Patrick Bolton on Sovereign Wealth Funds

In an interview with Columbia Business School’s Ideas at Work, Patrick Bolton discussed sovereign wealth funds (SWFs) and the new book he co-edited with Joseph Stiglitz and Frederic Samama, Sovereign Wealth Funds and Long-Term Investing. (A sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets.)

In the interview, Bolton expalins why SWFs have become more attractive investment and even a potential savior for the rattled global economy. SWFs offer a more prudent investment but also have social benefits as well. In the final question of the interview, Patrick Bolton discusses how SWFs influence climate change and sustainability. Here’s his response:

One of the biggest risks the very large funds face is uncertainty over the future price of carbon. Investors working on a 50-year horizon know that carbon pricing is coming their way, but they don’t know when, and they take a very different view from the typical investor who works on a five- or 10-year horizon who just takes a bet that carbon prices aren’t going to rise much in the next five years. The long-term investor has to think today what it means to be exposed to that risk and how it can reduce the costs of the future price of carbon — and has more to gain by investing more in renewable energy than in carbon-dependent industries like oil, automobile production, or airlines.

One last thing — until the financial crisis, the difference between long-term and short-term investing was underappreciated. We are now seeing research emerge that emphasizes that difference, with implications for portfolio composition, risk analysis, and so on. There is an opportunity for SWF fund managers to tap into that research and gain a better understanding of how to think about portfolio management.