The European Union is scheduled to request increasingly maligned sovereign wealth funds to accept a voluntary code of conduct in Brussels tomorrow (Wednesday).

SWFs look set to replace private equity groups in 2008 as the global financial system’s bogeyman as Governments grow increasingly wary of these state-backed cash cows.

The International Monetary Fund is expected to follow the EU move over the next few weeks with a more detailed outline than the voluntary request for funds to adopt best practice in the areas of transparency, accountability, and risk management, which was set out at the behest of the G7 in late 2007.

The issue of transparency and clarity of objectives remains a political hot potato.

Some of the world’s largest investment and financial institutions have been quick to accept capital injections recently from SWFs when the sub-prime fiasco caught a number of these red-brick institutions with their pants down.

However, the enormous financial muscle of many SWFs is making politicians uncomfortable.

Politicians globally are, to varying degrees, nervous and paranoid about the potential ramifications of SWFs acquiring strategic stakes in major domestic businesses.

SWFs have been around for a long time, but it’s only recently that they have come to the fore as economic heavyweights – largely the result of globalisation and surplus liquidity.

There are varying degrees of disclosure among the various SWFs with some open in declaring their returns, business objectives, and financial accounting methods, while others are as closed as some private equity funds.

The Government Pension Fund of Norway, Singapore’s Temasek and the Kuwait Investment Authority are some of the more transparent funds in the market.

However others are less forthcoming and it is unlikely whether the voluntary code to be introduced by the EU will reverse this, considering many funds can simply argue the accepted, if not widely adored, private equity and hedge funds operate in a similar opaque manner.

It will be interesting to watch how the 27-member state Eurozone deals with SWFs moving forward, in that acceptance of the code may simply become a ‘ticket to play’ for groups shopping for investments on the continent.