By Brett Keller
WWF, the global conservation organization, just released a WWF/ Innovest Strategic Value Advisors study: “Fund Management in the 21st Century: The role of sovereign wealth funds in contributing to a low carbon future,” authored by Karina Wong, Andy White, Dennis Pamlin and Rasmus Reinvang. The study has a special emphasis on the Norwegian Global Pension Fund. Lead author Karina Wong can be contacted at kwong@innovestgroup.com.
You may have trouble downloading the 86-page report from the WWF site, so it is available here (1.07 MB PDF). This study applies general ideas about socially responsible investing (SRI) to sovereign funds and advocates a stronger focus on such investment.
An investor can employ a combination of three main strategies in SRI:
- Negative screening to exclude undesirable companies or sectors
- Positive screening to select companies with better ESG [environmental, social and governance] performance
- Shareholder advocacy and engagement to improve company behavior
Their press release on the subject (“Sustainable investing can pay off for sovereign wealth funds”) summarizes nicely:
The analysis found that funds using socially responsible investment through positive screening strategies and using their influence as large investors to encourage improved company behavior enhanced investor returns, risk management and reputation.
Report lead-author Karina Wong, senior consultant at Innovest, said “Socially responsible investment can no longer be seen as a purely ethical exercise that reduces profit while doing good.
“Rather, in an increasingly resource restricted world sustainable business models are a crucial indicator for long-term profitability and risk reduction.”
Figure 2 from the report (page 10) compares SRI practices of several SWFs and pension funds:
Interestingly, while some are calling for SWFs to make investments with an eye on exclusively maximizing profit as a means of safeguarding against politically-motivated investing, others are advocating that investments not be made for pure profit maximization. In this case the socially-responsible investing is said to be more profitable as well, but it isn’t hard to imagine that in some cases investing in more responsibly-governed or environmentally-conscious investment choices could yield lesser returns.
It seems that different constituencies are pushing SWFs towards very different investment strategies. Is it possible to have an investment strategy that maximizes profits through socially responsible investments that are non-political, or is SRI inherently political? I think that while some SRI could be aptly labeled as politically motivated (similarly to the idea that SWFs should reserve a certain percentage of investments for sub-Saharan Africa) this is not the kind of motivation that has or should raise the suspicions of legislators and the media.
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