Strategy Note /
Saudi Arabia

Sportswashing and LIV Golf a warning for EM funds in the ESG era

  • Sportswashing describes a country’s efforts to improve its reputation via sports; an ethically charged and emotive term

  • LIV Golf, backed with copious capital by the Saudi Public Investment Fund, is, for some, the most recent example

  • The furore over LIV Golf may be driven by vested commercial interest but EM funds should heed the warning in the ESG era

Sportswashing and LIV Golf a warning for EM funds in the ESG era
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
14 June 2022
Published by

"If the return is juicy enough, is there any country you wouldn't invest in?" If not already, this is going to be a question faced by those who manage and market emerging market funds.

'Sportswashing' describes a country’s efforts to improve its reputation by hosting or sponsoring popular international sports events.

The advent of the LIV Golf Tour, backed financially by the Saudi Public Investment Fund – which is chaired by Crown Prince Muhammad bin Salman – has brought this thorny issue back under the spotlight.

In an era when institutionally managed investment funds are marketed under the ESG banner and when the trade and investment policy of the US and the EU is increasingly weaponised via sanctions, the LIV Golf episode is relevant for those who manage and market emerging market funds.

LIV Golf and sportswashing

The winner of LIV Golf's first tournament, over 54 holes with 48 players, took home US$4mn and total prize money was US$20mn. The winner of the US Open this week, played over 72 holes with 156 players, will pocket US$2.3mn and total prize money stands at US$12.5mn.

Before the inaugural LIV Golf tournament in London, participating golfers were publicly asked questions, such as “If Vladimir Putin had a tournament, would you play that?" and "If the money was right, is there any way you wouldn’t play?”

After the tournament, one of the highest-profile US golfers, Phil Mickelson, was sent a letter by families of 9/11 victims and quizzed publicly about his response.

There are lots of answers that the golfers could have given to questions about the ethics about playing for a new circuit backed by the Saudi PIF, by pointing to the hypocrisy and inconsistency captured by the term sportswashing, not least in golf.

  • The Saudi International was included in the European Tour for the first time in 2019. The February 2022 tournament was not included in the European Tour because of the looming commercial threat of the rival Saudi-sponsored circuit – known at that time as the Super Golf League, now branded LIV Golf.

  • The China Open was endorsed for the first time by the European Tour in 2004. This was discontinued in 2020 because of the Covid pandemic, not because of any issues related to human rights. The WGC-HSBC Champions tournament in Shanghai is part of the circuit this year.

  • Perhaps the most revered golf 'major', The Masters, is a case in point. The Augusta National Golf Club first invited players to its tournament in 1934 but did not include any Black player among its invitees until 1975, or admit any Black man or any woman, of any colour, to its membership until 1990 and 2012, respectively.

The LIV Golf players did not use the hypocrisy argument in any of their responses.

Perhaps, in the chaos of contract negotiations and an inaugural tournament, they were not sufficiently prepared. Perhaps, the can of worms debate around the ethics of one country versus another was one they did not wish to open.

The incessant references to sportswashing in mainstream media coverage of LIV Golf, and sanctions on participating players by the governing body of the US Tour, the US PGA, are, in many ways, resonant of some of the initial reactions to the seismic change wrought on global cricket during the advent of the Indian Premier League (and its precursor, the Indian Cricket League).

Echoes for ESG investing (and foreign policy)

ESG investing, particularly when it comes to the ethical criteria for countries, is arguably riddled with the same hypocrisy and inconsistency as sportswashing. Fund managers and marketers will need to have their responses ready for similar questions.

US and European financial sanctions may force open that can and legally enforce which countries are investable in the way it has for previously traded investments in Cuba, Venezuela and, most recently, Russia.

But if an emerging market fund is marketed as ESG-compliant, is it enough to define investable countries on the basis of sanctions? A stated policy on what determines whether a country is ethically on or off side is surely needed, just as it is for matters related to the environment, female board representation, or other sustainable factors.

And it may be that it is so difficult to determine an objective measure of a country's ethical merits, just like it is to determine what is sportswashing or what an ethics-based foreign policy amounts to in the real world, that this debate does not belong in an investment debate. That would be an uncomfortable conclusion for those pushing the ESG brand.

I have explored these issues in more detail in these two previously published reports.

  1. When countries behave badly: The tortuous morality of ESG investing, March 2022

    This report was an attempt to question the consensus on Russia following its invasion of Ukraine, arguing that labelling Russia's actions as reprehensible was easy but what about the morality of investing in other countries that behave badly but are not on a sanctions list? The answers are not so clear cut.

    It also considered the philosophical and practical limitations of commercial products like the Freedom 100 Emerging Markets ETF – Bloomberg code, FRDM US.

    This fund is down c15% in the past year, compared with down 27% for the iShares MSCI EM ETF, where country screening eliminates the likes of China, India and Saudi Arabia, and leads to a 24% weight for Chile in FRDM compared with 0.5% in MSCI EM.

    The net asset value of FRDM is a miniscule US$30mn, compared with over US$2tn of assets benchmarked to MSCI and FTSE EM. It would be a struggle to deploy 10% of global EM assets under management into a fund where Chile has such a large weight.

  2. Human rights presents a dilemma for ESG investors and US foreign policy, February 2021

    This report was a response to the stated intention of President Biden's administration to centre its interactions with the rest of the world on "democracy, human rights and equality", with the implication that policy on the likes of Saudi Arabia was about to change more markedly than at any time since Roosevelt met King Abdul Aziz in 1945.

    It argued that interests will always trump ethics in foreign policy and that ethical standards were not simple and universally agreed.

    Eighteen months on, with Brent at cUS$120, press reports suggest that President Biden will shortly be meeting Crown Prince Muhammad bin Salman for the first since the former took office.