Sovereign Wealth Funds (SWFs) are government-back or government-sponsored investment funds made up of money generated through the government, typically comprising a country’s surplus of reserves. These “reserves” can mean various things, such as bank reserves or, in many cases, natural resource revenues like oil and gas. SWFs primarily invest in public or private equities, to maximize their returns.
SWFs are vital because it is a way to cut down on government spending from taxpayers’ money to benefit a country’s citizens and the economy. In this sense, funds or returns from a SWF’s portfolio of a country’s surplus of revenues can be used to support programs or institutions needed for an economy to operate and prosper.
The largest SWF is located in Norway, which utilizes its surplus of oil reserves with total assets under management (AUM) of roughly $1.3 trillion USD. The largest SWF in Canada is called the Alberta Investment Management Corporation (AIMCo), based in Edmonton, and ranks 19th in the world regarding AUM which amounts to $106 billion USD.
Benefits and challenges exist for SWFs in terms of people and planet and vary depending on their location.
The primary benefit of SWFs is their position to act as a stabilizer for a country’s economy. By stabilizing, SWFs can enhance growth and protect the welfare of our children. Hard proof of this exists. Trinidad & Tobago’s SWF, called “HSF,” has used their excess petroleum reserves to allow the country to prosper relative to other Caribbean countries.
HSF has allowed Trinidad & Tobago to achieve the highest annual GDP, the fourth highest GDP per capita and the second lowest debt-GDP ratio among all Caribbean countries. The fund has also allowed Trinidad & Tobago to cushion their economy when faced with economic hardships such as a fall in prices of crude oil and natural gas.
However, when there are benefits, there are also challenges.
For example, a SWF located in Scandinavia would have fewer challenges when focusing on the environment, as Scandinavian countries tend to be more environmentally friendly. In comparison, a SWF located in the Middle East might face more significant challenges regarding being environmentally friendly.
Recently, the concern and worry about climate change has become a top challenge that businesses and organizations must face when determining how they want to conduct their operations. This challenge presents an issue for SWFs that are generally commodity-based. As a result, the largest SWF in the world, which happens to be commodity-based, Norway GPFG, decided to reduce their exposure to the oil and gas sector to combat the challenge.
With the future in mind, SWFs have either begun to commit or lay out the framework focusing on environmental, social, and governance (ESG) factors and sustainable investing. Some funds or investors are even embracing climate change metrics to assess the impact of their portfolios.
At home in Canada, it is possible to see the future of investment for SWFs in the works. AIMCo has gone to lengths to ensure its investment strategy follows the guidelines that align with its clients and their philosophy. AIMCo has a portfolio team named, “Infrastructure & Renewable Resources,” which manages more than $11 billion USD.
The Renewable Resources portfolio includes timberland and agricultural investments. AIMCo can balance investing in both traditional commodity-based assets and renewable assets. AIMCo’s CEO, Evan Siddall, believes AIMCo can be a leader in financing the transition to a low-carbon economy. However, divesting from traditional investments is not how to accomplish the goal of a low-carbon economy.
Moving into the future, it is essential to have a plan of how SWFs will address future trends such as sustainable investing and renewable energy investment, but at the same time, remember to consider the current ways of how SWFs operate or invest. It is not a matter of choosing one side of the argument but how one can balance the two.
For example, a SWF located in Scandinavia would have fewer challenges when focusing on the environment, as Scandinavian countries tend to be more environmentally friendly. In comparison, a SWF located in the Middle East might face more significant challenges regarding being environmentally friendly.
Recently, the concern and worry about climate change has become a top challenge that businesses and organizations must face when determining how they want to conduct their operations. This challenge presents an issue for SWFs that are generally commodity-based. As a result, the largest SWF in the world, which happens to be commodity-based, Norway GPFG, decided to reduce their exposure to the oil and gas sector to combat the challenge.
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