Developing countries and sovereign wealth funds ready for partnership on sustainable investment

23 October 2014

​Policymakers and representatives of major sovereign wealth funds (SWFs) and pension funds discussed the possible contribution of state-owned investment funds to the development agenda at an SWF roundtable held on 15 October during the UNCTAD World Investment Forum in Geneva.

SWFs manage assets of more than $6 trillion globally, while public pension funds manage almost triple that amount. As investors with long-term investment horizons these funds are able to take on less liquid investments, such as those in infrastructure and public facilities, which are actively sought by many developing countries.

Only a small portion of this huge SWF "reservoir" is currently dedicated to direct investment and many developing countries, in particular those in Africa, are still largely absent from the portfolios of these funds.

Executives of SWFs and public sector pension funds attending the meeting said they saw huge potential for long-term investment in sectors crucial for sustainable development, ranging from infrastructure to agriculture, energy, and clean water and sanitation. Recipient countries said they would welcome this.

"We are keen to attract investment in many sectors, including those most associated with sustainable development – from all investors and also from sovereign investors", Anthony Hylton, Minister of Industry of Jamaica, said.

Executives from SWFs from China, Saudi Arabia and South Africa, as well as representatives of public pension funds from Denmark and Norway, said that their long-term investment preference was in line with the nature of development-oriented projects, and they were increasing their investment in such sectors as infrastructure and agriculture.

They also said that investment directed to sectors where financial benefits are not necessarily clear for private-sector investors, such as education and healthcare, would be best managed under a separate fund. This would also avoid mixing mandates and reflect the fact that skills and manpower required to manage such funds are very different.

"Norway has created a separate vehicle to invest in development," Martin Skancke, chair of the Principles for Responsible Investment advisory council and a former manager of the Norwegian fund, said. "It needs people with different skill sets, and many more of them. If we would apply the same ratio of people-per-dollar invested in Norway's general fund, we would need 25,000 people to manage it."

The biggest barriers to investment in key sustainable development sectors cited by SWFs included:

  • Entry barriers to certain socially or politically-sensitive sectors such as agriculture

  • The lack of a stable and predictable investment environment in some developing economies

  • Inadequate information on, and effective packaging of, investment projects in developing countries for potential investors

"Project readiness is very important to compete with other, much easier investment options available to large investors," Mohamed Hedi Mejai of the Islamic Development Bank said.

In addition, SWFs and pension funds largely remain portfolio investors, with limited capacity for direct investment, in particular in developing markets. This is especially the case for small and newly-established SWFs.

Executives from the Angola Sovereign Wealth Fund said that the fund was mandated to invest 7.5 per cent of its assets in social development, and has set up funds dedicated to infrastructure and agriculture investment, but insufficient experience and capacity is a challenge in fulfilling these investments.

To bridge the gap between the financing needs of developing countries and potential of long-term investment by sovereign investors, policymakers and representatives of sovereign and public pension funds underlined the importance of innovative partnerships.

Collaboration could help in identifying and preparing bankable projects, and to commit more resources to public-private partnership projects in pro-development sectors. Partnerships between newly created funds in Africa and Latin America and traditional ones to match money and local expertise could also help increase investment in sustainable development goals.

It was also important for recipient governments to enable investors to have field representation in their countries.

"Having teams on the ground can really facilitate more investment as it helps identify opportunities and hands on management," Javier Santiso of ESADE (Escuela Superior de Administración y Dirección de Empresas) said.