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Asset management firms don’t invest as principals: they invest as agents for their clients. But as principals they can choose which clients to seek to serve and in what capacity.

Firms serving authoritarian states that stand accused of crimes against humanity run serious business risks. This project identifies these risks and offers a framework for firms to address them.

In managing assets for states with poor human rights records, investment managers undermine their role as agents of responsible capitalism.

In their extra-financial reporting, firms have been proud to surface commitments to respect and protect human rights issues pertaining to their own employment practices, and that of their supply-chain, as well as in the way that they invest client assets. Notably absent is an analysis of human rights violations on the part of their clients. Given that investment management firms work solely to increase the financial power of their clients, and that their some of their clients commit widescale human rights abuses, this omission is peculiar.

Developed markets with large economies tend to have strong institutions to protect civil and political rights. Taking IMF estimates at the end of 2021, around 63% of global GDP was accounted for by countries that Freedom House classes ‘Free’ on the basis of their Civil Liberties and Political Freedom scores, and a further 10% of global GDP was accounted for by states classed as ‘Partly Free’. Only 26% is accounted for by countries that are classed as ‘Not Free’.

However, those states classed as ‘Not Free’ are financially asset-rich. Across the world it is estimated that national sovereign wealth funds (SWFs) hold a collective $10.7 trillion, and of that, around $6.4 trillion is held by states classed as ‘Not Free’. Only $2.3 trillion is held by states classed as ‘Free’ – $1.2 trillion of which was Norway alone.[1]

Of the circa $13 trillion in foreign exchange reserves estimated by the IMF, around $5 trillion are accounted for by states classed as ‘Not Free’. Amongst public pension funds ‘Not Free’ states are less important, accounting for only $0.4 trillion of the c.$14.7 trillion market. After correcting for some double-counting, ‘Not Free’ states look to control some $9.0 trillion of SWFs, public pension funds and Central Bank reserves. To put this in context, the total assets under management for the top fifty investment management firms sums to just over $90 trillion. It is not hard to see why official institutions have been a target for investment management firms seeking to sell their services.[2]

The degree to which sovereign wealth funds of ‘Not Free’ states deploy external investment managers tends not be publicly disclosed. Besides BlackRock and SSGA – which report that they managed $316bn and $479bn respectively in mandates for official institutions such as central banks, sovereign wealth funds, and government ministries at year-end 2021[3] – no other top ten firm by assets under management splits out this figure in their annual report. Others make more or less vague reference to the business. JP Morgan Asset Management boasts that it does business with 60% of the world’s largest pension funds, central banks and sovereign wealth funds.[4] But public information around the presence of most firms in this market can be gleaned mainly from press cuttings, thought leadership papers, conference events, or the job titles of their distribution personnel.

Figure 1: Total Sovereign Wealth Fund Assets ($bn) by country, 2022 – colour-coded by Freedom House status (Dark blue = Free; Light blue = Partially Free; Red = Not Free)

Source: Author’s calculations based on data from Global SWF and Freedom House, 2022. See in Tableau here.

The total industry revenues attached to managing assets for states that are ‘Not Free’ is hard to establish. To make an estimate of investment management industry aggregate revenues we need three things: total asset values, the proportion of assets that are outsourced to external investment managers, and the fee paid on these assets. Estimates for total fund assets exist and have been discussed. But neither the proportion of assets outsourced to external investment management, nor the fee paid on these assets are in the public domain.

Some sovereign wealth funds exist solely as engines of domestic industrial policy with no external investment management intermediation. For example, Kazakhstan’s Samruk-Kazyna presents itself as a sovereign wealth fund, but is really a repository for state-owned Kazakh companies.[5] Other sovereign wealth funds have allocations to international financial asset pools, direct real estate and private equity allocations, as well as serving as a coordinating hub for some aspect of domestic industrial policy. For example, China Investment Corporation, which with $1.2 trillion of assets vies with the Norwegian Government Pension Fund to be the largest sovereign wealth fund in the world, has global exposure to listed and unlisted assets, but is also the parent company of Central Huijan Investment Corporation – the repository for the People’s Republic of China’s majority stakes in the big four state-owned banks as well as a host of other financial institutions.[6]

To improve an estimate of externally managed assets we can look to RFPs issued by sovereign wealth funds. The Sovereign Wealth Institute reports records of 210 RFPs from twenty of the thirty-six sovereign wealth funds owned and controlled by ‘Not Free’ states. Excluding SWFs with no recorded RFPs reduces the asset base by $934 billion.

Fees vary meaningfully across products, with passive allocations being offered for close to zero direct cost, active fixed income commanding low double-digit basis points, and active large-cap equity mandates costing perhaps 25-35bps. More specialised allocations, as well as private equity and real estate can command higher fee rates.

Given all the unknowns and unknowables, any estimate of annual revenues will lack precision. But overall, it seems reasonable to estimate that states understood as ‘Not Free’ account for billions of dollars each year in investment management firm revenue (see Figure 2).

Investment management firms have typically outsourced the ethical dimension attached to deciding their target market for clients to their home governments and financial regulators, being happy to work for any client that is not subject to financial or economic sanctions. This has the meaningful benefits of clarity and operational simplicity. Furthermore, firms can point to the legitimacy that is associated with a governance regime that has democratic oversight and avoid the risk of there being some slippery slope around client selection. All firms thus compete on a level playing field. When morality is outsourced to the law, firms can focus on profit maximisation.[7]

Figure 2: Investment Management Industry Revenue Estimates Derived from ‘Not Free’ Sovereign Wealth Fund External Mandates, 2022 – Depending on Average Fee and Proportion of SWF Managed Externally.

But the industry has, over the past decade, committed itself to fulfil a societal purpose beyond simple profit maximisation based on the insight that doing so increases their commercial resilience.[8] In the field of human rights, this insight has not been turned into action. Large quantities of sovereign wealth are managed for authoritarian regimes that are widely understood to be committing severe human rights violations of irremediable character. This is neither compatible with organisational higher value purpose, a healthy corporate culture, brand values attached to responsible capitalism, or resilient commercial operations given the demands from clients around responsible investment. As outlined in chapter 2, investment management firms who are working to increase the financial and fiscal capacity of states engaged in serious human rights violations can – and increasingly will – be understood as complicit in these violations.

Over the medium-term failing to ‘walk the talk’ will serve only to further undermine trust in a firm and the industry overall.[9] As discussed in chapter 5, this is part of the reason why purpose has become a central concern of financial regulation in the UK.[10] And it is a reason why we should expect regulators to evolve their focus from culture and purpose towards directly calling out and sanctioning firms engaged in greenwashing (following in the footsteps of BaFin) or potentially rights-washing.[11]

What does Freedom House ‘Not Free’ Status Mean?

Freedom House is a nonpartisan Non-Governmental Organisation founded in 1941 in Washington DC to champion the expansion of freedom and democracy around the world.[12]

Each year their analysts score ten political rights indicators (grouped into Electoral Processes, Political Pluralism, and Participation) and fifteen civil liberties indicators (grouped into Freedom of Expression and Belief, Associational and Organisational Rights, Rule of Law, and Personal Autonomy and Individual Rights). The overall political rights and civil liberties scores come together to arrive at a categorisation of states into ‘Free’, ‘Partly Free’, and ‘Not Free’ designations.[13]

States and territories that are deemed ‘Not Free’ include those states that afford their citizens the lowest levels of political rights and civil liberties, typically suppressing dissent with state-organised violence, denying paths to peaceful political change, and not operating under the rule of law.

The US government uses Freedom House ratings to determine whether governments qualify to receive economic aid via the Millennium Challenge Corp, and the World Bank uses them as a source for its Worldwide Governance Indicators.[14]

Back to Executive Summary

On to Chapter 2

[1] Global SWF (August 2022): Estimated AuM rankings of the world’s largest Sovereign Wealth Funds

[2] The interaction between assets controlled by CIC, SAFE and NSSF on the one hand, and the Peoples Bank of China’s foreign exchange reserves is not transparent. To be conservative, all Chinese sovereign wealth assets are assumed in the $9.0 trillion estimate to be sub-components of the PBoC’s reserves. This errs on the side of conservativism.

[3] Blackrock annual report 2021 (Form 10-K p6); SSGA Stewardship report 2021 (p13)

[4] JPMorgan Chase annual report 2021 (p.8)

[5] Samruk Kazyna Fund News: Home

[6] China Investment Corporation: Who We Are

[7] See Branco Milanovic (2021): Capitalism Alone: The Future of the System that Rules the World, Harvard University Press, pp177-187 for a fascinating discussion around this.

[8] See chapter 5

[9] Eg, the US Business Roundtable 2019 Role of the Corporation pledge was at the time widely heralded but is now best remembered as the go-to example to illustrate the rationality of taking a cynical approach to announcements around corporate responsibility. Stakeholder capitalism, done right, is what America needs | Fortune

[10] FCA (2020): Transforming culture in financial services: Driving purposeful cultures, Discussion Paper DP20/1

[11] Financial Times (June 2022): DWS: greenwash row highlights ESG’s own ethical conflicts

[12] Freedom House: About Us

[13] Freedom House: Freedom in the World Research Methodology

[14] Sarah Sunn Bush (2017): The Politics of Rating Freedom: Ideological Affinity, Private Authority, and the Freedom in the World Ratings, Perspectives on Politics / Volume 15 / Issue 3 / September 2017 pp. 711-731


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