Combining big spending on direct investments with promotion of ESG goals, a pair of deep pocketed SIFs, GIC and ADIA, have teamed up to back green, sustainable energy in the developing world. Both participated in 2019 in a nearly $500 million equity round to back a pair of green energy projects totaling $2 billion in India. This brings their aggregate investment to $2.2 billion in the issuer, Greenko Holding. With the latest round, Greenko Holding will be developing the two (2.4 GW total) projects, each with wind and solar generation and hydro energy storage. GIC is majority shareholder of Greenko, which holds the record for Asia's largest green bond issuance at $1 billion.
Politics, Ethics, and International Diversification
In a country with a total equity market capitalization of $1.9 trillion (2018), South Korea's nearly $600 billion national pension fund has announced its intention to rebalance its portfolio from about 45% domestic fixed income and 18% domestic equities to 30% and 15%, respectively, while raising overseas equities from 20% to 30%.
Asset managers of the fund – which reports to the cabinet and South Korean parliament – will now have to deal increasingly with the politically charged determination of which Japanese issuers may have engaged in war crimes during the Japanese occupation of Korea. In the face of proposed South Korean legislation that would ban South Korean pension funds from investing in “war crime companies,” the sovereign pension fund has announced a review of its portfolio of more than $1 billion in Japanese equities, the Financial Times has reported.
Of course, cross-border activity is not without baggage. In South Korea, the National Pension Service (NPS) has grown so large that the local markets are simply not deep and wide enough to absorb its moves. When expanding its overseas portfolio, however, the pension fund has faced difficult investment choices due to rising political tensions with Japan (see Box: Politics, Ethics, and International Diversification). In extreme cases, sovereign investors may turn into rogue traders themselves like those in the urban legends of the Wall Street (see Box: 1MDB the Outlier).
1MDB the Outlier
No survey of the sovereign investor playing field would be complete without a shout out to fugitive Malaysian financier Jho Low and 1Malaysia Development Berhad (1MDB), founded by former Malaysian Prime Minister Najib Razak. The fund was created to finance infrastructure and other development projects in Malaysia; instead the funds ended up “invested” in Hollywood films (“Dumb and Dumber,” “The Wolf of Wall Street”), a mega yacht, a private jet, a van Gogh, a Picasso, and luxury real estate.
Mr. Low, who remains at large and the subject of criminal charges for his alleged central role in defrauding up to $4.5 billion from 1MDB, recently agreed to forfeit over $700 million in assets to settle accusations of fraud involving the fund. That included a $125 million yacht, a $35 million jet, a $51 million New York City penthouse, the $139 million Park Lane Hotel in New York City, and, literally, a settlement from the producers of the “Wolf of Wall Street,” a movie that was partly financed with 1MDB-embezzled funds.
A former Malaysian prime minister has been sentenced to prison in the scandal. And the Malaysian government reached a $3.9 billion settlement with Goldman Sachs in the same affair, after a Goldman Sachs partner pled guilty in August 2018 to bribery and money laundering. Even a failed sovereign fund has a big impact on Wall Street.
It is far from clear what transpired with all the monies transferred to the fund by the Malaysian government and further funds borrowed by it from investors. What is clear is that controls and governance were sorely lacking and that in the sovereign investor leagues, the numbers are big – even in the worst case.
Given their typically global mandate and long-term investment horizon, sovereign investors increasingly build their portfolios based on major future trends, rather than on short-term market movements. Furthermore, they are not just passive actors affected by global megatrends, instead they actively influence the megatrends by their investments. For example, Temasek of Singapore has identified six structural trends, which collectively define the direction of its investment strategy: “Investing for a Better, Smarter, More Sustainable World” (see Figure 1.3):
Tech revolution essentially is the common denominator of all megatrends. Amid disruptions from new technologies, the sustainability of the world economy is critical for SIFs that seek long-term, sustainable returns from their investments. Consequently, most SIFs make global tech investments, either through external funds or directly; at the same time that they are integrating ESG factors into their investment process, leveraging tech capabilities for data analysis.
Take APG, the pension manager for ABP and a few other Dutch pension schemes, as an example. APG expresses its commitment to responsible investing by codifying such investing within one of its nine headline investment beliefs, and it has used digital tech for implementation. For instance, relating to the ESG/sustainable development goals (SDG) discussions in the previous section, whereas some asset owners say they are waiting for standardized data or more academic proof to implement ESG strategies, APG has used artificial intelligence (AI) to select companies that contribute sufficiently to the UN Sustainable Development Goals. ENTIS, the data analysis team of APG, uses smart algorithms to assess SDG-oriented investments, based on criteria that APG formulated itself.
Figure 1.3 Temasek Identified Six Structural Trends
Source: Temasek.
On climate change, the most significant movement is the One Planet SWF Working Group formed by five hydrocarbon wealth powers (Norway and four Middle East funds) and the NZ Super (see Figure 1.4). Representing several trillions of assets under management, the six funds held the One Planet Summit on December 12, 2017, which was followed by the Climate Finance Day (building upon the success of the 2015 Paris Agreement to collectively mitigate the effects of climate change), and the working group was established at the event.
Figure 1.4 One Planet SWF Working Group
For sovereign investors, climate change is both a financial risk for long-term portfolios, and an opportunity, as the development of technology and changes in government policy create new avenues for investments. During the transition to a lower-carbon economy, SIFs have embraced opportunities ranging from solar and wind energy infrastructure in both developed and emerging markets, to early stage venture investments in the battery and mobility sectors. In July 2018, One Planet published an Investment Framework designed to accelerate efforts to integrate financial risks and opportunities related to climate change in the management of large, long-term asset pools like those of SIFs, including the following aims:
foster a shared understanding of the key principles, methodologies, and indicators related to climate change;
identify climate-related risks and opportunities in their investments; and
enhance their investment decision-making frameworks to better inform