Competing Accountabilities:
Reframing the Governance
Challenge for Responsible
Investment
Heather Hachigian
DPhil. Candidate, School of Geography and the Environment
University of Oxford
RII Webinar, March 26, 2013
Sovereign Wealth Funds (SWFs)
• The term SWF was first used in 2005 to describe a class
of institutional investors defined by their government
ownership and lack of liabilities (outside of government)
see Monk (2009).
• SWFs are not only features of autocratic countries; many
democratic states have SWFs.
• SWFs are growing rapidly, from $1 trillion to over $4
trillion in 2012.
SWF Growth
Assets under management $trillion USD
Source: thecity UK Fund
Management November 2012
The SWF Opportunity
• For domestic constituents, well governed SWFs offer:
– Relief from reliance on non-renewable resource revenue;
– A mechanism for transferring wealth from current to future
generations; and,
– An opportunity to express national ethical values in global
financial markets.
• For the global economy, well governed SWFs offer:
– Stabilization through their countercyclical investment tendencies;
and,
– More efficient global financial markets that incorporate ESG
information.
Ambiguity, Uncertainty and Risk
• Risk and uncertainty are indeterminacies of the future.
• In contrast, ambiguity is an indeterminacy of the present (Best
2008).
• Uncertainty and risk can be reduced to subjective probabilities
and calculable decision problems.
• Ambiguity, conversely, cannot be reduced, as the problem of
communicating, interpreting and debating information
remains, even after uncertainty is transformed to risk and risk
is reduced to sophisticated decision problems.
Three forms of Ambiguity
Ambiguity
Socialized
Ambiguity
Ambiguity of
Conflict
Ambiguity of
meaning
Definitions
Examples
The process of forming and acting on
Large institutional investors and
expectations actually contributes to the stock prices, herding effects, selfoutcome we are trying to predict.
fulfilling prophecies
Competing institutional objectives that
make measuring success of the
institution difficult, if not impossible.
Ethical investment program
conflicting with financial goals
Band of interpretation that exists
between rules, norms, social
conventions and their implementation
Fiduciary duty interpreted to serve
specific interests over others
The Relevance of Ambiguity
• SWF accountability relationships have greater scope for
conflict than those of traditional fiduciary investors (e.g.,
public pension funds)
• Integrating extra-financial factors into investment
decision-making depends on the ability to communicate,
negotiate and interpret the valuation of intangible assets
and discount rates for the future.
Norwegian Government Pension FundGlobal
• One of the largest SWFs in the world, with $560 billion in
AUM;
• Invests entirely outside the Norwegian economy in public
equities, fixed income and real estate;
• Governed by three bodies: Ministry of Finance;
Norwegian Central Bank; and Council on Ethics
– Council on Ethics is responsible for screening criteria.
– Norges Bank Investment Manager is responsible for
ESG engagement.
Manifestation of Ambiguity in NGPF-G
Socialised Ambiguity: Uncertainty that is a consequence of
expectations and conventions that are irreducibly social and interactive,
making it impossible to perceive probability relationships.
• To reduce uncertainty, governance frameworks are designed to
encourage transparency (Norway is one of the most transparent
SWFs in the world).
• But this ignores the second (socialised) source of uncertainty that
cannot be resolved with more information.
• Flexibility embedded in institutional governance frameworks can
help institutions to cope with the unknowable unknowns.
Manifestation of Ambiguity in NGPF-G
Ambiguity of Conflict: The Principal-Agent problem in the
context of investment manager and sponsor relationship.
• To reduce this form of ambiguity, governance frameworks
appeal to asymmetric power relationships, either by
delegating power to the investment manager or leaving it with
the sponsor.
• But this raises other problems: For example, the Ministry sets
the universe of investment, but this can undermine NBIM’s
ability to change corporate behaviour through engagement.
• Negotiation can contribute to expanding the realm of what is
possible.
Manifestation of Ambiguity in NGPF-G
Ambiguity of meaning: An appeal to fiduciary duty seeks to
eliminate intersubjective interpretations.
• In absence of a mechanism for addressing consequences of
its entrenchment, fiduciary duty can contribute to inertia.
• By focusing on eliminating intersubjective forms of ambiguity,
we have ignored the ambiguity manifesting in other forms
(e.g., interests that are served by a particular interpretation of
a rule).
• Reflexivity allows the Fund to see through the problems that
it faces and allows new ideas to be integrated into the
decision-making process.
Conclusion
• Ambiguity differs from risk and uncertainty.
• Investors must learn to manage ambiguity because it is irreducible.
• Managing ambiguity is particularly important for the effective
implementation of RI programs.
• Institutional investors must invest in their governance, embedding a
degree of:
– Flexibility
– Negotiation
– Reflexivity
Recommended Readings:
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Best, J. (2005). The limits of transparency: ambiguity and the history of international finance.
Cornell Univ Pr.
Best, J. (2008), ‘Ambiguity, Uncertainty and Risk; Rethinking Indeterminacy’, International Political
Sociology, 2(4), pp. 355-374.
Clark, G. L., & Monk, A. (2010), ‘The Norwegian Government Pension Fund: Ethics over
Efficiency’, Rotman International Journal of Pension Management, 3(1), 14-19.
Crotty, J. 1994. Are Keynesian Uncertainty and Macro-theory Incompatible?
Gelpern, A. (2011), ‘Sovereignty Accountability and the Wealth Fund Governance Conundrum’,
Asian Journal of International Law 1(1) (January 2011). Preprint.
Knight, F. H. (1921), Risk, Uncertainty, and Profit. Boston, MA: Hart, Schaffner & Marx; Houghton
Mifflin Company.
Mahoney, J. and Thelen, K. (2010). Explaining Institutional Change. Ambiguity; Agency and
Power. New York, NY: Cambridge University Press
Monk, A., (2009), Recasting the Sovereign Wealth Fund Debate: Trust, Legitimacy, and
Governance 14(4), pp, 451-468.
Contact Details: heather.hachigian@ouce.ox.ac.uk