A Sovereign Wealth Fund ( SWF) is an investment fund owned and managed by a national government. SWFs were originally created in the 1950s by countries with economies dependent on oil and mineral extraction. Many of the largest SWFs are still financed by oil money, although others are funded by consistent budget surpluses, foreign exchange reserves, or the proceeds of privatization. Massive global imbalances in global trade have played an important role in generating these surpluses.
The aim of SWFs is to to protect the domestic economy against volatile international commodity prices, to build up savings for future generations, and to manage excess liquidity.
Unlike private equity and hedge funds, which have shrunk since the 2008 financial crisis, SWFs have continued to grow. They had $4.8 trillion in assets under management in 2011, while another $7.2 trillion is held by other sovereign investment vehicles, such as pension reserve funds and development funds, according to figures compiled by TheCityUK, a financial services lobby group. The largest SWFs are managed by China, United Arab Emirates and Norway.
The continued, post-crisis growth of SWFs is, to some extent, a product of their investment strategies. Most SWFs are ‘patient’ investors with a long-term outlook – as holders of state capital surpluses with no liabilities, they can remain committed to under-performing investments in the short term in the hope of future reward, and can also act against market trends. In the financial crisis, they took significant stakes in several of the investment banks perceived to be most at risk.
The same, long-term horizons could make SWFs significant investors in climate-related and low-carbon infrastructure. Norway’s $650 billion Government Pension Fund Global, which invests the country’s oil wealth, is one of the world’s largest SWFs and is currently the most activity in relation to climate change. It has committed over $500 million per year to rainforest conservation, with a significant proportion of this figure channeled into REDD, especially in Brazil and Indonesia. At the same time, however, it has almost US$13.7 billion invested in industry sectors that threaten forests, including oil palm, oil and gas, mining, cattle ranching, logging, pulp and paper, soy and hydroelectric dams, according to a March 2012 study by the Rainforest Foundation.
The investment strategies of several SWFs are also evolving to engage in more partnerships with private institutional investors, a significant factor in relation to land grabs in Africa and other parts of the global Southern. SWFs are also placing money with private international money managers, which is increasingly financing agricultural commodities. Infrastructure is another asset class that is increasingly appealing to SWFs. It remains difficult to fully assess the investments held by SWFs, however, with many lacking basic standards of public accountability and transparency. In this regard, they have adopted levels of ‘confidentiality’ that are akin to those of private sector investors.