Mutual Green Funds?

Ashby Monk

Back in May, Sang Yong Park and Leslie Young published an op-ed in the WSJ arguing for the creation of ‘Mutual Wealth Funds,’ which would facilitate SWF investing in equities by alleviating all geopolitical concerns. To be frank, I wasn’t particularly enthusiastic about the idea. First, the premise underpinning their proposal was that SWFs engender suspicion and cannot alleviate this on their own, which I thought was overly pessimistic. Second, I was of the opinion that Park and Young understated matters when they said “the details would be complex.” As I argued at the time:

“…there are easier ways to ensure SWFs are not hostile than adding another layer of complication to the global financial system. Imagine the difficulty of coordinating all the stakeholders so as to agree, design, and implement MWFs.”

Nonetheless, Park and Young are back on the op-ed pages of the WSJ with another proposal for their Mutual Wealth Funds. This time, however, they have nuanced their argument by re-branding MWFs as “mutual green funds.” According to the authors, MGFs would be an international consortium of SWFs interested in leveraging their long-term mandates in green projects.

SWFs are the longest-term investors in the marketplace. So Park and Young are correct in suggesting these funds should leverage this time horizon by investing in projects that have longer term payoffs (such as green tech investments). Moreover, I fully acknowledge the benefits of SWFs ‘working in concert‘ so as to achieve specific objectives in certain economic geographies. This idea would hold true for green investing. However, these funds still seem artificial and too complex. Even the authors simplified example of how a MGF could be set up is complicated:

“The host nation could inject equity and invite sovereign wealth funds to contribute more in return for a pro-rata share in the resulting intellectual property and profits from commercialization. The equity could be leveraged by a loan from the host country’s national pension fund. Or the fund could sell convertible bonds, which would offer sovereign wealth funds a base return plus upside participation. The global initiative could be coordinated by a supranational body, such as the United Nations. Its main political task would be to persuade each country to contribute, on the basis that others are participating in a global effort that would yield commercial as well as environmental benefits — and help safeguard the long-term value of their foreign exchange reserves.”

Really? I’m having trouble seeing the UN taking on the role as placement agent for MGFs. Still, I think Park and Young’s latest article was more compelling than the first. As an economic geographer, I am swayed by the argument that local knowledge is crucial for superlative investment performance.  So, while  I think the approach taken by Park and Young is overly ambitious and probably not practically viable,  I do agree that SWFs can benefit from working together. However, I think the clubbing or cooperation agreements that will take place (and indeed already are) between and among SWFs will be organic; they will grow out of mutual interests.

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About

This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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