Van der Zee: In between two societal actors – The responsibilities of sovereign wealth funds towards human rights and climate change

Abstract:

Sovereign wealth funds (SWFs) are long-time investment funds, owned by the government. They are able to exert influence on the behaviour of corporations through their investment policy. Due to the expanding number of SWFs, host states became concerned that investments by SWFs could be politically motivated. To ensure host states that an SWF has no political motivations, but merely seeks profit, the Santiago Principles were established. However, in a time where private actors are pressed to focus more on social values and becoming ‘socially responsible’, it seems strange that SWFs are pressed into a model of private behaviour with the objective of only maximizing financial and economic values and merely seeking profit. This paper explores the scope of responsibilities of SWFs towards social responsible investment (SRI). The paper provides a definition of SWFs, and examines the concept of socially responsible investment, the concept of fiduciary duty, and the concept of due diligence. Part of the study comprises an evaluation of 38 investment funds, which all qualify as an SWF as per the author’s definition of SWFs. Through desk research, the legal basis, governance structure and objectives of each of the SWFs were examined. Moreover, it was found that one quarter of the examined SWFs has adopted private regulatory regimes towards SRI. It is concluded that SWFs, due to their link to the state, are in a preferable position to become leaders in the sustainable investment field.

Available for download here.

Santiso, Capapé and Guerrero: Sovereign Wealth Funds – A Growing Financial Firepower

From the chapter:

In his 2011 book How to Run the World, global strategist Parag Khanna looks at the state of the global economy and international relations, describing the “Next Renaissance” as “a future of mixed economies, and the blurring of the line between all things public and private.” Whereas Adam Smith’s The Wealth of Nations revolutionized economic thought and introduced notions on limited government intervention in the economy, context and interest have since proven to be better determinants of government intervention than theory. While working for State Street, Andrew Rozanov was the first to coin in
his 2005 article “Who Holds the Wealth of Nations”) the term “sovereign wealth fund” (hereinafter, SWF), seeking to differentiate and delineate a new breed of state-owned funds from traditional central bank reserves in foreign currency. The state is back in the economic arena – and stronger than ever.

Swiss central banker Philipp Hildebrand argues that the French Caisse des Dépots et Consignations (founded in 1816), an independent investment vehicle designed to manage government savings and pensions, was the first actual sovereign wealth fund. General consensus, however, places the Kuwait Investment Authority (founded in 1953) as the first of the more modern and active kind of SWFs. What, then, is a sovereign wealth fund? Research interest in the field is less than a decade old, and due to their pragmatic or even customized nature, no two sovereign wealth funds are the same. Nevertheless, a list of common characteristics can be observed.

Available for download here.

Csoma: Appreciation of the Role of Sovereign Wealth Funds in the Global Economy

Abstract:

This article is intended to explore the reasons behind the accumulation of massive foreign currency assets in oil exporting and large manufacturing economies in the 2000s, and to explain how the affected countries adjusted their investment policies after the 2008 crisis in respect of their reserves. Based on the statistics and analyses available, the article demonstrates how it was inevitable in these countries to dedicate a substantial portion of the claims – in excess of the optimum central bank reserves – to set up large public funds (“sovereign wealth funds”), and to invest a part of the assets in those funds abroad. This proved to be a wise solution particularly in China, where fiscal reasons render the economy prone to overheating in any case, and the unrestricted exchange of export receivables to the domestic currency would make the money supply balloon, leading to high inflation. Although low-risk but also low-return money market investments had dominated sovereign wealth funds for a long period of time, the countries concerned have changed their investment policies since the crisis, gradually shifting their focus to capital market options promising higher returns. Owing to the tightening of regulations in the wake of the crisis, banks’ previous role in project finance was called into question, especially in the case of infrastructure project financing, which is associated with a long-term return on investment. This provided an additional investment opportunity for the funds. At the same time, through the investment activity of funds, a peculiar nationalisation process is at work in the global economy, allowing funds owned by foreign governments to interfere with the strategic decisions of private corporations.

Research Handbook on Sovereign Wealth Funds – Now Available

From the publisher:

Research on the role of sovereign investments in a time of crisis is still unsatisfactory. This Research Handbook illustrates the state of the art of the legal investigation on sovereign investments, filling necessary gaps in previous research. Current focus is based on investment flows and trends, grounded in economic scenarios and objectives. Conversely, investigations from a legal standpoint are still few, namely disregarding the host states’ concerns about sovereign investments goals and tools. Hence, most of the many relevant drivers that affect current sovereign investments, be they FDI or portfolio investments, remain unexplained. This book investigates the juridical foundation of sovereign investments and extends our frontier of understanding.

Contributions by G. Adinolfi, F. Bassan, M. Castelli, L. Catà Backer, A. De Luca, S. Ghahramani, K. Gordon, L. Hsu, A.Lee, F. Munari, J. Pohl, B.J. Richardson, P. Rose, F. Scacciavillani, M. Vellano, A. Viterbo, T. Weiler and
E. Whitsitt.

More information here.

1MDB and the Importance of Sovereign Fund Governance

The following post comes from Sheri Kindel:

Since 2009, debts created by a state investment fund in Malaysia, called 1MDB, have created controversy and recent calls for Malaysia’s Prime Minister, Najib Razak, to step down. The funds were allegedly used to bankroll the prime minister’s 13th general election campaign in 2013 by making overpriced purchases from a subsidiary of Genting Group. According to the Wall Street Journal, Genting then made a donation to a charity foundation called Yayasan Rakyat 1Malaysia (YR1M). During his campaign, the prime minister announced that YR1M would donate a large sum of money to local schools which were not in a poor neighborhood but whose support would be crucial to win votes in the area.

Meanwhile, Jho Low, 33, who has been friends with the prime minister’s stepson for 16 years and persuaded Najib to set up 1MDB, has also recently been getting a lot of attention. Low became friends with Riza Aziz, the prime minister’s stepson, while studying in London and grew close to Aziz’s mother, Rosmah Mansor. Najib became chairman of the board of advisers of 1MDB, a close friend of Low’s father became a director, and two of Low’s friends became staff members.

Since then, Low bought multi-million dollar properties in the U.S. on behalf of Aziz, who is now a film producer. However, Low denies any real estate transactions for the prime minister’s family, adding he never “engaged in any wrongful conduct regarding any financial matters for the prime minister and his family.” The sale of an apartment in New York involved shell companies connected to Low and Aziz to keep the transactions at arm’s length. Reports of the purchase identified two residents of Switzerland as the property owners, but these names were traced back to a shell company owned by Low. He later declared and is still adamant that the property was bought by a trust benefiting his family, but someone involved with the purchase recalled Low saying that he was buying for a group of investors with the main investor being the family of Najib. After three years, the apartment was sold to Aziz’s shell company for cash at a value nearly 40% greater than Low’s purchase price. This wasn’t the only property deal between the two. In Beverly Hills, Low bought a mansion for $17.5M and similarly turned around and sold it to Aziz.

Irwin Winkler, an executive producer of “The Wolf of Wall Street” described Low as the face of the financing for Red Granite Pictures, a Los Angeles based film production, finance, and international sales company. Aziz publicly announced the principal financer for Red Granite was Mohamed Admed Badawy al-Husseiny, chief executive of an Abu Dhabi government-owned company, Aabar Investments. Aziz denied the use of Malaysian money in Red Granite films, and Husseiny claims his investment was “personal money.”

Low claims that Najib is the final authority to approve or deny any 1MDB deal, transaction, and investment. Even though Low has no official role or title in 1MDB, multiple employees stated that he is regularly consulted for decisions. When asked about his involvement, Low admitted that he occasionally provided his views on various matters, but has never received compensation. Numerous documents have since emerged that tie Low to dealings with 1MDB, including a statement that finances on a deal would come from the Malysian government investment funds.

When asked about Najib, 1MDB, and the major purchases, Low declared that he is simply getting attention for being a young kid who made a lot of money and spent it partying. Najib made a public statement that Low “has never worked for 1MDB and all decisions and dealings of 1MDB was done by the management and board of directors.” Despite their declarations, there are documents establishing Low’s involvement in the prime minister’s affairs, including a joint venture project. A $700M “loan repayment” program was set up for 1MDB to pay back money loaned as part of a joint venture agreement with PetroSaudi. The money that supposedly repaid the loan was actually directed into a Swiss bank account controlled by Low. Soon after, that money was used to buy out Taib Mahmud’s UBG bank in Sarawak that failed to be sold on the open market. In 2011, 1MDB publicly pulled out of the PetroSaudi joint venture and the fund now claims the money was returned to 1MDB.

Until now, Low described himself as a friend of people with money coming from a “fairly OK family.” As the media began asking questions, Low recounted he was born with it himself. In an interview with the Wall Street Journal, Low reported that his grandfather made a fortune in mining and liquor investments in Thailand, but this wealth does not explain the vast amounts of resources spent so quickly and the power accumulated at such a young age.

1MDB’s information technology department is currently wiping clean all employees’ computers and smartphones hard drives. The company claims they are preventing the loss of information through any system breach, but skeptics claim they are dumping company records before lawyers can get their hands on them.

These events demonstrate the need for good governance controls with sovereign wealth funds and sovereign development funds. Since many funds experience a substantial amount of movement of large sums, the money must be closely monitored with purchases detailed to the board for tracking and security measures. By not tracking the money or by approving deals prematurely, cash can be spent before fund members even realize it was taken out. The trail would stop there. However, with stronger internal regulation of sovereign funds or a system of approving spending and maintaining records, individuals would be less likely to spend public money on private matters. In this case specifically, 1MDB should follow Low’s investments directly to determine where money is coming from and going to. Additionally, the fund could implement a strategy for multiple board members to sign off on deals and rotate through the members so it doesn’t seem like foul play with the same individuals working together. Low has recently acknowledged that he can no longer remain silent as to his involvement with 1MDB. With all the current news reports, Low must answer the questions he has been avoiding.

Monk, Kearney, Seiger & Donnelly: Energizing the US Resource Innovation Ecosystem

From the Executive Summary:

By 2050, the world population is forecasted to reach 10 billion people, and consumption of natural resources is expected to increase four-fold above current rates. Radical resource innovation – across energy, agriculture, water, and waste – is required to prepare the world for this future. Without it, we risk irreversible climate change, military conflict over resource access, and deepening inequity in the developing world.

Paradoxically, there are no shortages of breakthrough technologies being developed in universities, national labs, and garages that could be as transformative today as the steam turbine in the 19th century or the solar cell in the 20th.  What there is a shortage of, however, is patient, early-stage capital to support the transformation of these projects into lasting, profitable companies. Even growth-stage companies in this space sometimes lack access to project capital to execute first-of-a-kind demonstrations and deployments, and to achieve price competitiveness at commercial scale. In short, preventing a climate catastrophe demands that we create a new investment toolkit that can help bridge the “valleys of death” faced by these companies.

We thus believe that the resource innovation ecosystem could benefit from the creation of a new aligned intermediary (“AI”). The AI, detailed below, is designed to be a uniquely aligned financial services organization whose mission would be to specifically help Long-Term Investors (“LTIs”) – such as pensions, endowments, sovereign funds, family offices, and foundations – identify, screen, assess, and invest in high-potential companies that are producing the most impactful, and indeed profitable, solutions to climate change.

Available for download here.

Grigoryan: The ruling bargain: sovereign wealth funds in elite-dominated societies

Abstract:

This paper generate new results on the creation and use of sovereign wealth funds (SWF) as tools for maximizing political power of the ruling class. It models a ruler’s decision to set up a SWF in a society dominated by a powerful elite in order to pacify the elite’s political ambitions by transferring resource rents. Furthermore, it shows under which circumstances the ruler is able to gain the elite’s support using a fund and to overcome the danger of coups d’état. SWFs can serve as appropriate instruments for this purpose because they are long-term oriented and strongly institutionalized.

Available for download here.

 

A Primer on Norway’s Divestment from Coal

The following post comes from Sheri Kindel:

Norway’s recent decision to sell off coal investments from the world’s largest sovereign wealth fund is the biggest divestment from coal in history. Due to its size, this decision will likely cause other investors and governments to follow.

The Norwegian fund, called the Government Pension Fund Global (GPFG), was built on wealth from oil and gas reserves off the nation’s coast and served as a buffer for when its offshore wells ran dry. Many people, inside and outside the fund, refer to it as the “oil fund.”

On May 27, 2015, Norwegian politicians received 44,000 petition signatures for the GPFG to divest from fossil fuels. After parliament also issued a unanimous recommendation to divest on the same day, it wasn’t long before the fund announced its plan.

On June 5, 2015, Norway’s parliament endorsed the divestment from its $900bn sovereign wealth fund, affecting 122 companies across the world. Major U.S. utilities to be affected by this decision include American Electric Power Company Inc., Dominion Resources Inc., Duke Energy Corp., MidAmerican Energy Co., NRG Energy Inc., PLL Corp., Southern Co. and Xcel Energy Inc. According to a spokeswoman, the reasons for divesting include “long-established climate-change risk-management expectations.” While a climate-related investment strategy evolved in 2010, Norway recently joined a growing list of organizations that have pledged to give up some of their fossil fuel investments, including many cities, universities, and religious institutions.

The fund sets an example for others in shifting from polluting energy sources towards clean, renewable power. It will eliminate companies from its portfolio if more than 30% of their revenue-generating business activity involves coal, totaling $8.7bn of the fund’s current investments and 1.2% of the fund’s investment portfolio. The percentage is based either on the company’s activity or on the revenue that comes from coal, including mining companies and power companies that burn coal respectively. Therefore, this new plan will mostly impact mining and utilities.

Nonetheless, according to the head of Greenpeace Norway, Truls Gulowsen, “Norway is also still engaged in Arctic oil drilling, so while this is great news, there is still lots of work to do for Norway before it can brand itself as truly climate friendly.” For the United States as a whole, Global Climate Convergence recommended the transition away from unabated coal to be complete in 2030.

The new guidelines for the GPFG will take effect by January 1, 2016 and are a critical first step away from fossil fuels. At this time, the fund will begin divesting in its portfolio according to the percentage standard set out above. To achieve full divestment, Greenpeace, World Wildlife Fund, Future in Our Hands, 350.org, and Urgewald claim they will campaign for the GPFG to invest at least 5% of its value in renewable energy sources, specifically in emerging economies. In a joint statement, they asserted, “For Norway itself, our goal is a just transition out of oil and gas and into the green jobs of the future. We are rapidly approaching the time when no country can rely on fossil fuels for its economy or energy safety.”

Bertoni & Lugo: The Effect of Sovereign Wealth Funds on the Credit Risk of Their Portfolio Companies

Abstract:

We study how sovereign wealth fund (SWF) investments affect the credit risk of target companies as measured by the change in their credit default swap (CDS) spreads around the investment announcement. Our analysis is based on a sample of 391 SWF investments in 198 companies between 2003 and 2010. Our results indicate that the CDS spread of target companies decreases, on average, following an SWF investment. The reduction in the CDS spread is higher when the SWF is established by a politically stable non-democratic country that has a neutral political relationship with the host country of the target company. The results are robust to different definitions of the dependent variable in terms of event window, CDS maturity and calculation of the benchmark CDS spread. Our results suggest that creditors expect SWFs to protect target companies from bankruptcy when it is in the interest of their home country to build political goodwill in the host country of the company.
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Available for download here.