New focus for sovereign funds

Pooling forces for a post-coronavirus world

The coronavirus pandemic is stretching to the limits the financial and organisational resources of many governments as they respond to its impact on healthcare and the economy. Sovereign wealth funds have large financial resources that they should use to address this crisis and protect against future ones. The crisis could focus attention on how these state-owned vehicles for wealth creation and protection could adjust their operating principles for a post-coronavirus world.

Over 100 countries have set up sovereign funds which manage, in total, around $8.5tn. While each has different investment strategies and goals, many are geared towards helping stabilise government budgets. These types of funds can provide resources needed to fight the pandemic. Norway, for example, is requesting its giant sovereign fund to contribute $13bn to support a stimulus package aimed at mitigating the economic shock.

Sovereign funds are important for guarding against future crises. Value creation was never the sole aim. Their governance has evolved markedly over the last 15 years. A key step was the publication, and adoption by many institutions, of the 2008 Santiago principles, as well as the establishment of the International Forum of Sovereign Wealth Funds, now based in London. Another important advance by many funds is their interest in, and implementation of, environmental, social and governance investment policies.

An important development was the December 2017 launch of the One Planet Sovereign Wealth Funds Framework by six leading sovereign funds managing altogether around $3tn. The framework aims to mitigate climate-related investment risks, encompassing a quest for climate-friendly investment opportunities to promote long-term value and sustainable outcomes. In the light of the lessons of the coronavirus crisis, sovereign investors should reorientate some of their resources and adopt more broadly the One Planet style of long-term investment.

To protect against future upsets, sovereign funds should define, with their governments, where risks need to be mitigated, aligning this aim with their nations’ development needs. For many countries, risks include natural disasters, climate change, air, water and food security, and health hazards. Major fields for action are, among others, education, organised urbanisation and the management of immigration flows. All of these fields are either global in nature or would greatly benefit from international or regional co-operation.

On the basis of their national priorities, sovereign funds should organise and implement concerted strategies and investment initiatives, pooling forces in areas of common interest. This could include promising international investment in fields such as the medical, pharmaceutical and biotech industries, carbon management, security and sustainability of the food and water sectors, and education infrastructure.

Since their inception in the 1950s, sovereign funds have sought to invest with a long-term societal or policy objective extending well beyond mere value creation. Based on experience over many decades, sovereign funds – both the longer-established and more recently created institutions – have the chance to mobilise financial resources in priority areas.

Redeploying only a limited portion of their assets could create a massive force for positive change. Sovereign funds should look beyond present disruption to work for the long-term good of their national populations and the global community. Seizing opportunities from the crisis could pave the way for a better world.

Louis de Montpellier is a member of the OMFIF Advisory Council. He is a former global head of the Official Institutions Group at State Street Global Advisors and Bank for International Settlements official.

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