PARIS, March 28, 2008 (AFP) - European Trade Commissioner Peter Mandelson called Friday for sovereign wealth funds to agree to a code of conduct to avoid being cast as 'villains' by governments fearful of their power and influence.

'Our focus should not be on demonising them or stoking public fears about foreign investment,' Mandelson said in a speech at the Paris-based Organisation for Economic Cooperation and Development.

'Our chief focus should be integrating sovereign wealth funds effectively in the global financial system by working with them on a voluntary international code.'

The funds, state-owned investment vehicles, need to be integrated 'in a way that reassures the recipients of investment without casting the funds as potential villains.'

The state-run investment funds, found mainly in oil-exporting countries and Asian exporters, are feared by some as Trojan horses that could be used by governments to buy companies for political rather than commercial ends.

Mandelson estimated they currently controlled assets worth 2.0 trillion dollars but that would rise to 12 trillion 'before the middle of the next decade.'

Last Thursday, the US Treasury said it had struck agreements with big sovereign wealth funds based in Abu Dhabi and Singapore enumerating a set of principles for investments in US markets .

The agreements were hammered out following a meeting between US Treasury Secretary Henry Paulson, and Abu Dhabi and Singapore government officials.

Illustrating the attention now focused on sovereign wealth funds (SWFs), the International Monetary Fund and the OECD are both working on principles of best practice that they hope will be adopted by the industry.

Mandelson stressed throughout his speech his openness to SWFs, underlining that state-run investment funds had existed for decades and were a natural response from countries with an excess of capital earned from exports.

But he made clear that a code of conduct was in the industry's own interests and would allow recipient countries to have greater confidence that investments were financially, not politically motivated.

'What we need is reassurance that the benign conduct of funds in the past will remain a useful and consistent guide to the future,' he said.

A code of conduct, proposed by the European Commission a month ago, would require SWFs to disclose the regulation and oversight they are subject to and to be transparent about their investment strategy.

Some SWFs -- with the notable exception of oil exporter Norway, which operates a fully transparent fund -- have rejected taking on a code of conduct, which they view as being unfair.

'The funds themselves cannot afford to underestimate how important reassurance about systems of transparence and governance is in ensuring that unfounded suspicion doesn't mushroom into protectionism that is in nobody's interest,' Mandelson said.

SWFs exist in Russia, China, Kuwait, Singapore, the United Arab Emirates and Norway and several of them recently made giant cash injections into Western banks struggling with the fallout of the US subprime home loan crisis.

This action, widely viewed as the emerging countries coming to the rescue of ailing Western institutions, increased the funds' profile but also sparked calls for closer inspection of their activity.