Sovereign wealth funds: What’s in it for csr

Sovereign Wealth Funds are growing in importance, yet the world of CSR both passes them by and is passed by, by the SWFs themselves. Does this matter? This article explores some of the issues and options.

What are Sovereign Wealth Funds?

SWFs are investment vehicles controlled by government agencies, and currently have investments of about $5,000 billion (about 3.1 billion euros). Richard Fuld, chief executive of investment bank Lehman Brothers, predicted that – with other state-controlled firms taken into account – these countries would control $15-20 trillion (in euros 9-12 trillion) in 5 years. The owners are 15 governments, and five of them control 70% of the total. With the notable exception of Norway, these funds are fairly secretive. They don’t publish their investment strategy and are not publicly accountable. Note that the UN costs around $18 billion (11 billion euros) a year i.e. 0.4% of current investments in SWF.

The sheer numbers should make us sit up and take notice. Citizens of countries with SWFs are already phenomenally wealthy by global standards, and SWFs are accentuating the international wealth divide with each passing year – an issue that is, perhaps, beyond control altogether for the foreseeable future. The responsibility with which SWFs invest, however, is not. Hence is there a role for CSR?

SWFs are not popular

The global wealth distribution impact of SWFs is cause for concern. Current capitalist practice does not allow for redistribution internationally: the UN has no tax-making authority. This is one of the reasons that SWFs are not popular in the countries in which they invest.

Indeed, they have been branded as locusts in Germany and piranhas in Japan. Apparently they are going to ravage companies and economies in the interests of their home countries. This would be short-sighted, to say the least, and it is hard to see how an oil-exporting country such as the UAE would benefit from desecrating the US manufacturing base, for instance. China has already seen how cheap goods and a massive dollar surplus has coincided with the USA using its cheap money to fuel the disastrous housing boom. The USA’s economy is too big to ignore and its current financial troubles are starting to hit home overseas.

More likely, if anything, would be a distorting investment in countries that were likely to need oil. Whatever the governments themselves say – and the governments of Singapore and Abu Dhabi have pledged that investments made by their SWFs would be based solely on commercial grounds and that they would not use them for political gain – “their investments aren’t purely commercial or about maximizing the value of their portfolio. They’re looking at how they want to develop their economies.”

Former US Treasury Secretary Larry Summers agrees, writing in the Financial Times last year that it was ‘far from obvious’ that SWFs were interested exclusively, or even primarily, in maximising the value of their shares. Wake up and smell the coffee, Larry – they wouldn’t be the first organisations to have something else in mind, nor would it necessarily be a bad thing, as public pension funds have constantly argued. It is quite remarkable, not to say ironic, to see examples such as the campaign to force foreign investors to withdraw from South Africa, and current efforts to force divestment from China over Darfur being cited as the sort of politically-inspired decisions by pension funds that SWFs might emulate and which should be discouraged.

SWFs not known to be ethically driven – important for CSR

On the contrary, the flexibility for a SWF to determine its policy with something other than the most short-term of investment horizons is potentially of huge global social benefit. Norway has already excluded a number of arms manufacturers, miners and the world’s biggest retailer, Wal-Mart, from its SWF for ethical reasons. Recently Norway’s SWF dropped British mining and metals group Vedanta Resources from its $350 billion (204 billion euros) sovereign wealth fund for ethical reasons, blaming it for environmental damage and human rights violations in India. Whether or not SWFs make good use of that flexibility is quite another matter, but to object to ethical business in principle is misguided. Moreover, governments will always be able to engage with SWFs to circumscribe and even direct their likely future political influence; national governments are far from powerless against SWFs, holding as they do significant weapons of taxation and ultimately expropriation. They may even be able to negotiate reciprocal concessions of access to SWF markets, although without SWFs of their own, this is valuable only to their own private sector.

And CSR?

Supporters of CSR argue that all investment institutions able to take significant stakes in companies have very definite obligations towards the stakeholders of those companies. SWFs are almost uniquely placed, due to their governance, to follow best CSR practice. At the moment, many certainly still do not feel the need, so it would be a better use of Larry Summers’ time to join the mounting pressure for them to subscribe to investment codes of practice than to decry them altogether.

When the China Development Bank buys into Barclays, tapping into a vast commodity trade in Africa, the time has come for activists to place pressure on the CDB to invest responsibly. China has been accused of much that CSR activists deplore, including rampant intellectual property theft, supporting corrupt Dictators such as Mugabe and currency manipulation, as well as distortions of the system about which they might be less concerned, such as subsidies. Similarly, SWFs have invested in private equity companies such as Blackstone, which would potentially allow them to influence private equity investment policy, notoriously at odds with best practice on CSR.

Critics, such as Fred Halliday of the LSE, spit venom. The idea that a “code of practice” can address such systemic conditions is unreal, he says. The kinds of practice Russia has engaged in – tearing up contracts with foreign firms, appropriating the business of figures like Mikhail Khodorkovsky of Yukos Oil – he claims as evidence of the state’s controlling ambition; while the conduct of Saudi Arabia in relation to the al-Yamamah arms deal with Britain in the late 1980s – and the investigation into the bribery associated with this deal, which was abandoned in 2006 – reveal in his view the way the House of Saud is used to doing business. The ideas of “transparency” and “accountability” beloved of western NGOs and progressive business advocates look irrelevant in this context, he argues. Halliday is certainly right to point out that traditional Western methods of controlling business investment behaviour and enforcing good CSR practice, through shareholder activisim, are not likely to bear fruit. As he says an Arab diplomat put it to him, ‘the minister of finance is, in effect, the private accountant of the ruler. There are no shareholders to whom to appeal. They are just not playing fair, are they?’

Julian Roche is an international consultant, formerly with venture capitalists, Hudson Venture Partners. He currently advises global banks and government agencies and is also with the World Bank.