Abstract
As the UK government is exploring its options to have its own Sovereign Wealth Fund, recent media and financial presses have extensively covered the increasing concern around sub-optimal and the often-myopic horizon of this class of investors when performing their fiduciary duties in the face of political pressures. Emerged as an important institutional investor class with sheer size and influence, the value of assets under management of Sovereign Wealth Funds, which stood at USD 6.07 trillion in 2012, grew to a whopping USD 11.16 trillion in 2023 as reported by SWF Global.
On the one hand, establishment of a Sovereign Wealth Fund could help the UK contribute positively to its Sustainable Development Goals by promoting relocation of capital into adaptation initiatives and sectors thus contributing to the country’s sustainable growth. Nevertheless, the potential that a Sovereign Wealth Fund could pursue state political goals in the guise of investment means there is the risk of corruption culminating in a vicious playing field of state expropriation and political opportunism.
Policy Recommendations related to Sovereign Wealth Fund Management
A Sovereign Wealth Fund could pose a reputation risk to investee firms through undue intervention, appointments, and influence. Scandals involving SWFs could consequently affect these investee firms, undermining their reputational integrity. To address this, the government should implement policies ensuring that the appointment of trustees and fund monitors remains independent and based on meritocracy.
Our empirical work highlights that individuals holding distinct societal positions play a crucial role when seated on corporate boards, contributing positively to the Environmental, Social, and Governance (ESG) performance not only of the firms they directly oversee but also those within the supply chain. We recommend that Sovereign Wealth Funds leverage trustees and board members with societal distinction to foster positive and sustainable outcomes in the assets managed by these funds.
Our study shows that Sovereign Wealth Fund interferences trigger managerial short termism, investment myopia and deterioration of operational efficiency. Therefore, we advocate for more independent boards. The government should revise existing policies to advocate board independence and prevent political interference in the decisions of investee firms.
We recommend that the government implements a policy wherein Sovereign Wealth Funds, while considering investments in cross-border firms, prioritise funds originating from countries with transparent practices, higher standards of national governance, and a predictable legal environment. This approach aims to mitigate potential reputational risks.
A Sovereign Wealth Fund can mitigate potential reputational damage while investing in cross border firms by screening investee firms with formal and informal institutional proximity like similar dominant ideology and democratic belief and similar languages and cultural connectedness.
On the one hand, establishment of a Sovereign Wealth Fund could help the UK contribute positively to its Sustainable Development Goals by promoting relocation of capital into adaptation initiatives and sectors thus contributing to the country’s sustainable growth. Nevertheless, the potential that a Sovereign Wealth Fund could pursue state political goals in the guise of investment means there is the risk of corruption culminating in a vicious playing field of state expropriation and political opportunism.
Policy Recommendations related to Sovereign Wealth Fund Management
A Sovereign Wealth Fund could pose a reputation risk to investee firms through undue intervention, appointments, and influence. Scandals involving SWFs could consequently affect these investee firms, undermining their reputational integrity. To address this, the government should implement policies ensuring that the appointment of trustees and fund monitors remains independent and based on meritocracy.
Our empirical work highlights that individuals holding distinct societal positions play a crucial role when seated on corporate boards, contributing positively to the Environmental, Social, and Governance (ESG) performance not only of the firms they directly oversee but also those within the supply chain. We recommend that Sovereign Wealth Funds leverage trustees and board members with societal distinction to foster positive and sustainable outcomes in the assets managed by these funds.
Our study shows that Sovereign Wealth Fund interferences trigger managerial short termism, investment myopia and deterioration of operational efficiency. Therefore, we advocate for more independent boards. The government should revise existing policies to advocate board independence and prevent political interference in the decisions of investee firms.
We recommend that the government implements a policy wherein Sovereign Wealth Funds, while considering investments in cross-border firms, prioritise funds originating from countries with transparent practices, higher standards of national governance, and a predictable legal environment. This approach aims to mitigate potential reputational risks.
A Sovereign Wealth Fund can mitigate potential reputational damage while investing in cross border firms by screening investee firms with formal and informal institutional proximity like similar dominant ideology and democratic belief and similar languages and cultural connectedness.
| Original language | English |
|---|---|
| Type | Policy Recommendation |
| Media of output | Text |
| Publisher | Academy of Social Sciences |
| Publication status | Published - 28 Feb 2024 |
