National Council of Applied Economic Research
Opinion: UdaiBir Das.
The UK’s newly minted National Wealth Fund (NWF) stands not merely as a state-owned financial entity but as a beacon of hope amidst climate challenges. Its mission: To secure a lasting reservoir of funding for climate resilience and sustainable economic growth. Much like a lighthouse, this state-owned investment fund promises to inspire confidence in the UK’s ability to chart a course towards a more sustainable future. The question remains: Will the NWF successfully guide the UK towards resilience and sustainability, or will it echo a foghorn, sounding bold yet lost in the murky maze of the political economy of state-owned funds?
The NWF’s long-term success is not a game of chance but a testament to robust governance and accountability. Effective governance is not just a requirement—it is the lifeblood of the Fund’s success and the UK’s future. Unfortunately, the Green Finance Institute’s Task Force report, which laid the groundwork for the NWF, downplayed these crucial aspects.
A well-governed, accountable national Fund is a priceless legacy for current and future generations. It promises to create enduring long-term value and wealth, free from short-term constraints. This is paramount as climate change and broader economic growth factors will leave their mark on countless future generations. High governance standards will offer reassurance about the NWF’s long-term impact and foster confidence in the future of a more resilient and prosperous UK economy.
Governance: The Cornerstone of Success
The performance and longevity of state-owned funds are inextricably tied to their governance. Studies have demonstrated that sound governance, marked by transparent decision-making, accountability mechanisms, and checks and balances, can enhance the performance of state-owned funds. Conversely, poor governance can result in inefficiencies, subpar performance, and scandals.
While state-owned investment funds in developed economies often operate with high transparency and adhere to stringent governance standards, governance mishaps occur, rapidly eroding public trust. Understandably, governance structures will differ across countries, influenced by their risk tolerance and institutional setup. However, these mishaps underscore the critical role of robust governance in ensuring the effectiveness of these funds.
While the Task Force’s report offers economic and financial assessment, it falls short of a guide on NWF governance. It lacks the depth and rigour necessary for managing a fund of such magnitude and national significance. This oversight is not merely a technical flaw but a fundamental weakness that could threaten the Fund’s long-term success.
Four Critical Governance Gaps
The report lacks a clear framework for the Fund’s mandates and objectives. A well-defined mandate is crucial, serving as the cornerstone for guiding investment decisions and aligning the Fund’s activities with national priorities. The absence of clear objectives can lead to discretionary decision-making and strategic drift, potentially undermining the Fund’s effectiveness.
Effective oversight is another aspect that warrants due importance. The report’s proposed oversight mechanisms should have been more robust to safeguard the Fund’s integrity and performance, as it lacks detailed provisions for independent audits, regular performance evaluations, and stringent accountability measures. Without these, the risk of financial misconduct and corruption escalates.
The NWF’s success is contingent on the trust and support of various stakeholders, including the public, private sector, government entities, academia, public commentators, and the global community. The Task Force report needed to address how the Fund will effectively manage and engage with stakeholders. Transparent and inclusive stakeholder engagement processes ensure broad-based support and mitigate potential conflicts of interest.
The existing governance model, a compromise product, could undermine the Fund’s autonomy and efficacy. This compromise raises significant concerns about the Fund’s vulnerability to political interference, potentially leading to suboptimal investment decisions and jeopardising the Fund’s mission.
Striking the Balance: Speed to Market and Robust Governance
In the NWF context, the ability to swiftly mobilise investable funds and seize opportunities that align with public interests is crucial. However, the bedrock of this philosophy is robust governance. Accountability must be enforced to address delays, inefficiencies, and missed opportunities. Striking a balance between these two aspects is vital for creating enduring financial value and fostering a more resilient and prosperous UK economy.
Given the NWF’s nature and mandate, robust governance is non-negotiable. Unlike a traditional sovereign wealth fund (SWF) that focuses on wealth creation through market-based investments, the NWF, as currently envisioned, will function more as a policy-based financing vehicle. The Fund is designed to serve as a long-term financial reservoir, investing in assets that generate future returns and provide UK citizens with climate resilience. This long-term horizon necessitates a robust governance framework insulated from political fluctuations, sudden policy changes, government turnovers, and short-termism. The focus should be on enduring sustainability, not just immediate gains. The Fund’s mandate to promote sustainable economic growth further underscores the need for governance structures prioritising strategic, forward-looking decision-making.
Global Trend: Autonomy and Higher Governance Standards
Globally, state-owned funds and investment vehicles are moving towards greater autonomy and enhanced governance standards. This trend reflects a growing recognition of the need to build public trust and credibility and insulate these funds from short-term political or bureaucratic opportunism. Many countries are reforming their sovereign wealth funds and state investment arms to adopt best governance practices, emphasising transparency, accountability, and professional management.
Given the UK’s well-established values of openness and partnerships, a constitutionally independent intergenerational fund would be a promising idea and a necessary change. It would augment the traditions of transparency and accountability the UK has espoused globally for centuries. Such an independent fund would be explicitly designed to create enduring value, free from political interference, and aligned with intergenerational equity and sustainability goals. The urgency of this change cannot be overstated.
Macroeconomic and Financial Stability Issues
It must be recognised that strong governance is also necessary as the NWF, as a state-funded and policy-based investment fund, will have several macroeconomic, fiscal, and market implications. The NWF could influence the UK’s macroeconomic stability. If the Fund’s investments generate substantial returns, it could boost economic growth. However, if the investments underperform, it could lead to financial losses and potential fiscal and budgetary instability. The NWF will also have to consider the impact of its funding and investment decisions on financial stability and the City of London and closely coordinate with other agencies, including the Bank of England. Good governance will require safeguards that prevent the NWF from adversely affecting the UK’s budgetary balance and forcing the government to increase its contributions, potentially leading to higher public debt and market destabilisation.
Governance Design of the NWF: A Blueprint
To rectify the governance deficiencies, the architects and legislators of the NWF should consider the following four pillars:
Define Clear Mandates and Objectives: Establish a detailed and explicit NWF mandate that outlines its strategic goals, risk tolerance, and investment horizon. This mandate should be enshrined in legislation to ensure consistency and long-term adherence.
Enhance Oversight and Accountability: Implement rigorous oversight mechanisms, including an independent supervisory board, regular external audits, and transparent reporting practices. An independent body should periodically evaluate the Fund’s performance and compliance to ensure accountability.
Facilitate Inclusive Stakeholder Engagement: Develop a comprehensive stakeholder engagement strategy that includes regular consultations with key stakeholders, public disclosure of investment activities, and mechanisms for incorporating stakeholder feedback into decision-making processes.
Ensure Autonomy from Political Interference: Design the governance structure to safeguard the Fund’s autonomy. This includes a clear separation between the Fund’s management and political entities, statutory protection against political influence, and the appointment of experienced, non-partisan professionals to critical positions.
A Final Observation
The UK’s NWF can transform the nation’s economic and financial landscape. It could bolster stability in the broader economy and restore financial equilibrium. Conversely, the NWF could become a public financial liability. Therefore, the NWF’s governance framework and autonomy quality are crucial. Policymakers must address the governance gaps identified above. By adopting a governance model prioritising transparency, accountability, and independence, the UK can ensure its NWF becomes a pillar of sustainable prosperity and financial stability.
The stakes are high, and the NWF’s governance must rise to this critical challenge. The most promising path forward is a constitutionally independent intergenerational fund focused on enduring value creation. Given the uncertainties and the need for the Fund to outlast electoral cycles, robust and independent governance is essential. Let the NWF become an intergenerational beacon of the UK’s resilience and future growth.
Udaibir Das, Global Macrofinancial Advisor & Strategist, Distinguished Fellow, Senior Advisor, and Visiting Professor
Udaibir Das is a former Assistant Director at the IMF, Senior Advisor to the International Forum of Sovereign Wealth Funds, Bretton Woods Committee Member, and Visiting Professor at the National Council of Applied Economic Research. He advises the Bank of England, is a Distinguished Fellow at ORF America, serves on the Advisory Board of the Kautilya School of Public Policy, and lectures at the University of Navarra and COMESA Monetary Institute. Views are personal.