A landmark study of Sovereign Wealth Funds (SWFs) and Public Pension Funds (PPFs) has just been published.[1] It looks at the Governance, Sustainability, and Resilience (GSR) scores of 71 SWFs and 29 PPFs, and applies 25 assessment criteria to these 100 funds. The scoreboard will be useful for assessing international investment flows in today’s world of “my country first”, and the political desire to bring home and exert control over production and jobs.
The GSR builds on the Santiago Principles[2] of 2008, but benefits from incorporating current day concerns on both the climate crisis, and the Covid-19 pandemic. It also has a wider coverage brief, and most importantly, it is independently monitored. The GSR may become an important market reference for the authorities in nations receiving inflows from those state owned investors recognised as SWFs and PPFs.
The governance section of the GSR explores the clarity of mission of SWF and PPF by asking if the key investment objectives are published, and whether the existing investment portfolio is both visible, and consistent with an observable investment strategy. This seems reasonable. Take a simple example: a state-owned investor which buys a stake in a football club whilst already having stakes in football clubs in other nations. The football authorities might well have concerns about the future integrity of international club football competitions and the transfer of players between clubs.
A single investment in a seaport facility by a SWF or PPF might not appear significant, but similar investments in several countries might start to raise concerns. Sensitivity would apply (as it did in the mid 2000s) to investments in fields such as energy and transportation, but also to infrastructure investments such as water, and technology.
The sustainably section of the GSR scoreboard is focussed on ESG considerations. To continue with our example, the new owner of your football club should not flout environmental standards in any part of the world, or treat players like royalty while treating low paid workers badly. International investors should employ the same high ESG standards in all of the nations in which they operate.
An ESG lens should have a specific implication for Chinese capital flows. The emphasis on economic growth in China during the last 30 years that has generated the wealth that has flowed into Chinese investment vehicles, has come at a considerable cost to the environment. China is the biggest polluter in the world, social conditions for its population remain well below western standards, and corporate and political governance is opaque and inspires neither confidence nor trust. How should we assess investment from China compared to flows from nations with better ESG credentials?
Resilience measures in the GSR scoreboard have been influenced by the Covid-19 pandemic. This section contains assessments that will help to establish if the overseas investor is a fit and proper owner of a football club. Football fans might be keen to welcome wealthy owners to their clubs, but only if that wealth is real, and when the ownership is a long term strategic investment. Short term aggressive management of a football club’s balance sheet, such as securitising future TV revenues to benefit current shareholders, could create an existential risk for the club.
The focus on football clubs helps to make an important point. Paris St German are owned by a company controlled by the Qatari royal family, and Manchester City by a company owned by the the Abu Dhabi royal family. These companies are not considered to be SWF. Newcastle United are expected to be bought by Saudi PIF, which is recognised as a SWF. In reality is there any significant difference in the type of owner that we are looking at?
We should recognise that although all SWF and many PPF are state owned investors, not all state owned investors are SWF or PPF. It might be argued that the 2008 Santiago Principles helped a subset of SWF operate under a flag of convenience that elevated them to a “preferred investor status”. In the current climate it is unlikely that a state-owned investment vehicle will be able to achieve a better overall assessment than that of the sovereign nation that owns it. The China Investment Corporation (CIC) might no longer be viewed as a more welcome investor than Huawei.
The GSR scoreboard will help host nations to assess the relative merits of any SWF or PPF that has capital to deploy in their economies. The scoreboard is strong on analysing how the fund is governed, and the linkage between the fund and the home nation. Future versions of the GSR might include an analysis of how well governed the home country is, and an assessment of how durable the institutional architecture of each SWF or PPF might be during a future crisis.
Recipient nations are increasingly uninterested in differentiating between portfolio investment by a state owned fund, and direct investment by a state-owned company. The GSR might extend the analysis to all state owned investors rather than limiting the study to SWF and PPF.
[1] Governance, Sustainability & Resilience Scoreboard for Sovereign Wealth Funds and Public Pension Funds. Diego Lopez et al, Global SWF. 1 July 2020. [2] International investment flows are going to be monitored in a manner that we have not seen since 2006-2008. The mood of mistrust that existed at that time prompted a group of SWFs to work with the IMF to produce the Santiago Principles, a series of guidelines that helped to smooth access to international capital markets for group of SWFs in the immediate aftermath of the Global Financial Crisis.