Although they have been in existence for decades, sovereign wealth funds have found themselves in the spotlight in recent months. While much of the recent attention given to these funds has focused on the political implications of their investment, sovereign funds’ impact on fellow shareholders has received scant coverage. Indeed, their growing presence has sparked discussion within the global institutional investor community on how best to define, understand, interact, and potentially influence these funds.

As such, RiskMetrics Group's new report, Sovereign Wealth Funds & Emerging Governance Issues, is intended to: (1) provide an overview of sovereign wealth funds; (2) identify key and emerging issues of interest to institutional investors; and (3) explore potential solutions to concerns related to the transparency practices of sovereign investors.

Key takeaways from the paper include the following:

* Sovereign wealth funds are firmly established. There are now roughly 40 such funds—half of which came into being since 2000—collectively managing assets in the range of $1.9 to $2.9 trillion. Macroeconomic trends, including a weak U.S. dollar, tightening of credit, growth in commodity prices, and market volatility suggest that sovereign investment, and its influence, will only grow.

* Traditional institutional shareholders are seeking to understand the investment objectives and strategies of these potential power brokers. The International Monetary Fund is now involved in consultations with more than two dozen sovereign wealth funds in an effort to develop a code of conduct for their transparency, and market regulators across the globe are considering guidelines for disclosure and related issues. Mainstream investors will wish to monitor and potentially influence these efforts.

* There are concerns that sovereign funds will primarily be “disengaged” investors in equities. Some traditional investors have suggested that they will ride the coattails of other shareholders who press underperforming management for change through governance activism; or that their proclivity for non-voting stakes could help to entrench or otherwise insulate underperforming management.

* Substantial investment from sovereign funds could lessen pressure on governments and corporations in developing economies to raise corporate governance standards in such markets.

* Sovereign wealth investors with long-term investment horizons may serve as a stabilizing force in the market, however. Most are not bound by the constraints of many traditional investors who may have to withdraw capital on short notice for income or liquidity needs. Moreover, sovereign investors have demonstrated their willingness and ability to expeditiously shore up the capital base of distressed companies.

* There is no standard disclosure model for sovereign wealth investors. But some sovereigns may be more comfortable with disclosure models other than that of Norway’s fund—widely viewed as the gold standard for transparency—and traditional institutional investors may wish to promote alternatives such as Temasek’s approach to transparency. Temasek, a Singapore-based fund, is an active investor disclosing key investment objectives and strategies though does not disclose its full portfolio or voting record.

* Pressure from lawmakers and regulators for sovereign investors to meet elevated standards of disclosure could have unintended consequences. Such pressure might lead to the funds avoiding direct investment in corporate issuers and allocating more of their capital to private equity and hedge funds, potentially leading to greater acquisition activity and proxy fights.

To access RiskMetrics new paper, Sovereign Wealth Funds and Emerging Governance Issues, please visit here.