Sovereign Wealth Funds and Socially Responsible Investing: Do’s and Don’ts

Abstract

A sovereign wealth fund (SWF) is a long-term investment fund owned by the state. The oldest is the Kuwait Investment Corporation, which was established in 1953. However, because most SWFs were established in 2004 or later, SWFs are, generally speaking, a fairly new phenomenon. Depending on the definition, there are currently between 38 and 50 SWFs worldwide. An SWF can exert influence on the behavior of companies through its 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 SWFs have no political motivations, but merely seek profit, the Santiago Principles were established. However, in a time where private investors are pressed to focus more on social values to become ‘socially responsible’, it may seem strange that SWFs are pressured into a model of private behavior with the objective of only maximizing financial and economic values. This article explores the scope of responsibilities of SWFs in terms of social responsible investment (SRI). The article provides a definition of SWFs and examines the concept of SRI and whether SRI is compatible with the Santiago Principles. Part of the study comprises an evaluation of 38 investment funds, which all qualify as SWFs as per the author’s definition. The legal basis (whether an SWF is embedded in a separate legal entity), governance structure (how the management of the fund is regulated, and whether the regulation is laid down in statutes), and objectives of each of the SWFs are examined. Moreover, it is examined which private regulatory regimes were adopted by these SWFs. The UN Principles of Responsible Investment (UN PRI) and the Santiago Principles will be discussed in more depth. Finally, this article discusses whether SWFs, due to their link to the state, should become leaders in the sustainable investment field.