COVID-19 Forced Sovereign Wealth Funds to Prioritize Sustainability

The funds are now more focused on ESG, health care, tech, and venture capital than ever before.



Sovereign wealth funds are among the newest and most heterogenous class of institutional investors. The term was only coined in 2005, to characterize several already existing organizations that invested on behalf of governments.

Yet, because these organizations are accountable to the local populations they serve, they were quickly used as rainy-day funds during the early days of the pandemic. Three Latin American funds were completely exhausted, while others in different parts of the world were reformulated or merged. This dramatic shock to the sovereign wealth fund industry led to a change in how these organizations function, according to an academic paper by Diego López that was published this February.  

“One can argue that 2020 has indeed marked the beginning of ‘SWF 3.0’, a period for a more mature industry that is focused on specific matters such as sustainability, resilience, and cooperation,” writes López.

The paper refers to SWF 3.0 as the post-pandemic era, SWF 2.0 as the era between 2005 and 2020, and SWF 1.0 as the early era of sovereign wealth funds before a name was coined.

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“COVID-19 ended the opulence and excesses of SWFs and accelerated some of the trends occurring in the industry,” states the paper. These trends include “less and different real estate, more healthcare and technology, more partnerships, more ESG, and, especially, more venture capital.”

For example, sovereign wealth funds are now involved in startup investments all over the world.

“Funds are now able to enter earlier and smaller financing rounds, including seed and Series A, which was unthinkable a few years ago,” López writes.

The pandemic also pushed the funds to focus more on domestic investments, as SWFs were often relied upon to help with bailouts. Funds have also moved away from traditional real estate investing.

“Investments in brick and mortar, once favored by SWFs because of their alignment in risk and horizon, have decreased in volume from 34% of the total in 2012 to 18% in 2021,” states the paper.

Over the last decade, the amount of assets owned by sovereign wealth funds has increased dramatically. In 2008, global SWFs owned just $3.5 billion in total assets. In 2021, that number was $10.5 billion.

For the funds that survived the pandemic, long-term resilience has taken on greater importance. Now that the “rainy day” is passing, investors are starting to think further into the future. This has meant an increasing interest in long-term investing strategies. But sovereign wealth funds still trail behind many other institutional investors when it comes to ESG.  

“Only 12 funds are signatory members of the UN Principles for Responsible Investing and only German quasi-SWF KENFO and NZ [New Zealand] Super Fund have committed to the objective of Net Zero by 2050,” states the paper.

Related Stories:

Norway’s Sovereign Wealth Fund Loses $71 Billion in Q1

Grim Outlook for Singapore Sovereign Wealth Fund after Poor Returns

Support Grows for US Creating a Sovereign Wealth Fund

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There Is Still Time to Register for the 2022 CIO Summit

Don’t miss our in-person return, May 16-17 in Chicago.

A fireside chat between Shundrawn Thomas, president of Northern Trust Asset Management, and CIO Executive Editor Amy B. Resnick will open the CIO Summit in Chicago this month. The discussion will focus on the shift to sustainability and responsibility in investing and the implications of that change for institutional managers and investors. It will help set the tone for the two-day event.

The conference sessions are focused on how institutional investors are being challenged to navigate volatile economic and market conditions. Our speakers will drill down into the latest strategies being used to build and operate investment teams and manage institutional assets in this evolving environment.

Learn from our expert panelists Nicole T. Musicco, chief investment officer at CalPERS, Dhvani Shah, CFA, chief investment officer at JM Family Enterprises, and Tony Payne, senior vice president of technology and innovation at BCIMC, among others.

The event will highlight the techniques CIOs are using to achieve their investment goals. Panels and presentations will include allocators speaking about ESG investing and governance issues, building high-performing teams and investment offices, balancing investing for growth with risk mitigation, how geopolitics affect emerging markets, and how new technology is being used to achieve better investment outcomes.

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The full agenda and registration page are available here.

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