The proliferation of sovereign wealth funds (SWFs) – state-owned investment vehicles generally funded by excess profits from commodity exports – has been widespread over the past two decades. In 2000, there were 26 established SWFs. Now, there are more than 75 globally with collective assets exceeding $8 trillion. The largest can be attributed to Norway (the Government Pension Fund Global) and China (the China Investment Corporation), closely followed by Abu Dhabi and Kuwait. Such funds have served as a stabilising force through periods of fluctuating oil prices, naturally proving crucial for resource-rich countries including Iran and Algeria.

Despite the phenomenal growth of many SWFs, the future of oil revenue-funded investment vehicles is being increasingly called into question. The ever-evolving market for energy alternatives poses a real risk to the value of oil in the coming decades. Given that many funds are almost wholly reliant on robust oil prices in sustaining their primary source of funding, SWFs are likely to face substantial financing challenges in future. These risks were most recently outlined in a World Economic Forum white paper which discusses sustainable investment and adaptation to market changes caused by global warming shifts. The authors outlined the ‘mere 0.19%’ of SWF investments in green energy and the real dangers for countries that are heavily reliant on traditional fuel sources in being left behind – ‘stranded nations’ in the future decarbonised world. Maha Eltobgy (Head of Shaping the Future of Long-Term Investing, Infrastructure and Development at the World Economic Forum) commented that ‘the resource dependent, fossil fuel-rich nations that have diligently built large sovereign wealth funds to manage the economic challenges of the Age of Oil must now consider how to use this vast wealth to prepare for the Age of Green Energy.’ The countries deemed most ‘at-risk’ of being ‘stranded’ are predominantly Middle Eastern: Iraq, Kuwait and Saudi Arabia have percentage total wealth tied to carbon assets of 67 percent, 52 percent and 49 percent respectively.

To prepare for the transition, the WEF authors propose that countries seriously consider investment in alternative energy as part of an alignment of financial expertise and public policy. This ‘strategic investment fund’ model is promoted as a mechanism to merge economic and development goals to guarantee the sustainability of SWFs in decades to come. One paradigm of success that competing SWFs could undoubtedly learn from is the world’s largest fund, the Norwegian Government Pension Fund Global. At face value, its credentials are remarkable: its assets amount to over $1 trillion. Beyond the surface the fund is more impressive, having built its wealth on increasingly sustainable, ethical investment decisions. For example, in 2006, it banned Walmart from its portfolio for human rights violation accusations. It also barred Boeing, Honeywell and Airbus for their production of nuclear weapon components.

Besides its seemingly impenetrable ethical standards, the Norwegian Oil Fund also mandates environmental protection as a priority: last year, it laid out its intentions to encourage the 9,000 firms in its portfolio to be more transparent regarding their CO2 emissions and their plans to adapt to the changing energy market. The Fund’s Chief Corporate Governance Officer, Carine Smith Ihenacho, outlined that the Fund’s team “want clear targets for CO2 emissions and other greenhouse gases, including methane” and to “see reporting of progress against the targets”. These strict mandates reflect the suggestions proposed in the WEF paper that countries need to begin designing the future of the decarbonised energy market landscape, rather than being passive bystanders and reacting when it may be too late to recover lost wealth.

Setting a clear mandate for investment which has sustainability at its core could also help to quell ongoing concerns around SWF investment and national security: accompanying the expansion of overseas investment by large SWFs is a fear that countries may use their financial clout to pursue a geopolitical, rather than purely economic, motive. For example, the recent announcement of China’s SWF – the China Investment Corporation (CIC) – partnering with HSBC to invest £1bn into British companies with Chinese links has raised concerns over large global players investing in politically sensitive industries. President of the CIC, Tu Guangshao, has complained that the US and Europe have made “protectionist moves” regarding investments which unfairly target China, such as last year’s announcement of updated rules on US screening of foreign investments in industries including biotechnology, nanotechnology and wireless communications. Whether the increased security measures are justified are not is a pertinent question. However, whilst investigations are ongoing, countries such as China should view the challenging situation as an opportunity to set clearer investment goals and consider taking a more holistic approach to investment, drawing on the Norwegian model.

SWF strategies must shift – these shifts will be awaited with great anticipation. To avoid catastrophe, countries must heed the warnings of the WEF and others: stable oil prices will not be guaranteed for much longer and the global shift towards decarbonised energy alternatives will happen more rapidly than initially envisaged. Funds would likely do well to draw on the Norwegian example as a paragon of sustainable, ethical SWF governance. Faced with a transformative opportunity to refine investment goals, only time will tell if they are to sink or swim.