less vulnerable to the volatility of prices of food products.
Indeed the 2008 crisis of food prices made those countries that heavily rely on imports to
feed their population realize the extent to which they were exposed to such price surges.
However, it is crucial to look closer at the impact that these investments have had and are
having on the local populations of the countries in which they are made. Indeed, China’s
investments in Africa have been pointed the finger at insofar as some have described them
as plain ‘land-grabbing’. The lack of regulation and the difficulty to gather data due to very
low levels of transparency in the operations of most SWFs make these issues even more
relevant and worth scrutinizing.
5. Technological breakthroughs: some sovereign investors have been sensible to the recent and
upcoming innovations in the field of new technologies and start ups choosing to put
increased focus on venture capital and incipient Internet companies. Southeast Asian funds
for one have been the first to open up offices in San Francisco Bay for instance to locally
monitor their investments in the companies and startups of the Silicon Valley. In June 2016,
the sovereign fund of Saudi Arabia invested $3.5 billion in the capital of Uber, Silicon
valley’s most highly valued private company22. Southeast Asian and Middle Eastern funds
are not the only ones to have started invested in these tech companies as both the Alaskan
and New Zealand funds also came through with investments in digital healthcare and in
clean technology business respectively. Sovereign funds have indeed made investments in
venture capital and start ups for a total of $10 billion through 93 deals, 63% of which during
the year 2014 and 201523. Javier Santiso who had come up with the term Sovereign
Development Funds in a 2008 OECD working paper24 to designate these funds enclined to
invest in development projects both in their home country and abroad, now refers to these
20
In a study on seven African cities (Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos and Luanda), Shlomo Angel of
NYU calculates that only 16% of the land was set aside for roads in the newly residential areas built since 1990. Urban planners
usually recommend reserving twice this figure for road space.
21 “The right kind of sprawl” and “Bourgeois shanty towns”, The Economist, July 2nd 2016
22 “Sovereign wealth funds throw funding lifeline to tech ventures”, E. Auchard and S. Ahzar, Reuters
http://www.reuters.com/article/us-wealthfunds-tech-idUSKCN0YT1OC
23 Data from the Sovereign investment lab presented in the 2015 report of the Sovereign Investment Lab of the Bocconi University:
“The sky did not fall”, in “The rise of sovereign venture funds”, D. Lopez, p65
https://www.unibocconi.eu/wps/wcm/connect/961cda94-6412-4d5b-93e912af00ac8bb9/DEF_report_SIL+2016_low.pdf?MOD=AJPERES
24 Santiso, J. “Sovereign Development funds, Key financial actors of the shifting wealth of nations”
http://www.oecd.org/dev/41944381.pdf
29
funds undertaking such investments in tech firms and start ups, as Sovereign Venture
Funds25.
It comes as quite an intuitive concept that investing in a company not only has an impact on that
business but also on society at large. Suffice it to mention that investing in a company that produces
cluster munitions or anti-personnel mines seriously undermines and infringes upon the principle of
civilians’ protection in armed conflict laid down in international law as it has been repeatedly
proven that these specific weapons were used indiscriminately to harm civilian populations in the
context of war or armed conflicts. Similarly, investments in coal companies or tobacco companies
have harmful consequences respectively on the environment and on public health. The principle of
responsible investment thus stems from the very observation that investment activities are not
innocuous and points out to the necessity – nay, the moral obligation – for investors to seek
investments that provide financial returns but that also entail positive social, environmental and
governance impact or that at least refrain from having deleterious overall societal repercussions.
Furthermore, responsible investments are sound from a financial standpoint if one is to consider
yields over the long-term. Indeed, there is evidence that unsustainable practices inevitable harm the
reputation of a company and may affect its performances over the medium to long term.
Historically, responsible investment has tended to reflect the political and social climate of the
times. The 1960s for instance saw a growing awareness with regards to issues such as social
inequalities, women rights, civil rights more generally and these concerns soon translated into calls
for more socially responsible behaviors on the part of actors across all sectors of society, including
financial investors. The weight and power of investors was fully grasped and appreciated when
public and private investors alike pressured the South-African white minority government in the
1980s into giving up the racist apartheid regime that had been tearing the country apart for decades.
While divestment might not have caused the dismay of the regime, it contributed greatly to isolating
it and making it unsustainable. The use of investment and divestment as means of moral pressure
proved to be an efficient instrument into triggering social and political change and better corporate
governance practices. The climate change crisis has since put the environment at the top of the
agenda of the international community and socially responsible investors have thus followed up on
the necessity to finance forms of sustainable development through what has come to be known as
green investments. Today, socially responsible investors encourage an array of corporate practices
that promote consumer and worker protection, human rights, and environmental stewardship among
other things. As sovereign investors, SWFs have a responsibility as they are managing assets that
are by essence public assets. While they have to fulfill a commitment of yielding financial returns,
they also have to do with a more implicit commitment to respect international legal requirements
and thus find themselves at the heart of a non-negligible dilemma, which is to find the adequate
balance between their financial and ethical commitment. As Anna Gelpern puts it: “How do we
reconcile diverse accountability demands on SWFs when such demands do not necessarily stand in
a hierarchical relationship to one another?”26 According to her, there are four dimensions along
which demands for accountability behoove SWFs: public, private, internal and external although as
she points out “there is no stable ex ante ordering saying which dimension comes out on top.”27 The
challenges that arise from these various layers of accountability translate mostly into ordeals in
terms of governance, transparency and in some ways in the choice of investment strategies and the
type of management of existing investment in equities for instance.
Following the financial and economic crises, the financial world has come under greater scrutiny
and irresponsible behaviors on the part of financial agents were blamed for having led to the
collapse of the financial system. Responsible investment is not merely about being morally and
Santiso, J. Forthcoming, Cambridge University Press, as mentioned in “The rise of sovereign venture funds”, D. Lopez, p63 in the
2015 report of the Sovereign Investment Lab of the Bocconi University: “The sky did not fall”
26 Gelpern, A. “Reconciling sovereignty, accountability and transparency in sovereign wealth funds” in Sovereign Wealth Funds and
long-term investing, edited by Bolton, P., Samama, F. and Stiglitz, J.E. p205
27 Ibid. p206
25
30
ethically righteous, it has also demonstrated to be more sound financially speaking. Indeed,
investing in a company that has a mediocre relationship with its employees or that carries out
operations that negatively impact the environment might prove financially unsustainable over the
medium to long term precisely as a result of these malpractices. The commercial performance of the
firm might eventually be affected by these shortcomings and the result for investors might end up
being nothing short of disappointing. Furthermore, beyond the situation of single firms, it is the
health and the stability of the market as a whole that is at stake and that socially responsible
investors seek to actively preserve.
So, the socially responsible investment strategy that considers successful returns on investment and
responsible corporate behavior as indivisible has inevitably gained momentum and is being adopted
by an increasing number of actors among which some sovereign wealth funds. It makes perfect
sense for sovereign investors to seek both financial returns and positive societal impact, as their
ultimate shareholders could be considered to be the citizens of their countries28 although their
fiduciary responsibility is not as clear-cut and direct as that of pension funds for instance. However
they do belong to states and are associated to governments given their ownership status. As such,
the actions taken up by SWFs and their being associated with firms that have unsustainable
practices might tarnish the reputation of the state in question and stand in contrast with its
international legal obligations. Besides, many SWFs share the common objective of providing for
future generations. This commitment entails a greater sense of responsibility when deciding upon
portfolio strategy and evaluating the various investment opportunities along with taking riskmeasurement seriously. With assets under management of $7 trillion and counting, SWFs have a
say in the corporate practices of the companies they invest in and taking a more active ownership
approach seems evermore necessary and justified. Richardson indeed argues that the next logical
step in the evolution of SWFs would be for them to take it upon themselves to invest in a more
sustainable fashion. He points out in his comparative study of Norway’s GPFG and of the New
Zealand SF that neither of these funds yet manage their portfolio comprehensively to actively
promote sustainable development29. We shall come back to this observation in our analysis of the
GPFG’s practices in terms of responsible investment. Furthermore, as sizeable investors, there is a
reasonable expectation that they could – nay should – set the ethical bar high and inspire best
practices on the part of other investors.
3.2. Norway’s Government Pension Fund Global
Among all SWFs, Norway’s Government Pension Fund Global (GPFG) is often pointed out to as
the most transparent, most ethical and overall most deserving of praise of its peers. Unlike its name
would have ones believe, the GPFG is not a pension fund insofar as it does not have designated
beneficiaries, as it is not ruled by the principle of fiduciary duty and does not have a set time
horizon over which to realize its commitment (Clark and Monk). Its stated objective is to turn
petroleum revenue into financial wealth, aiming for the highest possible returns bearing an
acceptable level of risk. Its commitment to socially responsible investment is both a translation and
a consequence of its obligation and dedication to have its operations subject to both transparency
and accountability. It is accountable to the Norwegian people through the Ministry of Finance and
publishes yearly reports, highlighting its investment strategy and activities. The Ministry of Finance
which is charged with the management of the fund, sets the bar in terms of investment strategy but
also gets involved in ethical matters as it defines the ethical guidelines to be followed. In its task, it
is assisted by two advisory bodies part of the Minister of Finance: the Council of Ethics and the
Strategy Council on Investment. However, operationally, it is the Norges Bank through Norges
Bank Investment Management (NBIM) that manages the GPFG. Considered in general to be both
an ethical and responsible sovereign investor, GPFG has doted itself of various tools to support
28
Lo Turco, Cecilia
Richardson, B.J. “Sovereign Wealth Funds and the Quest for Sustainability: Insights from Norway and New Zealand”, Nordic
Journal of Commercial Law issue 2011#2, p1
29
31
responsible investment practices. It expresses expectations as an investor and exercises active
ownership through voting in companies’ board meetings and by engaging with the board and the
management to encourage socially responsible investments and good corporate governance. It has
also started since 2008 to include particular areas of focus dear to SRI into its investment and risk
monitoring and management processes. In 2008, it chose to focus first on children’ rights to later
come in 2010 to both climate change and water management. These three areas fall under the
broader umbrella of topics inherent to sustainable development as defined by the United Nations in
1987 as “development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.” The GPFG thus sees its involvement in the promotion
of responsible investment as part of an overarching strategy to act for sustainable development. It is
reflective of Norway’s standing in the international community as pointed out by Clark, Dixon and
Monk that see the GPFG as both “an instrument of long-term national welfare and as an expression
of Norway’s commitment to global justice.” They regard the GPFG as “a moralist sovereign wealth
fund.” This characterization is true to the extent that the GPFG uses naming and shaming to deter
other entities from investing in companies that carry out unsustainable practices. But that is not all it
does. Indeed, the GPFG has contributed to improving industry standards by participating to both
institutional discussions on the topic and private companies roundtables. It has also enhanced its
own legitimacy by insisting that its own activities be reported transparently to the public. This has
led the fund to come under great scrutiny when it supposedly had divested from coal producing
companies but then it was made public later that these assets had only been redirected to coal
transforming industry instead. However when confronted with these shortcomings, the GPFG
divested all its assets once and for all from all coal related industries. In 2014 it divested from 49
companies and like every year it published the list of the latters on its website with a joint
justification that mentioned the reason behind the divestment. The same year, it conducted an
analysis of greenhouse gases emissions from the companies in their equity portfolio in order to get
an idea of their portfolio emissions’ intensity. Their contribution to research is part of their
dedication to SRI insofar as it also allows for a better-informed active ownership in the companies
they invest in.
NBIM’s market value as of July 2016 is of $847 billion. With such important assets under
management, the decisions and operations of the fund are scrutinized by other investors and
companies around the world as it clearly has the potential to make or break the places it chooses to
invest or divest from.
3.3.Sustainable investments (New Zeland)
TO BE DEVELOPPED
32
Annex 1 - The six principles for responsible investment
Principle 1
We will incorporate ESG issues into investment analysis and decision-making processes.
Possible actions:
➢ Address ESG issues in investment policy statements.
➢ Support development of ESG-related tools, metrics, and analyses.
➢ Assess the capabilities of internal investment managers to incorporate ESG issues.
➢ Assess the capabilities of external investment managers to incorporate ESG issues.
➢ Ask investment service providers (such as financial analysts, consultants, brokers, research
firms, or rating companies) to integrate ESG factors into evolving research and analysis.
➢ Encourage academic and other research on this theme.
➢ Advocate ESG training for investment professionals.
Principle 2
We will be active owners and incorporate ESG issues into our ownership policies and practices.
Possible actions:
➢ Develop and disclose an active ownership policy consistent with the Principles.
➢ Exercise voting rights or monitor compliance with voting policy (if outsourced).
➢ Develop an engagement capability (either directly or through outsourcing).
➢ Participate in the development of policy, regulation, and standard setting (such as promoting
and protecting shareholder rights).
➢ File shareholder resolutions consistent with long-term ESG considerations.
➢ Engage with companies on ESG issues.
➢ Participate in collaborative engagement initiatives.
➢ Ask investment managers to undertake and report on ESG-related engagement.
Principle 3
We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Possible actions:
➢ Ask for standardised reporting on ESG issues (using tools such as the Global Reporting
Initiative).
➢ Ask for ESG issues to be integrated within annual financial reports.
➢ Ask for information from companies regarding adoption of/adherence to relevant norms,
standards, codes of conduct or international initiatives (such as the UN Global Compact).
➢ Support shareholder initiatives and resolutions promoting ESG disclosure.
Principle 4
We will promote acceptance and implementation of the Principles within the investment industry.
Possible actions:
➢ Include Principles-related requirements in requests for proposals (RFPs).
➢ Align investment mandates, monitoring procedures, performance indicators and incentive
structures accordingly (for example, ensure investment management processes reflect longterm time horizons when appropriate).
➢ Communicate ESG expectations to investment service providers.
➢ Revisit relationships with service providers that fail to meet ESG expectations.
➢ Support the development of tools for benchmarking ESG integration.
➢ Support regulatory or policy developments that enable implementation of the Principles.
Principle 5
We will work together to enhance our effectiveness in implementing the Principles.
33
Possible actions:
➢ Support/participate in networks and information platforms to share tools, pool resources, and
make use of investor reporting as a source of learning.
➢ Collectively address relevant emerging issues.
➢ Develop or support appropriate collaborative initiatives.
Principle 6
We will each report on our activities and progress towards implementing the Principles.
Possible actions:
➢ Disclose how ESG issues are integrated within investment practices.
➢ Disclose active ownership activities (voting, engagement, and/or policy dialogue).
➢ Disclose what is required from service providers in relation to the Principles.
➢ Communicate with beneficiaries about ESG issues and the Principles.
➢ Report on progress and/or achievements relating to the Principles using a comply-or-explain
approach.
➢ Seek to determine the impact of the Principles.
➢ Make use of reporting to raise awareness among a broader group of stakeholders.
34
4.Development Financing
Among the diverse stated or implicit objectives of SWFs, one can find that of fulfilling a
developmental mandate. This mandate can be applied either domestically or through foreign
investments.
In other words, a sovereign fund can make domestic investments that have a dual return structure,
insuring both financial and socio-economic – nay-developmental – returns. It is quite a reach, as
some would argue for as we discussed in the first chapter, some choose to define SWFs as funds
that invest only in foreign assets. But others still do refer to these Sovereign Development Funds
(SDFs) as part of the bigger SWFs’ family.
SDFs as they have been defined30 have been the object of academic and institutional scrutiny
insofar as they represent sizeable pools of capital and that like traditional sovereign wealth funds
they tend to adopt a long-term investment horizon fit to finance development projects. There are a
number of reasons that could be put forward to explain the recent appeal of investing domestically
rather than concentrating on commercial investments abroad. While the latter investments might
have proven more profitable, the recent global crisis has put a toll on the traditional sources of
infrastructure financing in developing countries.
Long term investment are a bet on the synergies between human and institutional capital.
There are various ways in which a sovereign fund can impact domestic development but as it has
been argued and as we will address further, a SDF is not a panacea for all the problems faced by
developing countries in their attempt to foster economic growth and development. For instance, in
resource-rich countries, where financial and macroeconomic equilibrium are threatened by the burst
and booms cycles that derive from the fluctuations of resource prices, it might make much more
sense to set up a sovereign fund with a stabilization mandate rather than a sovereign development
fund as the latter might not have positive externalities in an economy that has not been stabilized
before hand. There is thus a necessity for countries that consider creating a SDF to ponder over
whether it is the right instrument for the challenges the country is facing and in order to solve the
critical issue of timing. According to the IMF, “a development fund can make investments that
support, if implicitly, wider socio-economic projects and industrial development that help raise a
country’s potential output31.” So, according to the IMF, the role of a SDF with a domestic mandate
is to support or boost the country’s productivity by making strategic investments in sectors that may
crave financing and to finance wider projects that contribute to the development of the country from
a socio-economic rather than industrial perspective. In their sympathetic critic of SDFs, Clark and
Dixon describe two sub-types of funds belonging to this categorization.
The first type is almost identical to the definition put forward by the IMF insofar as it takes upon
the role of “supporting productive efficiency through strategic investments and through the
contribution to the development of local financial market capacity.”32
They distinguish this investment vehicle from a second type of SDFs with a slightly different
mandate that focuses rather on enhancing distributive justice. This second type of fund accordingly
chooses to invest in a global portfolio to then redistribute some of the returns through a cash
dividend destined to every citizen – present and future? By doing so, it contributes to boost the
purchasing power of the poorer segments of the population hence positively impacting demand
while reducing socio-economic inequalities.
As mentioned earlier, most SWFs are to be found in emerging/developing countries and the
discrepancy between the amount of reserves accumulated and the living conditions in the SWF’s
sponsor country – be it with regards to infrastructure, telecommunications, health conditions and
Javier Santiso – Clark, Monk
Making the global economy work for all, IMF Annual Report, 2008
http://www.imf.org/external/pubs/ft/ar/2008/eng/pdf/ar08_eng.pdf
32 Clark and Monk
30
31
35
education – has brought some countries to allow and even to encourage their SWFs to invest
domestically. As of 2012, thirteen SWFs had domestic investment mandates, as reported in the
table33 to be found below. It can be observed that eleven out of these thirteen are indeed emerging
or developing countries whose SWFs’ domestic investments aim at supporting sustainable growth
for their countries and provide the population – and future generations – with sustained returns. The
list has since grown and Monk came up with a list of 20 SWFs with domestic investment mandate
in 2013. While these domestic investments could be key in financing development locally, to be
effective the SWFs’ quality of management is paramount as dealing with financial assets is nothing
short of an arduous task and neither is insuring that the outcomes for the country be constructive. To
be sure, sovereign funds that choose to place their investments locally must have in-house talents
that are familiar with the local market and enterprises. SDFs might choose to partner up with
foreign investors on large-scale projects and to do so they must be able to act as a qualified
intermediary between the investors and the local agents. The governance of the fund ought to be
top-notch to encompass the challenges posed by seeking to insure a dual return structure and to be
able to attract foreign investors looking for reputable partners. It should also be able to stand up to
foreign due diligence – that is to prove that it is in fact able to deliver upon what it promises to
achieve. Moreover, the governance of the fund should be as detached as possible from the political
play as it shall not be dependent upon the electoral cycles – for the sake of insuring viable long-term
investments and projects – and should avoid to fall prey to malpractices – among which corruption
– that are common in many developing countries.
Alan Gelb, S. Tordo, H. Halland, N. Arfaa and G. Smith, “Sovereign Wealth Funds and long term development finance: risks and
opportunities”, February 1st 2014, Policy Research Working Paper, The World Bank
33
36
Table 14 - SWFs domestic investment mandates
Moreover the state of governance in some developing countries might make it difficult for even an
internally well-managed fund to have concrete positive fallouts on the real economy. Indeed, a SDF
while it offers some hope and real opportunities can substitute neither a well-functioning
government with sound monetary and fiscal policies nor the application of the rule of law. The
example of the Nigeria Excess Crude Account (ECA) that was set up in 2003 by the government of
37
then President Olusegun Obasanjo is telling although it was not clearly designed as a SWF. While
the fund started off well as the rise of oil prices allowed it to set aside a considerable amount of
money (20 billion dollars), it soon became clear that the ECA would not fulfill quite what it had
been set out for. Indeed as reported by Dixon and Monk, over a relatively short period of time,
government and state officials withdrew 17 billion dollars from the fund: “withdrawals that did
nothing to improve the quality and quantity of infrastructure even though a majority of the outflows
were designated for this purpose34.” The failure of the ECA shows how important it is for a fund to
be able to function aside from the political play lest it performances may be hindered by corruption,
and malpractices of all kinds.
4.1. Financing domestic development projects (Brasil)
4.2. Financing foreign development projects (China, Dubay, Quatar)
4.3. Elements for discussion
Adam Dixon and Ashby H. B. Monk, “What role for Sovereign Wealth Funds in Africa’s development?”, Oil-to-Cash Initiative
background paper, Center for Global Development, October 2011
34
38
39
Bibliography
Adrian Blundell-Wignall and Patrick Slovik: A Market Perspective on the European Sovereign
Debt and Banking Crisis; OECD Journal: Financial Market Trends 2011
IMF Staff Report, Euro Area Policies: 2011 Notice on the Executive Board Discussion; and
Statement by the Executive Director for Member Countries
Karl Whelan, Bank and Sovereign Debt Resolution: ‘Never Again’ Meets ‘Not Yet’; Directorate
General For Internal Policies Policy Department A: Economic And Scientific Policies Economic
And Monetary Affairs, Draft pre-published 2010
Michael G. Arghyrou and Alexandros Kontonika, The EMU sovereign-debt crisis: Fundamentals,
expectations and contagion; Economic Papers n. 436, Directorate-General for Economic and
Financial Affairs, European Commission 2011
Michael G. Arghyrou and Alexandros Kontonikas: The EMU sovereign-debt crisis: Fundamentals,
expectations and contagion, 2011
Norbert Metiu, The EMU in debt distress: Contagion in sovereign bond markets, 2011
Reinhart, Carmen and Kenneth Rogoff, “Growth in a time of debt”, American Economic
Association, Papers and Proceedings, 2009
S. Valentina Lizarazo, Contagion of Financial Crises in Sovereign Debt Markets, 2005
Willem Buiter: Global Economics View, Sovereign Debt Problems in Advanced Industrial
Countries; Citigroup Global Markets 2010
Dembinski P., 40 ans de la price de pouvoir des marchés sur l’economie mondiale, Le Temps, 15
aout 2011
Feldestein N., Il default greco e I due anni di speranza, Il Sole 24 Ore, 29 settembre 2011
Nerenberg A., Our world is now ruled by finance, The Gazete, Montreal, October 7th 2011
Parkinson D., Four tales from a troubled quarter, The Globe and Mail, Montreal October 1st 2011
Rinke A. and Melander I., Merkel walks fine line in bid to aid Greece: Eurozone rescue fund,
National Post, Montreal September 28th 2011
Sargent Thomas J. and Evans David, History of dependent public policies, 2011
Sims Christopher A., Communicating about uncertainty of policy projections, workshop-talk
presented at meetings of the Society for Economic Dynamics and Control in Prague, June 2007
Baharumshah A.Z., Thanoon M., (2006) “Foreign capital flows and economic growth in East Asian
countries” in China Economic Review, vol. 17, pp. 70– 83.
Barba Navaretti G., J.Venables A., (2006) Le multinazionali nell’economia mondiale, Il Mulino,
Bologna.
Basu P., Guariglia A. , (2007) “Foreign Direct Investment, inequality, and growth” in Journal of
Macroeconomics.
Becattini G., Rullani E. , (1993) “Sistema locale e mercato globale” in Economia e Politica, n. 80,
pp. 25-48.
Becattini G. (1993), Sistema locale e mercato globale, in Fuà G., Zacchia C. (a cura di),
Industrializzazione senza fratture, Il Mulino, Bologna.
40
Brainard S.L., (1997) “An empirical assessment of the proximity-concentration trade-off between
multinational sales and trade” in American Economic Review, vol. 87, pp. 520-544
Chakrabarti A., (2003) “A theory of the spatial distribution of foreign direct investment” in
International Review of Economics and Finance, pp. 149 – 169
Deutsche Bank, “Sovereign Wealth Funds, State investment on the rise”, Deutsche Bank Research ,
September 10th 2007
Doh J., Ramamurtia R., (2004) “Rethinking foreign infrastructure investment in developing
countries” in Journal of World Business, pp. 151 – 167
Eggera P., Winnerb H., (2005) “Evidence on corruption as an incentive for foreign direct
investment” in European Journal of Political Economy, pp. 932 – 952
Eichengreen B., Tong H., (2007) “Is China’s FDI coming at the expense of other countries?” in
Journal of Japanese International Economies, pp. 153 – 172
Fernandez-Ariasa E., Hausmannb R., (2001) “Is foreign direct investment a safer form of
financing?” in Emerging Markets Review, pp. 34 – 49
IMF, Sovereign Wealth Funds—A Work Agenda, prepared by the Monetary and Capital Markets
and Policy Development and Review Departments in collaboration with other departments,
approved by Mark Allen and Jaime Caruana, February 29th, 2008
JP Morgan, Sovereign Wealth Funds: A Bottom-up Primer, May 22nd 2008
Global Economics (2007), October 5th
Goldstein I., Razin A., (2006) “An information-based trade off between foreign direct investment
and foreign portfolio investment” in Journal of International Economics, vol. 70, pp. 271–295.
Grogan L., Moers L., (2001) “Growth empirics with institutional measures for transition countries”
in Economic Systems, pp. 323 – 344
IL SOLE 24 ORE, (2007) articoli vari (Bortolotti, Cristalli, Debenedetti, Garten, Merli, Pasca di
Magliano, Riveda, Summers)
ISIAE (2007), Rapporto sui Fondi di Ricchezza Sovrana, Roma
Higino Schneider P., (2005) “International trade, economic growth and intellectual property rights:
A panel data study of developed and developing countries” in Journal of Development Economics,
pp. 529 – 540
Hines J.R., (1999) “Lessons from behavioural responses to international taxation” in National Tax
Journal, vol. 52, pp. 305-322
Hooper V., Kim S.J., (2007) “The determinants of capital inflows: Does opacity of recipient
country explain the flows?” in Economic Systems, vol. 31, pp. 35–48.
Jen S., (2007) “Russia the Newest Member of the “SWF club”, Morgan Stanley Research Global.
Jenkins R., Edwards C., (2006) “The economic impacts of China and India on sub-Saharan Africa:
Trends and prospects” in Journal of Asian Economics, vol. 17, pp. 207–225.
Li X., Liu X., (2005) “Foreign Direct Investment and Economic Growth: An Increasingly
Endogenous Relationship” in World Development, pp. 393 – 407
Markusen J.R., Maskus K., (2001) “Discriminating among alternative theories of the multinational
enterprise” in Review of International Economics, vol. 10, pp. 694-707
41
Merril Lynch (2007), The overflowing bathtub, the running tap and SWFs
Noy I., Vu T., (2007) “Capital account liberalization and foreign direct investment” in North
American Journal of Economics and Finance
Russ K.N., (2007) “The endogeneity of the exchange rate as a determinant of FDI: A model of entry
and multinational firms” in Journal of International Economics, vol. 71, pp. 344–372.
The Economist (2008), “The Invasion of the Sovereign wealth-funds”, January
Truman E.M., (2007) “SWF: the need for greater transparency and accountability”, Peterson
Institute for International Economics Policy Brief.
Stephen J,. Morgan Stanley, (2007) “How big could Sovereign Wealth Funds be by 2015?”, 4 May
UNCTAD, (2006) WIR 2006 FDI From Developing And Transition Economies: Implication For
Development, United Nations, New York and Geneva
UNCTAD, (2007) WIR 2007 Transnational Corporations, Extractive Industries And Development,
United Nations, New York and Geneva
Yeaple S., (2003) “The role of skill endowments in the structure of Us outward foreign
investments” in Review of Economics and Statistics, vol. 85, pp. 726-734
42
Annex 1 - Swf operating on the international capital market
Rank
Country
1
Funds
Assets (US$Billion)
Origin
CIC / SAFE / NCSSF / CADF
1,461.7
Non-commodity
ADIA / ADIC / EIA / ICD / IPIC / MDC / RIA
1,246.8
Oil
GPF
847.6[2][3]
Oil
758.4
Oil
592
Oil
China
2
United
Arab Emirates
3
Norway
4
PIF / SAMA
Saudi
Arabia
5
Kuwait
6
KIA
GIC / TH
537.6
Non-commodity
HKMA
442.4
Non-commodity
Singapore
7
Hong
Kong
8
Qatar
9
QIA
256
Oil
SKJSC / KNF / NIC
164.1
Oil
RNWF / RRF / RDIF
152.2
Oil
Kazakhstan
10
Russia
11
United
APF / NMSIC / PWMTF / PSF / PUF / ATF / NDLF / LEQTF /CSF / WVFF
142.4**
States
12
Oil & Gas / Non-commodity /
Minerals / Public Lands
AFF / WAFF
95.3
Non-commodity
KIC
91.8
Non-commodity
LIA
66
Oil
NDFI
62
Oil
RRF
50
Oil
BIA
40
Oil
OIF / SGRF
40
Gas / Oil
Australia
13
South
Korea
14
Libya
15
Iran
16
Algeria
17
Brunei
17
Oman
18
SOFAZ
37.3
Oil
KN
34.9
Non-commodity
SIF
25.5
Non-commodity
NPRF
23.5
Non-commodity
SESF / PRF
23.1
Copper/ Non-commodity
NZSF
20.2
Non-commodity
AHSTF
17.5
Oil / Non-commodity
TLPF
16.9
Gas / Oil
Azerbaijan
19
Malaysia
20
France
21
Ireland
22
Chile
23
New
Zealand
24
Canada
25
East
Timor
26
Finland
27
Solidium
11.5***
Non-commodity
MHC
11.1
Oil
FSF (or FEF)
9.2
Non-commodity
Bahrain
28
Peru
29
Mexico
29
ORSFM
6
Oil
ISF
6
Non-commodity
PF
5.7
Diamonds / Minerals
[1]
5.5
Oil
SFB
5.3
Non-commodity
Italy
30
Botswana
31
Trinidad and
Tobago
32
Brazil
43
Rank
Country
33
Funds
FSDEA
Assets (US$Billion)
5
Origin
Oil
Angola
34
Nigeria
35
NSIA / BDIC
2.9
Oil / Non-commodity
FAP
1.2
Non-commodity
FINPRO
1.2
Non-commodity
1
Non-commodity
Panama
35
Bolivia
36
SSIF - FONSIS
Senegal
37
DFI
0.9
Oil
PIF
0.8
Non-commodity
FEM
0.8
Oil
RERF
0.6
Phosphates
SCIC
0.5
Non-commodity
GPF
0.45
Oil
GSWF
0.4
Oil
GIU
0.3
Non-commodity
NFHR
0.3
Gas / Oil
FSF
0.3
Mining
FFG
0.08
Oil
Iraq
38
Palestine
38
Venezuela
39
Kiribati
40
Vietnam
41
Ghana
42
Gabon
43
Indonesia
43
Mauritania
43
Mongolia
44
Equatorial
Guinea
TOTAL
7.297,93
** The Oregon Common School Fund (CSF} is not in the Sovereign Wealth Fund Institute's list. However, it has been added here.
*** Solidium is not in the Sovereign Wealth Fund Institute's list. However, it has been added here.
44
Annex 2 – Top operating SWFs
n°
Country
Fund
Billion $
Date of
creation
Source
1
Norway
Government Pension Fund – Global
$838
1990
Oil
2
UAE – Abu Dhabi
Abu Dhabi Investment Authority
$773
1976
Oil
3
Saudi Arabia
SAMA Foreign Holdings
$675.9
n/a
Oil
4
China
China Investment Corporation
$575.2
2007
Non-Commodity
5
China
SAFE Investment Company
$567.9
1997
Non-Commodity
6
Kuwait
Kuwait Investment Authority
$410
1953
Oil
7
China – Hong Kong
Hong Kong Monetary Authority Investment
Portfolio
$326.7
1993
Non-Commodity
8
Singapore
Government of Singapore Investment Corporation
$320
1981
Non-Commodity
9
Singapore
Temasek Holdings
$173.5
1974
Non-Commodity
10
Qatar
Qatar Investment Authority
$170
2005
Oil & Gas
11
China
National Social Security Fund
$160.6
2000
Non-Commodity
12
Australia
Australian Future Fund
$88.7
2006
Non-Commodity
13
Russia
National Welfare Fund
$88
2008
Oil
14
Russia
Reserve Fund
$86.4
2008
Oil
15
Kazakhstan
Samruk-Kazyna JSC
$77.5
2008
Non-Commodity
16
Algeria
Revenue Regulation Fund
$77.2
2000
Oil & Gas
17
South Korea
Korea Investment Corporation
$72
2005
Non-Commodity
18
UAE – Dubai
Investment Corporation of Dubai
$70
2006
Oil
19
Kazakhstan
Kazakhstan National Fund
$68.9
2000
Oil
20
Libya
Libyan Investment Authority
$66
2006
Oil
21
UAE – Abu Dhabi
International Petroleum Investment Company
$65.3
1984
Oil
22
Iran
National Development Fund of Iran
$58.6
2011
Oil & Gas
23
UAE – Abu Dhabi
Mubadala Development Company
$55.5
2002
Oil
24
US – Alaska
Alaska Permanent Fund
$49.5
1976
Oil
25
Malaysia
Khazanah Nasional
$40.5
1993
Non-Commodity
26
Brunei
Brunei Investment Agency
$40
1983
Oil
27
Azerbaijan
State Oil Fund
$34.1
1999
Oil
28
US – Texas
Texas Permanent School Fund
$30.3
1854
Oil & Other
29
France
Strategic Investment Fund
$25.5
2008
Non-Commodity
30
New Zealand
New Zealand Superannuation Fund
$20.3
2003
Non-Commodity
31
Kazakhstan
National Investment Corporation
$20
2012
Oil
Source: Sovereign Wealth Funds Institute (March 2014)
45