July 2008

Sovereign Wealth Funds and CSR

By Julian Roche Director, Vice-President, MHC International Ltd.

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

What are SWFs?

SWFs are investment vehicles controlled by government agencies, and currently have investments of about $5,000bn.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 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[1]. Note that the UN costs around $18bn 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[2].

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.”[3]

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[4], 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 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[5], although without SWFs of their own, this is valuable only to their own private sector[6].

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[7] 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[8]. 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[9], 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?’[10]

So, do CSR advocates simply shut up shop when faced by the opaqueness of many SWFs? No. First, and most cynically, SWFs frequently invest through investment managers who themselves can be individually targeted. It takes expertise, usually it has to be said Western banking expertise, to make profitable investments, and these individuals and firms can be targeted.

Second, and more importantly, it is a category mistake Halliday makes in confusing the opaqueness of an institution with the opaqueness of its investments or its investment criteria. No one needs to know how wealthy the House of Saud is to pass legislation forcing a Saudi SWF to disclose its investments in any country, in extremis, or for the Saudi SWF to be really quite useful in pressuring a company for example to cease using child labour. 

Third, it is a mistake to think that shareholders are the only stakeholders: pressure can be placed on family firms as well as governments; the threat of boycott, for instance, would work just as well against Mars as against Shell, and just as well again to persuade an SWF to influence an investee company.

Fourth, many of the interests of SWFs and CSR activists coincide. There is no reason, for example, why an SWF would be in favour of corruption in the management and operation of a firm.Indeed if that resulted in a diversion of resources away from dividends and towards management one would expect them to be firmly against it. Given the sensitivity of Gulf states, in particular, over the far-ranging and extensive nature of their investments, the very last thing a Gulf SWF would want is to become entangled in a financial scandal, or associated with a company destroying the rainforests or otherwise breaching the Equator Principles. It would be ridiculous, for example, for CSR activists to join the anti-Islamic crusade against SWFs in the Gulf – especially as Islamic sensitivities in investment may themselves be a useful adjunct to CSR itself.

Finally, SWFs probably need reminding from time to time that CSR makes good business sense, as numerous studies have indicated. This is all something that can be examined on a case-by-case basis, viewing SWFs as not really different in practice from any private wealth management organisation, but with certain advantages and disadvantages in terms of taming and shepherding along the CSR path.

The way forward

The real issue is the practical way forward. Part of the role in promoting CSR within SWFs is for Governments and International Organisations. Australia’s Foreign Investment Review Board will now examine a SWF’s record on observing laws and “common standards of business behaviour”: in principle, good – although it may be a pious hope that considerations of national economic policy will not masquerade as investigations into standards. The IMF is planning to work up a SWF code, too, with emphasis on governance and transparency, which CSR activists can at least try to influence. 

Part of the role, however must fall to the media, NGOs and CSR consultancies active in Russia and the Middle East, as well as the most forward-thinking of the SWFs themselves. It is obvious enough to see what would be desirable. Annual CSR publications by SWFs, for example, and greater openness such as has been promised by Singapore’s Temasek, would be most welcome as a start. CSR guidelines and the establishment of ethics councils would be a next step, following the Norwegian example[11]. A detailed legal analysis of the Ethics Council of the Norwegian SWF has already been made[12]. The main icing on the cake would be stakeholder dialogue – are SWFs brave enough for that?

Expecting annual CSR reports and activism on social and environmental issues from SWFs might be far-fetched at the moment, but that is the right route forward and Annual Reports would be a great first start. It is up to the CSR industry to make itself indispensable to SWFs, and the time to start is now.

[By Julian Roche, VP, MHC International Ltd with additional comments by Michael Hopkins]

[1], accessed 20 July 2008

[2] Again, with the exception of Norway.

[3] Jan Randolph, head of Sovereign Risk at Global Insight

[4] Most family companies are run at least in part for ‘lifestyle’ reasons, and they provide the backbone of Western economies

[5] Luxembourg Finance Minister Jean-Claude Juncker has emphasised this point

[6] A huge benefit, however, for US private equity firms

[7]China vetoed minor UN sanctions on Zimbabwe in July 2008, presumably to support its voracious appetite for mineral resources than for any concern of the desperate plight of Zimbabwean citizens.


[9] See Michael Hopkins, “The politics of responsible business”, 8 June 2007.

[10] It is remarkable that critics of SWFs never see fit to deliver similar criticisms against family firms, which control more wealth, and more lives, than all the world’s SWFs put together

[11] see,9171,1813509,00.html


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