Why Sovereign Wealth Funds need to recalibrate their governance, risk and controls

Described in PwC’s first blog in this series, the world's Sovereign Wealth Funds (SWFs) are a hugely diverse group. For some, the primary goal is to drive domestic economic growth and development. For others, the aim is to protect and grow the nation's wealth.  

But whatever their remit, SWFs share two fundamental features. The decisions they take can have far-reaching impacts, on local communities and global markets. And they’re all operating in a complex, fast-changing risk landscape – under intense public and regulatory scrutiny.  

Now as economic and geopolitical tensions evolve and multiply, SWFs are having to adjust their investment strategies, recalibrating their risk profiles to achieve targeted returns. This brings with it a different view of governance, risk and controls. A top priority for all SWFs today? Understanding and balancing risk appetite across the risk spectrum – from investment risk and opportunity to other risk elements like operational and credit risk. 

Insights that guide strategic decision-making 

As SWFs move between asset classes and geographies and expand their operating footprints, proactively managing the spectrum of complex and often interconnected risks is increasingly business critical.  

There’s an ever-growing need for transparency and oversight, especially for SWFs that focus on local economic growth and development. With the general public looking at their performance with growing interest, management teams need to be aware of their strengths and weaknesses and ready to defend their decisions with robust processes and facts.  

Risk functions need to act on risk and respond by becoming even more vigilant and more proactive. Their data feeds (structured and unstructured), internal processes and controls need to continuously adapt to take advantage of the power of technological advances to enhance decision-making and, ultimately, protect value, power growth and drive better investment returns. 

New skills and capabilities in demand 

This is driving a more sophisticated form of risk management, with risk functions thinking strategically around the skills and capabilities their teams need to provide forward-looking insights that support strategic decision-making. Most of the risk functions use backwards looking data points to predict the future but, within the current environment, the past may no longer be a reliable proxy for the future. Skills and tools that can support the forward-looking analysis and insight are becoming more readily available. As a result, PwC is seeing an increasing focus on advanced data processing, new modelling and valuation solutions, and AI-powered predictive analytics. These are all key to identifying new opportunities and providing crucial early warning signals. The new tools allow risk, compliance and internal audit functions to become much more efficient but that will also mean that the competencies of the teams can, and by necessity will, evolve to focus on critical thinking and relationship building. 

Learning from each other 

The ways in which risk and internal audit functions are rising to the various challenges they face was a key theme at PwC’s recent roundtable event held in Toronto, Canada which welcomed risk and internal audit professionals from some of the largest SWFs in the World. Underlining the real value that comes from risk managers and risk takers coming together as a community to share experiences, we explored key issues in the current environment, including: 

• Generative AI is already disrupting traditional ways of working. But developments are moving at such speed, an agile and responsive approach to adoption is imperative. But it's not just about putting powerful tools in peoples’ hands. Fostering a culture that encourages trial and error and equally rewards success and failure is just as critical, if not more so. 

• Having diverse points of view and open and honest internal conversations enables SWFs to negotiate the many disruptions now impacting the global investment environment. That's why risk and internal audit leadership needs to have a seat at the table. 

• Environmental and social risks are going to continue to pose long-term risks. But they can also create tremendous opportunities. Strategies will have to adapt to recalibrate investments in industries and sectors that are not environmentally sustainable, in regions where social inequality and unrest are increasing, or in locations that will continue to face physical damage through climate change. 

Embedding a new risk mindset 

In our next blog in this series, we’ll be zeroing in on sustainability, which is now established as a core consideration in many investment decisions. Meanwhile, you can learn more about how leading organisations are embracing the transformative power of technology and data to change the way they see risk by reading our in-depth survey.