Over the last 15 years and especially since the global financial crisis, investors around the world have been increasingly paying attention to the investment policies of sovereign wealth funds (SWFs). This paper examines the relationship between SWFs’ investments and the ESG practice at the ownership stake level.
Authors of this paper distinguish between SWFs’ selection (i.e., whether the ESG performance of potential target firms affects SWF investment decisions) and engagement (i.e., whether SWF investment affects the ESG performance of target firms). To this end, the authors also distinguish between SWFs with an explicit ESG policy and those without.
While SWFs have been in existence for many decades, the public interest in it has only been mounted over recent years. Still, the lack of transparency and political motivations lead host country governments and firms to react cautiously to SWFs’ investments. As SWFs are government-owned, they do not need to exclusively focus on financial returns, but can also add a stakeholder perspective to their investment goals. It is challenging to investigate SWFs considering that many lack transparency and differ significantly in terms of their purpose, geographical focus, and funding source, etc.
Do SWFs, which typically aim at accumulating national wealth for the future generations thus have a long-term investment horizon without short-term liabilities, put a stronger focus on stakeholder welfare compared to other institutional investors? Given their long-term focus and immunity from pursuing short-term financial returns, it is reasonable to expect that SWFs may be more inclined to care about sustainability issues and take environmental, social, and governance (ESG) issues into account in their investment decisions. However, aside from some case studies on specific funds, extensive research on the tradeoff between ESG-focus and pursuit of financial returns by SWFs is still scarce.
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