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Sovereign Wealth Funds as Socially Responsible Investors

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International Economic Law

Abstract

Sovereign Wealth Funds (SWFs) are public investment vehicles, owned and managed directly or indirectly by governments and set up to achieve a variety of macroeconomic purposes. As institutional investors, SWFs have the fiduciary duty to act in the best long-term interest of their beneficiaries. In this context, socially responsible investment may enable a SWF to increase its financial profitability. However, the fiduciary duties of SWFs towards their beneficiaries go beyond the economic maximization of returns on their investments. In the aftermath of the financial crisis, SWFs have established themselves as important financial markets participants. This paper will, first, address the existing international regulatory frameworks that govern the responsibility and accountability of SWFs, and, second, discuss ways to improve those frameworks in order to enable SWFs to become sustainable investors. The focus of the paper is on evaluating the leverage of SWFs in the global economy, as well as their potential to promote corporate social responsibility and, therefore, to lead the financial sector towards greater sustainability.

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Notes

  1. 1.

    Sarkar (2010), p. 623.

  2. 2.

    The first SWF was the Kuwait Investment Corporation, which was established in 1953; see Van der Zee (2012), p. 141; Hahn (2012), p. 103.

  3. 3.

    The OECD estimates the total of SWF assets around US $2.6 trillion, see Blundell-Wignall et al. (2008), p. 121.

  4. 4.

    Richardson (2013), p. 227.

  5. 5.

    Yet, there are some exceptions, see Keenan and Ochoa (2009), p. 1151; Cummine (2014), pp. 163–177; Ghahramani (2015), pp. 321–332; Munari (2015), pp. 333–370.

  6. 6.

    See the SWF ranking, available at http://www.swfinstitute.org/sovereign-wealth-fund-rankings (accessed 18 January 2016).

  7. 7.

    See http://www.swfinstitute.org/sovereign-wealth-fund-rankings/ (accessed 18 January 2016); Senn (2009), p. 4.

  8. 8.

    See O’Brien (2008), p. 1233; Hahn (2012), p. 84; Senn (2009), p. 4.

  9. 9.

    The GIC subscribed to a mandatory convertible bond of US $ 11.5 billion issued by UBS, created by conditional capital that has been approved by the UBS shareholders on an Extraordinary General Meeting on February 2008. According to the terms of the agreement and subject to the approval of UBS shareholders, the GIC will become a significant shareholder in UBS when the notes are converted into ordinary shares. See Senn (2010), p. 154.

  10. 10.

    See O’Brien (2008), p. 1233; Backer (2010), p. 11.

  11. 11.

    O’Brien (2008), p. 1242; Rose (2008), p. 101.

  12. 12.

    Rose (2008), p. 107; Bassan (2011), p. 31; Van der Zee (2012), p. 142; International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds Generally Accepted Principles and Practices—Santiago Principles, October 2008, http://imf.org/external/np/pp/eng/2008/022908.pdf (accessed 19 January 2016).

  13. 13.

    Backer (2010), p. 117; Richardson (2013), p. 228.

  14. 14.

    Bassan (2011), p. 31; Castelli and Scacciavillani (2015), p. 10.

  15. 15.

    Santiago Principles (2008), supra, n. 12, p. 3.

  16. 16.

    OECD (2007), p. 42.

  17. 17.

    Balding (2008); Bassan (2011), p. 29.

  18. 18.

    Van der Zee (2012), p. 142.

  19. 19.

    Ibid.

  20. 20.

    Burgstaller (2011), p. 166; Backer (2010), p. 11.

  21. 21.

    Anabtawi and Stout (2007–2008), p. 1307.

  22. 22.

    Monk (2009), p. 456; see also Collier (2011), p. 111.

  23. 23.

    Richardson (2013), p. 227.

  24. 24.

    Ghahramani (2015), p. 322.

  25. 25.

    Sullivan and Hachez (2012), p. 221; Wen (2013), pp. 178 ff.

  26. 26.

    See Sullivan and Hachez (2012), p. 221.

  27. 27.

    Ghahramani (2011), p. 87.

  28. 28.

    Richardson (2013), p. 230.

  29. 29.

    Demeyere (2011), p. 199; Emilio Agustín Maffezzini v Spain, ICSID Case No ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction, 25 January 2000, para 77: “… a finding that the entity is owned, directly or indirectly [by the State], gives rise to a rebuttable presumption that it is a state entity”.

  30. 30.

    Demeyere (2011), pp. 199 ff.

  31. 31.

    Ibid., p. 200.

  32. 32.

    For a classification of SWFs according to their investment objectives see Kunzel et al. (2010), table 1, 4.

  33. 33.

    International Forum of Sovereign Wealth Funds, ‘Santiago Principles: 15 case studies’, Doha November 2014, http://www.ifswf.org/pst/SantiagoP15CaseStudies1.pdf (accessed 20 January 2016); Munari (2015), pp. 339 ff.

  34. 34.

    Cappelen and Urheim (2012), p. 3; Van der Zee (2012), p. 147.

  35. 35.

    Van der Zee (2012), p. 147.

  36. 36.

    Sullivan and Hachez (2012), p. 218.

  37. 37.

    Ibid.; see also Henkin (1999), p. 25.

  38. 38.

    Sullivan and Hachez (2012), p. 219.

  39. 39.

    Davis et al. (2006), p. 18.

  40. 40.

    Burgstaller (2011), p. 167.

  41. 41.

    See Coffee (1991), p. 1277; Fairfax (2011), pp. 31 ff.

  42. 42.

    Gill (2008), p. 459; Rohde (2011), p. 5.

  43. 43.

    According to the OECD, FDI is “a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The accepted threshold for a FDI relationship is 10 % or more of the voting rights of the investee company. See OECD (2008), p. 234 http://www.oecd.org/daf/inv/investmentstatisticsandanalysis/40193734.pdf (accessed 19 January 2016).

  44. 44.

    Raeschke-Kessler and Gottwald (2008), p. 587.

  45. 45.

    UNCTAD (2013), pp. 10–12.

  46. 46.

    Ibid.

  47. 47.

    Ibid.

  48. 48.

    Van der Zee (2012), p. 147. See also Frankental (2012), p. 221.

  49. 49.

    Richardson and Lee (2015), p. 398.

  50. 50.

    Nystuen et al. (2011), p. 3.

  51. 51.

    Principle 2 UN-PRI.

  52. 52.

    Cummine (2014), p. 168.

  53. 53.

    Nystuen et al. (2011), p. 3; Cummine (2014), p. 168.

  54. 54.

    See the UN-PRI website http://www.unpri.org/signatories/signatories/#asset_owners (accessed 15 January 2016).

  55. 55.

    Cummine (2014), p. 168; Nystuen et al. (2011), p. 4; Frankental (2012), p. 222.

  56. 56.

    United Nations, Guiding Principles on Business and Human Rights, New York and Geneva 2011, http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf?v=1392752313000/_/jcr:system/jcr:versionStorage/53/b6/9c/53b69c6d-0745-4070-99b2-68e02dde1b99/1.4/jcr:frozenNode (accessed on 19 January 2016).

  57. 57.

    Frankental (2012), pp. 221 ff.

  58. 58.

    See http://www.reports-and-materials.org/sites/default/files/reports-and-materials/Ruggie-report-7-Apr-2008.pdf (accessed 11 January 2016).

  59. 59.

    Sullivan and Hachez (2012), p. 229.

  60. 60.

    Guiding Principles on Business and Human Rights, commentary of the Principle 19, p. 21.

  61. 61.

    Van der Zee (2012), p. 147.

  62. 62.

    As the commentary of Principle 4 clearly states: “Where a business enterprise is controlled by the State or where its acts can be attributed otherwise to the State, an abuse of human rights by the business enterprise may entail a violation of the State’s own international law obligations”, Guiding Principles on Business and Human Rights (2011), p. 7.

  63. 63.

    See www.unglobalcompact.org (accessed on 11 January 2016); for a general overview of the UN Global Compact see Banerjee (2007), pp. 97–99.

  64. 64.

    See www.unglobalcompact.org (accessed on 11 January 2016).

  65. 65.

    Banerjee (2007), p. 45; Kaufmann (2013), p. 744.

  66. 66.

    Nystuen et al. (2011), p. 5.

  67. 67.

    Cummine (2014), p. 171.

  68. 68.

    Dixon (2014), p. 581.

  69. 69.

    Truman (2010), p. 103.

  70. 70.

    Ibid.

  71. 71.

    Van der Zee (2012), pp. 146 ff.

  72. 72.

    Rose (2013), p. 914.

  73. 73.

    Richardson (2013), p. 227.

  74. 74.

    Ghahramani (2015), p. 323.

  75. 75.

    Bengtsson (2008), p. 978.

  76. 76.

    Shemirani (2011), p. 52.

  77. 77.

    The company exclusion list is available online, see https://www.regjeringen.no/en/topics/the-economy/the-government-pension-fund/internt-bruk/companies-excluded-from-the-investment-u/id447122/ (accessed 5 January 2016).

  78. 78.

    Guidelines for the Observation and Exclusion of Companies from the Government Pension Fund Global’s Investment Universe https://www.regjeringen.no/en/topics/the-economy/the-government-pension-fund/responsible-investments/guidelines-for-observation-and-exclusion/id594254/ (accessed 20 January 2016).

  79. 79.

    About the notion of complicity and due diligence of SWFs under international norms, see Ghahramani (2015), pp. 329 ff.

  80. 80.

    Richardson (2013), p. 241.

  81. 81.

    Ibid., p. 227; Cummine (2014), p. 172.

  82. 82.

    Ibid.

  83. 83.

    Richardson (2013), p. 227.

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  1. University of Geneva, Geneva, Switzerland

    Xenia Karametaxas

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  1. Department of International, Legal, Historical and Political Studies, University of Milan, Milan, Italy

    Giovanna Adinolfi

  2. Faculty of Law, University of Leiden, Leiden, The Netherlands

    Freya Baetens

  3. Doctoral College of Law and Economics, University of Hamburg, Hamburg, Germany

    José Caiado

  4. Department of International, Legal, Historical and Political Studies, University of Milan, Milan, Italy

    Angela Lupone

  5. Department of International, Legal, Historical and Political Studies, University of Milan, Milan, Italy

    Anna G. Micara

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Karametaxas, X. (2017). Sovereign Wealth Funds as Socially Responsible Investors. In: Adinolfi, G., Baetens, F., Caiado, J., Lupone, A., Micara, A. (eds) International Economic Law. Springer, Cham. https://doi.org/10.1007/978-3-319-44645-5_15

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