Sovereign wealth fund responsibility

As the banking crisis deepened, media attention increased on the role and size of sovereign wealth funds (SWFs), which played a major role in the multi-billion-dollar bailouts of Western banks such as Citigroup and UBS. Rising energy prices and trade surpluses by exporting nations enabled SWFs to grow to control assets worth an estimated $3 trillion, a figure that the Organisation for Economic Cooperation and Development (OECD) estimated could increase to around $10–12 trillion by 2012. The rise of these government-owned foreign investment funds is, the BBC notes, ‘one sign of the shift in the balance of power in the world economy from Western industrialised countries to new emerging market giants like China and the oil-rich Middle East’.18

How does the emergence of SWFs relate to corporate responsibility? In at least two ways. First, as investors and owners of companies, they become relevant for assessment by firms with policies on whom they do business with. Second, as asset owners they have responsibilities to their ultimate beneficiaries, which are their national governments, and to others they affect through their investment decisions: sovereign wealth fund CSR.

The first area was highlighted when The Co-operative Bank in the UK publicly stated a policy on SWFs, based on its policies excluding business with companies connected with countries with poor human rights records. One league table (see Figure 8, available in pdf download or hardcopy), of the world’s 12 largest SWFs, shows that only four are from countries with democratically elected governments, although neither Russia nor Singapore was rated as fully free by Freedom House. Barry Clavin, The Co-operative Bank’s ethical policies manager, explained, ‘our policy precludes us from investing in an oppressive regime or in businesses and investments owned by an oppressive regime. Any business more than 20 per cent-owned by a blacklisted sovereign wealth fund will be turned down for business.’19 Given the growth of SWF investing in Western companies, that stance may become difficult to maintain, as well as raising questions about its efficacy in either promoting social change or more effectively managing financially relevant human rights risks.

Hugo Chavez: a political leader who ‘mixes investments with politics’

Hugo Chavez: a political leader who ‘mixes investments with politics’

The second area of relevance for corporate citizenship is that of the SWFs’ own responsibilities as private institutions—both to their beneficiaries and wider stakeholders. As the SWF assets are state-owned, we might expect them to be managed as those states see fit. The investments of SWFs have therefore raised concerns in the West that (Western) strategic assets such as banks and energy firms may end up in the hands of (unstable or unfriendly) foreign governments.20 Concerns of stakeholders in countries receiving inward investment from SWFs therefore became more widely discussed during 2008. A McKinsey report on the topic even cited Venezuela’s President Hugo Chavez as an example ‘of a political leader who mixed investments with politics’21 as an illustration of the growing calls for new rules for SWF investments.

Traditionally, however, despite periodic press coverage about human rights abuses by some SWF regimes, both investor and investee country governments have taken a laissez-faire approach to the role of SWFs, with investee nations tending to welcome investments and SWFs tending to shy away from controversy and any appearance of interference in other states’ affairs. For instance, China, Singapore and Saudi Arabia have historically downplayed the extent of their governments’ potential influence on investments in the West.22 On the other side of the SWF coin, as Western economies tend to be the major recipients of their investment funds, the OECD has argued the world economy benefits from the growth of sovereign wealth funds, ‘which recycle the trade surpluses earned by oil producers and manufacturing exporters like China back into the world economy’ and point out that OECD countries should be as open to investment as they have called on other countries to be.23 The occasional high-profile protectionist stances by US lawmakers to foreign investment (for example, objecting to Dubai Ports’ takeover of UK company P&O because of its US port interests on ‘security grounds’) have been atypical or driven by short-term political concerns. More frequently, the default position has been for governments to avoid public interference as far as possible.

This debate led to some increased transparency: for instance, by the Government of Singapore Investment Corp. (GIC), which publicly released its annual report for the first time in 2008 ‘to help allay Western fears that their investments are politically motivated’,24 following GIC’s $18 billion investments in the struggling UBS and Citigroup.

Given the continuing concerns from recipient countries, and the potential backlash against SWF investments, an IMF-hosted working group involving 23 investing and recipient countries agreed a voluntary code to increase transparency by SWFs in order to ‘promote a clearer understanding of the institutional framework, governance, and investment operations of SWF, thereby fostering trust and confidence in the international financial system’.25 It was a challenging task, given the SWFs all have different sources of capital, different legal statuses, different mandates and different investment policies. In October 2008 the working group released the Santiago Principles—also known as the Generally Accepted Principles and Practices (GAPP). The principles cover areas such as SWFs’ meeting of local recipient regulatory requirements, making public disclosures in a variety of areas, and investing on the basis of economic and risk-and-return considerations. The principles were founded on the notion of keeping politics out of the way of SWF investment, whether the politics of the recipient or investor country.

Although some questioned whether the code would really restrict political involvement in the management of the funds and thus the companies they invest in, what matters more for corporate responsibility and responsible investment is the way the code reasserts the primacy of financial value over other values, and limits fiduciary duty to solely financial considerations. Thus, SWF managers may become more accountable through procedures associated with the measurement of the financial performance of their funds, yet less accountable to the people whose savings created the funds in the first place, because their interests are assumed to be purely financial. If, as a result, managers of large companies worldwide can access funds that are purely interested in financial returns, this may not help achieve greater corporate accountability, and could undermine the move towards more active and responsible ownership typified by the development of the UN Principles for Responsible Investment (UNPRI).

Norway’s Finance Minister Kristin Halvorsen: excluding Rio Tinto on ethical grounds

Norway’s Finance Minister Kristin Halvorsen: excluding Rio Tinto on ethical grounds

In 2008 one SWF was a member of the UNPRI. The Norwegian Government Pension Fund–Global, with an estimated US$390 billion-worth of assets, is the world’s second largest SWF after the Abu Dhabi Investment Authority. It highlighted its uniquely active ethical policy by selling its US$500 million stake in Rio Tinto, a leading UK-based mining company for potentially subjecting it to ‘grossly unethical conduct’. Norway’s finance minister, Kristin Halvorsen, said its concerns related to Rio Tinto’s joint venture with US-based Freeport McMoRan, a company excluded by the fund in 2006, for a mining operation in the Indonesian province of West Papua. In a statement on the ministry’s website, she said,

Exclusion of a company from the fund reflects our unwillingness to run an unacceptable risk of contributing to grossly unethical conduct. The council on ethics has concluded that Rio Tinto is directly involved, through its participation in the Grasberg mine in Indonesia, in the severe environmental damage caused by that mining operation.26

The Grasberg complex is the biggest gold mine and third largest copper mine in the world. Environmental groups and local people are concerned with the environmental damage caused by dumping millions of tonnes of ore waste into the local river. In 2007, a study published by the campaigning charity War on Want claimed that local people had suffered serious human rights and environmental abuses. Rio Tinto spokesman Nick Cobban expressed surprise to the Guardian at the Norwegian move, saying, ‘Our immediate response is one of surprise and disappointment. We have an exemplary record in environmental matters—world leading, in fact—and they are given the very highest priority in everything we do.’27 The Guardian also quoted Ruth Tanner, campaigns and policy director at War on Want, welcoming the decision to exclude Rio Tinto and challenging other funds to follow its lead: ‘The Norwegian government has again put its money where its mouth is to ensure a real ethical investment policy. Now other pension funds should follow Norway’s example.’28

The unprecedented level of investment transparency practised by Norway’s SWF potentially makes it easy for other investors to follow suit and to leverage its global influence. Norway’s SWF invests profits from oil and gas in a portfolio of around 7,000 companies around the world. The fund’s ethical policy is based on applying to its investments the spirit of international agreements and ethical norms (such as ILO [International Labour Organisation] conventions) signed by the Norwegian government.

The bulk of the fund’s ethical activity is in common with a growing number of public pension funds, largely based on engagement with companies in which it is invested. What sets it apart is the combination of the sheer size of its holdings and the ability and willingness of its Ethics Council (governed separately by the Ministry of Finance) to recommend shares for disinvestment. Of the 27 companies disinvested by Norway’s investment programme on ethical grounds since 2005, the majority relate to governmental objections to certain types of military and nuclear weapons hardware. Boeing, Raytheon, Northrop Grumman and Lockheed are among the leading US arms companies excluded along with Britain’s leading arms manufacturer BAE Systems, Thales of France and UK support services group Serco, which was removed in 2007 because of its involvement in the UK Atomic Weapons Establishment at Aldermaston.29 The Norwegian Ethics Council has also disinvested from major companies for ‘serious, systematic or gross violations of ethical norms’, notably Wal-Mart for alleged complicity in breaches of international labour standards (including child labour, gender discrimination and the blocking of unionisation attempts). As the fund itself acknowledges, while disinvestment may continue to be applied in some high-profile cases, its preferred strategy remains engagement on a broad range of ethical issues.

As you may have noticed, this actively responsible approach from Norway’s SWF is a form of politics: it derives from the interests of the Norwegian government in certain social and environmental principles. Therefore, its engagement in the development of the SWF code led to an interesting compromise, illustrated by the paradoxical Principle 19. It reads that ‘The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds’, but then continues in a subprinciple that ‘If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed’, further qualifying that ‘The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.’ Principle 21 goes further in describing the nature of the shareholder activism and engagement that will be acceptable, saying, ‘if an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments’. These principles limit the exercise of social responsibility from SWFs, including Norway, to approaches that have demonstrable financial benefits. As previous Annual Reviews from Lifeworth have outlined, the ‘enhanced risk management’ approach to responsible investment is only one approach, with some recognising how individual savers, as human beings, have interests that extend beyond the financial, whatever time-frame is applied.

The code is what one would expect from a group convened by the IMF, given its ideological bias towards traditional financial disciplines, and the fact that this code was developed to defend SWFs from Western scepticism. A much-needed dialogue would focus on what active responsible ownership can look like when being pursued by SWFs from the Gulf or Asia, rather than Scandinavia. Just because the latter have been historically more active on their concerns for people in other countries, and come from a cultural and political tradition less complicated for the West than those from the Middle or Far East, does not mean that only their form of shareholder activism should be welcomed. Without such dialogue on what are universally acceptable ways of governments, or any organisation, pursuing their full range of interests through their commercial activities, this code will soon lose legitimacy among SWF nations, and, as world power shifts, may be increasingly ignored.

For now, the code means the SWFs are tethered to the shareholder-value paradigm and thus environmental, social and governance (ESG) concerns can be forwarded only in terms of enhanced risk management. Therefore, the opportunity lies in corporate responsibility advocates seizing on Principle 22’s statement that ‘The SWF should have a framework that identifies, assesses, and manages the risks of its operations’ and promoting a fuller understanding of ESG-related risk management.

» From CSR in Asia to Asian CSR

(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)

This section can be referenced as:

Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines. (Page numbers for this section are available in the pdf download and hardcopy.)

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