Given this enormous concentration of wealth, it is no surprise that these giants have been viewed as economic superheroes, repeatedly turned to in times of crisis: in war, in the global financial crisis, and now in pandemic. Like superheroes, each has a role to play and some have even morphed to encompass additional roles, particularly when, as now, a new crisis arrives on the scene.
And their ranks continue to swell at an increasing pace. Assets under management continue their relentless rise while new funds emerge. The establishment of new funds is not a region-specific trend, as can be illustrated by funds being set up across the globe, including the Hong Kong Future Fund, Holdings Equatorial Guinea 2020, and West Virginia Future Fund. Europe is especially interesting, because Europe traditionally is not a significant player when it comes to sovereign wealth. (The Norway Government Pension Fund (also known as the Oil Fund), managed by Norges Bank Investment Management (NBIM), is considered the world's largest SWF, but it sits outside the European Union.)
There is now a Luxembourg entrant into the SWF world: Fonds soverain intergenerational du Luxembourg, which will invest for many generations to come. Also in Europe, the French, Italian, and Spanish funds, among other nations, emerged as a solution to attract other foreign players to co-invest with them in their respective domestic economies. Even a UK Citizens Wealth Fund has been proposed. But look to sub-Saharan Africa for the next surge of sovereign investors. While Nigeria and Kenya are highlighted in case studies later in this chapter, there are also sovereign funds in Algeria, Angola, Botswana, Ghana, Libya, Morocco, Nambia, and Rwanda. Not to be left behind, others, such as Japan and India, have also joined their ranks.
Talk vs. Walk
There are two main approaches that institutional investors deploy when they seek to influence the strategies of their portfolio companies. To achieve environmental, social, and governance (ESG) aims, for example, they may remain as shareholders and engage with the top management and boards of such companies in order to reduce emissions (the “talk” channel). Or, they can “vote with their feet,” by divesting polluting companies from their portfolio (the “walk” channel).
NBIM is well positioned for active engagement with public companies' management. By most accounts, its $1 trillion plus portfolio holds, on average, 1.5% of every listed company on Earth. NBIM's latest report on responsible investing released in March 2020, covering its 2019 voting, engagement with management, and follow up, runs to over 100 pages. Of the more than 9,000 companies in which it holds voting shares, NBIM cast votes in more than 97%, and it was not shy about voting against management even in its top holdings, such as Google, Amazon, and Facebook.
For climate change, NBIM has exercised both options: on the one hand engaging with companies developing strong decarbonization strategies; and on the other hand, divesting from heavy polluters like coal and fossil fuel companies. An ongoing and intriguing debate among SIF investors is whether it is better to divest, or better to engage. In practice, many SIFs use both channels and typically start with “talk.”
Arguably, both strategies can be effective, and they can interact with each other, as the threat of “walk” can reinforce the influence of “talk.” And sometimes the line is quite nebulous. “It's easy to have a slogan,” said Raphael Arndt, the Australia Future Fund's Chief Investment Officer. “But if someone says, ‘Get rid of fossil fuel companies', do I sell AGL? That's also my biggest exposure to renewables.”
Their size alone means that their actions, collectively and even individually, can have material impacts even when the intent is simply prudent management. For example, Norway's fund holds, on average, 1.5% of every listed company on earth, making it an investor that boards around the globe must heed (see Box: Talk vs. Walk). Japan's GPIF, the world's largest pension fund, was fingered by financial journalists as the mover behind an unexpected drop in the value of the yen. The action by GPIF to rebalance its portfolio in favor of more non-Japanese investments was enough to change the course of the $6 trillion daily volume of the foreign exchange markets. Wherever these giants turn their gaze, the impact is felt.
Their rise is taking place at a time when governments become ever more active players in markets across the board. This chapter surveys the universe of sovereign investors from a comparative political economy perspective. We will introduce their little-known enormous capital power for global investments, looking at how each is cast in a role, and how many have responded to the crisis of today, those of the past, and are anticipating those of the future.
Follow the Money
Understanding how these actors of gargantuan proportions are funded and assigned their missions is key to grasping the unique nature of their power in the world. It is important to understand that the funding source and motivation for creating a sovereign investment fund varies widely and has an impact on its operations, structure, and investment profile. Most funds, with increasingly broadened mandates from their home states, perform more than one of the functions outlined here; in countries like Nigeria, multiple sovereign funds are established for different policy objectives of savings, stabilization, and development (see Figure 1.2).
First, the most widely known SWF is the long-term savings fund for the country's future generations (as such, also known as “intergenerational funds”). Savings funds are often set up by commodity-rich countries to save a portion of their resource wealth for the future. (As the cases below illustrate, sometimes the future arrives sooner than expected. And in unexpected ways.) Oil, gas, and precious metal reserves are finite: one day they will run out. There is also a risk that these resources will become stranded assets as climate-change regulation and green-energy alternatives may render hydrocarbon extraction uneconomic.
Using their SWFs to convert today's resource wealth into renewable financial assets, governments can hope to share the windfalls of today with the generations of tomorrow. The world's oldest SWF, the Kuwait Investment Authority (KIA), is a good example, dating back to 1953. According to its website, it invests financial reserves to “[provide] an alternative to oil reserves, which would enable Kuwait's future generations to face the uncertainties ahead with greater confidence…”. Such uncertainties did arrive, with war and pandemics.
The fund for future generations of Kuwaitis did not have to wait for the oil to run out before it was called upon. After Kuwait had been sacked during the seven-month long Iraqi occupation in 1990, KIA provided over $85 billion (nearly $169 billion in 2020 dollars) to rebuild the Emirate. Its oilfields set ablaze by retreating Iraqi forces, the country was devastated in the wake of the occupation. With funds invested abroad for nearly four decades, the fund was at the ready to reconstruct its economy and physical infrastructure. And now, as recounted in Chapter 4, Kuwait sovereign funds are building, snug against the Iraqi border, a smart city of the future featuring a planned kilometer-high skyscraper.
The long-term savings funds of the oil-laden Gulf States also got the call to save the world a scant two decades later as the global financial crisis of 2008–2009 threatened to kill off the world's largest financial institutions and take the global economy with them. As we will explore in Chapter 8, KIA and ADIA of UAE in short order poured more than $10 billion into Citibank alone. And the Gulf States were not alone in riding to the rescue: CIC of China put nearly $10 billion in Morgan Stanley, and Singapore's twin SIFs, GIC and Temasek,