As Sovereign Wealth Funds Expand, A Look at their Impact

On December 1, 2014, Chief Executive Yngve Slyngstad of Norway’s Government Pension Fund Global announced that the fund will begin to invest nearly $3 billion in companies specializing in renewable energy research as well as clean waste disposal. The move comes as activists have called for the reduction in the fund’s exposure to coal and increased government support of environmentally-friendly technologies. The $870 billion fund, administered by the Norwegian government and fueled by North Sea oil profits, represents the largest sovereign wealth fund in the world by a considerable margin. Along with the considerably smaller Government Pension Fund of Norway, the so-called “Oil Fund” was established in 1990 to mitigate the risk created by periodic fluctuations in oil prices and to ensure that the inevitable exhaustion of Norway’s oil reserves does not lead to rapid reduction in living standards or place undue strain on Norway’s social support systems. Instead of directly spending profits from the sale of natural resources, Norway and other oil-producing nations set these profits aside to form some of the world’s largest institutional investment funds.

Each of the six largest sovereign wealth funds is larger than the world’s largest mutual fund (The Vanguard Group’s Total Stock Market Index Fund, with $369.8 billion in assets under management at press time), and four of these sovereign wealth funds (those of Norway, Saudi Arabia, Abu Dhabi, and Kuwait) are driven primarily by oil revenues.

In recent months, Norway’s Government Pension Fund has diversified its holdings, including a move into real estate with the acquisition of a large parcel of commercial properties along London’s Savile Row back in August. Traditionally, sovereign wealth funds have concentrated almost exclusively on equities, and typically only those traded on public stock and bond markets. However, as the funds have grown, their goals have expanded as well. Norway isn’t alone in using its fund to pursue political goals. In early November, Qatar announced its intention to invest $15 billion from the Qatar Investment Authority in Chinese infrastructure and healthcare projects in a move seen as bolstering economic partnership with China. At the same time, China and Qatar agreed to establish a 35 billion yuan currency swap line as part of China’s long-term strategy to increase adoption of its currency as an international reserve currency.

Still, Norway’s move to increase its investment in renewable energy companies is particularly intriguing, since the European Renewable Energy Index has delivered a 35% loss to investors over the past five years, underperforming the general market. Slyngstad insists that he expects “this part of the portfolio will be a long-term outperformer”. But he also preemptively defended the investment in his speech announcing the move, stating: “No matter what you think, if it’s going to be a good investment or not, it’s very simple: We will invest in this area.”

This green energy move has been pushed by environmentalist segments within the government who see the fund as a tool to financially support research and development of renewable energy technologies. A number of advocacy groups, financial institutions, religious organizations, and green energy companies have lobbied for a modification to the fund’s investment requirements, pushing for an expansion into different asset classes. At present, the Norwegian government requires that 60% of the fund be invested in stocks, 35% of it in bonds, and 5% in properties. A broader interpretation of this last component could allow direct investment of oil funds in wind farms, solar panel arrays, energy storage units, and other technologies.

Loosening the fund’s requirements will benefit green energy companies and their supporters. However, questions remain about the fund leadership’s motivations in requesting permission from the Ministry of Finance to enter into these direct infrastructure investments. The risk involved in the $3 billion in green energy investments may not pose any serious threat to the viability of the fund, but may set an interesting precedent of utilizing Oil Fund resources for purposes other than pure maximization of profit and dilution of risk for Norwegian citizens. Oil profits have provided the capital necessary to make possible a transition to more environmentally-friendly technologies, with Slyngstad perhaps hoping that this boost to innovation foster growth in other areas of the economy as well.

The decisions made by Norway’s Government Pension Fund Global will likely serve as a standard. Sovereign wealth funds can be used to accomplish political and economic goals aside from their primary functions as mechanisms for converting fleeting natural resource wealth into long-term sources of steady income. With this, governments can sustain social welfare programs such as pensions. If the strategy proves successful in improving Norway’s green energy sector without hampering the fund’s ability to provide profits sufficient for planned withdrawals, expect other countries to follow suit.