By: Krish Bandivdekar & Punit Rambhia
A sovereign wealth fund (SWF) is a state-owned fund comprised of capital earned by the government to invest in financial assets including stocks, bonds, real estate, commodities, or in alternative investments including private equity and hedge funds. Money generated in these funds is often derived from a country’s surplus with the ultimate goal of accruing profit to benefit the nation’s economy and citizens. Many countries are using their SWF to transition away from an economy driven by non-renewable resources.
SWFs’ success as a global investment vehicle remains uncontested. They have the power to move markets and impact international economic and political policies. Currently, the largest SWF is the Norway Government Pension Fund Global, with assets totalling 1.34 trillion USD.
Current Trends
Several trends within the SWF space have been observed throughout the past decade. SWFs have experienced increased size and growth as total assets have skyrocketed between 2003 and 2013, primarily due to rising commodity prices, especially oil and gas. Additionally, over 40 sovereign wealth funds have been created since 2005, representing 30% of the worlds’ total.
Moreover, there have been differing views on transparency and protectionism of the investment holdings of SWFs. Some SWFs may disclose their investment holdings periodically, while others will keep them private. However, since 2008, SWFs have taken strides to increase transparency to dispel fears of protectionism.
There have also been developments within the field through the addition of sovereign wealth enterprises (SWE). These are investment vehicles that are owned and controlled by SWFs that allow for greater investment flexibility.
The Future of SWFs and ESG
Although the future of SWFs is difficult to predict, a clear trend towards environmental stewardship has emerged.
Many funds, like that of Norway and Saudi Arabia, have been funded through profits regarding oil exploration and extraction. These funds are in the unique position of being backed by leaders in the fossil fuel industry, and as a result, their investment decisions mark the future of the industry.
Norway’s SWF had incurred a sector loss during a period between 2019-2020 when exiting its positions in major oil companies like Suncor and Imperial Oil, citing goals of reducing exposure to oil and the unsatisfactory CO2 emissions from the affected companies.
Moreover, although Saudi Arabia’s 500 billion USD fund, PIF, is largely regarded as an investing “black box” as many of its holdings remain unknown, the public does know that the PIF has long-term goals of diversification from oil. The fund has also recently consulted major banks on ESG-framework in preparation for a multibillion-dollar bond sale to cater towards ESG-focused investors. This may also result in a portfolio review, investment strategy evolution, and a dump of ESG-unfriendly holdings to secure an advantageous credit rating.
Takeaways
Overall, SWFs represent immense amounts of capital with the power to heavily affect global markets wielded by many countries that have generated wealth through non-renewable resources. The decisions of these funds are long-term, diversification-oriented, and safe in nature. The trend towards ESG compliance by the worlds’ largest SWFs represents the significant impact of ESG-aware investors and financial institutions on asset holdings.
As the SWF space continues to grow, it will be important to look at the assets targeted by diversification strategies where these asset managers think growth will occur. However, it will be arguably more pertinent to view the positions exited by SWFs and the impact of ESG on decision-making to gain a better understanding of global investing trends.