Sovereigns versus citizens

Sovereign wealth funds need to become more democratic if they want to reduce citizen action against them.

Even the most responsible and ethically minded sovereign investors have come up against citizen campaigns, causing them to change investment practices. But the implementation of citizens’ desires can be problematic, particularly after investments have been made.

Installing democratic processes into the funds increases transparency, engagement and accountability, keeping problems from blowing up later, says Dr Angela Cummine, the director of The Wealth Project at Oxford University.

Investment practices aren’t the only contentious issue for sovereign wealth funds at the moment. Citizens are expressing strong feelings about the purpose of the funds as well.

While economist and philosopher Adam Smith first proposed state-controlled investment funds in the 18^th century, it was not until the turn of the 21^st century that the number of sovereign wealth funds boomed. Today, more money exists in sovereign wealth funds than ever, upping the stakes, and governments and citizens both consider the money to be theirs.

Cummine argued that classical political theory holds the key to deciding whose money it is. According to that theory, citizens are the principal and government is merely the agent.

“If you accept that basic insight of classical political theory, then sovereign funds are only ever in the custody of the government,” Cummine said at a Lowy Institute event on sovereign wealth funds. “This does not mean governments can’t or shouldn’t manage the money on our behalf, but we should have a clear understanding of who is the ultimate owner.”

But the typical sovereign wealth fund does not involve much direct citizen participation; in fact, many citizens are not aware of their existence.

This means citizens have decisions made on their behalf with no exit options, which can generate a backlash if the investments do not match social and ethical expectations, Cummine explained.

Trouble for New Zealand

The issue has already cropped up.

New Zealand is one of the most responsible and ethically minded sovereign investors, yet this hasn’t shielded it from facing some real citizen opposition to its investment practices, Cummine said.

New Zealand, like Norway, held some equity investments in mines in Papua New Guinea that ran into trouble in terms of labour rights and demonstrations that the police put down. Huge environmental destruction was going on around these mines, as well as questions around destruction of indigenous land rights practices.

These concerns led the Norwegian fund to divest from that particular investment.

New Zealand Super, which also has in its mandate strong obligations to respect human rights and preserve the country’s reputation as a responsible investor globally, took a different approach.

The management and trustees of New Zealand Super decided a better outcome could be achieved by actively engaging with the management of the mine company – a recognised form of ethical investing.

Unfortunately, when New Zealand citizens became aware of the investment, they were extremely uncomfortable with the fact that their universal retirement pension was being funded by this particular investment.

“They did not want, in effect, blood money in their retirement funds,” Cummine said.

After pressure and debate, the sovereign fund divested from the mines.

More pressure on the Future Fund

“That sort of problem can be avoided if you open up these funds to more consultation about what values we hold as a community, and what sort of values we like to see become accepted investment practices through our sovereign funds,” Cummine said.

In Australia, the $127 billion Future Fund is likely to feel the heat of  increased citizen engagement as it grows.

The former chair of the Future Fund, David Murray – who was on the event panel with Cummine – said the implementation of ethical investments was difficult for the nation’s sovereign wealth fund.

“The government wanted to ban the Future Fund from investing in tobacco, but does that mean that [we exclude] trucks on the road carrying the product? It gets very hard to implement,” Murray said.

To help guide the implementation decisions, a catch-all rule was created: the Future Fund cannot diminish the reputation of the Commonwealth Government in financial markets because of its operations.

“On the other hand, we decided that [when the] government had expressed its view by legislating or forming a treaty, for example on landmines, that was much easier for us to follow,” Murray explained.