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Home » Comment: How Sovereign Wealth Funds Can Leverage Their Capital for Social Good

Comment: How Sovereign Wealth Funds Can Leverage Their Capital for Social Good

by Arnav Perez
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Investing in people is not just a morally rewarding proposition; it’s also a smart economic strategy. In my work at the Oxford Centre for Mutual & Co-owned Business at Kellogg College, University of Oxford, I look at how can investment strategies by influential sovereign wealth funds (SWFs), such as Norway’s Government Pension Fund Global, the Abu Dhabi Investment Authority, or the China Investment Corporation, could reap significant rewards for broader society and the environment.

A sovereign wealth fund is an investment pool of foreign currency reserves owned by a government, and according to The Sovereign Wealth Fund Institute, the amount of money held by the largest has more than doubled since September 2007, from $3.265 trillion to $9.1 trillion in 2021. Therefore, in financial terms, the potential for SWFs is great.

The largest, Norway’s Government Pension Fund Global, held nearly $1.1 trillion as of August 2021. Significantly, Norway has already devoted some of this influence to helping the environment by pulling out of several palm oil companies over deforestation risk during the last 10 years.

But there is still a long way to go, and my research proposes a shift in investment strategy, urging influential SWFs to direct their vast capital towards co-operatives, mutuals, co-owned businesses, and social enterprises across the globe. The objective is to harness these vast funds in the pursuit of Sustainable Development Goals such as SDG 8 (decent work and economic growth), SDG 10 (reduced inequalities) and SDG 13 (climate action).

Alternative enterprises, unlike traditional businesses, consider the “triple bottom line” of people, planet and profit. Investing in these organisations promises not only financial returns but also positive social and environmental impacts. Herein lies the need for this innovative research.

SWFs, with their long-term investment horizons and significant capital, are well-positioned to influence the global investment landscape towards sustainability. With their focus on intergenerational wealth, they are a perfect fit for the steady, generational rewards that social enterprise investment offers.

Burnt land is pictured next to a palm oil plantation in South Kalimantan province, Indonesia. Norway’s sovereign wealth fund has pulled out of several palm oil companies over deforestation risk.

By focusing on businesses such as co-operatives and employee-owned businesses, investors can empower local communities, foster job creation, and catalyse a transition towards a more inclusive, resilient and sustainable economy, “people capital” and nurturing the human potential necessary for future growth.

Cross-sector collaboration is needed to identify potential hurdles and to formulate strategies for making this shift attractive to investors. A comprehensive understanding of the risk-return profile of social investment is necessary, and an exploration of legal and regulatory frameworks accommodating such strategies is imperative.

It is encouraging news that global investment firms such as Kohlberg Kravis Roberts & Co (KKR) are increasingly recognising the value of such social investments. Peter Stavros, co-head of global private equity at KKR, recently spoke at the University of Chicago Booth School of Business about the transformative power of broad-based employee ownership.

When employees are treated more like owners, they become invested in the success of the business. This not only enhances the sense of collective responsibility but also cultivates a culture of innovation and commitment. It encourages employees to think beyond their individual roles and contribute more holistically to the growth and prosperity of the business.

The shift in perspective from leading investment firms like KKR indicates a global trend where significant financial players are beginning to realise the importance of alternative social investments.

We as academics are uniquely positioned to address social and environmental issues in helping other stakeholders to make significant strides to fulfil this commitment. It is our vision that as socially conscious investing becomes more mainstream, investment firms are increasingly exploring the possibilities, and alternative social investments represent a unique opportunity to combine financial return with social impact.

By strategically directing capital towards these areas, they can catalyse the development of innovative business models and solutions that prioritise societal value alongside economic value. This blend of financial return and social impact represents a new frontier in investing, reflecting the sector’s significant potential to contribute to a sustainable and equitable world.

Source : Reuters

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