Paper: Norway Sovereign Fund Offers Best Insights to Investors on SRI

Institutional investors should look toward the sovereign wealth funds of Norway and New Zealand in their quest for sustainable investing, according to a recent paper.

(February 28, 2012) — Institutional investors should look to the example of sovereign wealth funds, which have among the best practices with socially responsible investing (SRI), according to a newly released paper by a professor at the University of British Columbia.

The paper — titled “Sovereign Wealth Funds and the Quest for Sustainability: Insights from Norway and New Zealand” written by Benjamin J. Richardson — asserts that among sovereign funds, Norway ranks as the leader in SRI initiatives. “If pensions and insurance companies want to look for guidance and take SRI seriously, some of the best examples come from Norway and New Zealand, largely because of their regulatory environment,” Richardson, a professor at the University of British Columbia, tells aiCIO.

He adds: “It’s easier for governments to regulate their own funds because they can correct behavioral changes in a market where you have competitive pressures to act differently.”

According to the Sovereign Wealth Fund Institute, as of May 2011, there were 52 sovereign wealth funds worldwide, with assets of some US$4.3 trillion. A recent survey by the Monitor Group, published in July 2011, put Norway’s SWF as the largest (with US$560 billion in assets), while New Zealand’s was ranked 20th (valued at US$15.8 billion), the paper asserts. Therefore, with sovereign wealth fund assets expected to at least double within the next decade, and growing awareness of their economic, social, and political power, international efforts to urge voluntary behavioral codes for such funds have become more pronounced.

The paper states: “However, few states so far have obliged SWFs to invest ethically. While regulations to encourage socially responsible investment (“SRI,” as ethical investment is sometimes known) in the private sector are appearing, such as taxation incentives and corporate governance reforms, explicit duties to practice SRI have only been imposed on public financial institutions. The first precedents were adopted in the 1980s by some states and municipalities in the United States, which restricted government pension funds from investing in firms operating in the discriminatory milieu of South Africa or Northern Ireland. Since 2000, the SWFs of Sweden, Norway, New Zealand and France have been subject to legislative direction to invest ethically, with more comprehensive and ambitious obligations than the American precedents.”

According to Richardson, many institutional investors still fear SRI as a barrier to success. “If you have to act ethically, you may compromise financial returns – there is some truth to that because the market doesn’t reflect all social, and environmental costs,” he says.

Another perceived barrier to effective SRI implementation: Disagreement among the beneficiaries of the fund as to what is an ethical action. “When you have millions of beneficiaries, plurality of ethical perspectives can be a problem,” says Richardson. To overcome this, he adds, funds should devote more research into examining SRI’s financial value over the long-term, and having a more democratic and transparent way of making decisions.