SWF Radar NonFinancialInvestmentCriteria

Alessandro Bruno, a research analyst at Innovest Strategic Value Advisors, writes for Middle East Online that, “True ‘sustainable’ investment has at least three dimensions: economic, environmental, and social. With the conspicuous exception of Norway's Government Pension Fund - Global, Sovereign Wealth Funds (SWFs) have paid relatively little attention to the latter two dimensions. We believe that the embrace of Sustainable Investment (SI) approaches by the SWFs, particularly those in the Persian Gulf region, could pay important economic, social, environmental and even political dividends.”

To be fair, some of them haven’t been paying too much attention to the first dimension either this past year.

Thomson Reuters reports that, “Norway should earmark some of its $295 billion oil fund [the Government Pension Fund–Global] for long-term investments in environmental stocks, Environment Minister Erik Solheim said on Thursday.”

planadviser reports that, “The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) said in a news release that its guidance asserts that plan fiduciaries may never increase expenses, sacrifice investment returns, or reduce the security of plan benefits to promote legislative, regulatory, or public policy goals with no connection to the payment of benefits or plan administrative expenses. ‘Fiduciary consideration of non-economic factors should be rare and, when considered, must comply with ERISA’s [Employee Retirement Income Security Act’s] rigorous fiduciary standards,’ EBSA officials said in the announcement.”

GAPP 19 states that investment decisions by SWFs should be based on economic and financial grounds:

GAPP 19. Principle

The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

And Subprinciple 19.2 states that SWFs should follow standard asset management principles:

GAPP 19.2 Subprinciple The management of an SWF's assets should be consistent with what is generally accepted as sound asset management principles.

Subprinciple 19.1, however, makes it clear that the “based on economic and financial grounds” does not mean “exclusively based on economic and financial grounds”:

GAPP 19.1 Subprinciple If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

This certainly leaves the door open for some use of non-financial investment criteria – no doubt so as not to rule out the kind of SRI of which Norway’s Government Pension Fund–Global is very keen. But the demand for transparency and the demand that all investments must be based [also] on financial criteria makes it unlikely that an SWF could adhere to GAPP, make a substantial politically-influenced investment (other than for relatively benign social or environmental reasons), and still fail to provoke an outcry.

(Update a couple of minutes after initial post: The full report makes clear that this is indeed targeted at SRI-type investments (page 22 of the report, 29 of the PDF): “Some SWFs may exclude certain investments for various reasons, including legally binding international sanctions and social, ethical, or religious reasons (e.g., Kuwait, New Zealand, and Norway). More broadly, some SWFs may address social, environmental, or other factors in their investment policy. If so, these reasons and factors should be publicly disclosed.”)

Meanwhile, GAPP 20 states that SWFs must keep their distance from their respective governments:

GAPP 20. Principle

The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

And other protections against the kind of political investing that many lawmakers and commentators fear from SWFs are contained in GAPP 21, which rules out any kind of value-eroding shareholder activism on the part of an SWF:

GAPP 21. Principle

SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

The Financial Times writes (reporting the findings of a report for Noway’s SWF by the SRI-consultancy Innovest) that, “Sovereign wealth funds lag significantly behind the leaders in the field of socially responsible investing, missing a chance to enhance returns as well as help mitigate climate change.”

I don’t understand why SRI is so often accepted as being something that will increase returns. Are fund managers actively screening-out ethically sound investment opportunities? Are they actively screening-in financially unsound yet immoral ones?

The article adds (paraphrasing the report) that, “Since the Norwegian government has announced its intentions to set an example in international climate change efforts, this would be in line with government policy.”

Climate change isn’t the kind of hot-button political issue that helped drive anti-SWF sentiment earlier this year. But it does seem strange that the report’s authors could have thought, given the furore, that aligning its investment policies with its respective government’s political policies is something that should be welcomed in an SWF.

Financial News reports (subscription required) that, “Two of Sweden’s four state pension funds could divest as much as Skr500m (€52m) from companies involved in the marketing of cluster bombs, becoming the latest retirement schemes to withdraw from investments that breach their ethical policies.”

UPDATE (Sept. 16, 2008): The Local has the full story without the paywall.

The Financial Times writes that, “For critics of governments that throw their financial weight around to achieve political ends, the revelation of the activities of China's State Administration of Foreign Exchange (Safe) will be yet more cause for alarm. Even more disturbing is that such activities will be left untouched by an international drive towards transparency and accountability of sovereign investors [the IMF’s International Working Group of Sovereign Wealth Fund’s (IWG) proposed Generally Accepted Principles and Practices (GAPP)] that has been making some progress.”

The Financial Times reports that, “The secretive government agency that supervises China's foreign exchange reserves [the State Administration of Foreign Exchange (SAFE)] used its funds to help convince Costa Rica to sever ties with Taiwan and establish relations with Beijing last year, according to documents obtained by the Financial Times.”

The Financial Times has published a backgrounder with commentary on China’s State Administration of Foreign Exchange [SAFE] and the China Investment Corporation [CIC].

The article concludes that, “[G]iven the overtly political nature of at least some of its investments many observers are wondering why Beijing has chosen the secretive Safe to buy stakes in international companies rather than go through CIC.”

Carl Mortishead of The Times writes of the decision of Norway’s Government Pension Fund-Global to divest in Rio on environmental grounds that, “This is Norwegian government policy at work and it has the backing of a fund that is worth some $375-billion (U.S.). It is the most striking example of a sovereign wealth fund used to implement social and political policy at the corporate level with a detailed ethical investment policy.”

I wonder how the IMF’s GAPP code for SWFs will deal with SRI.