Calls for Sovereign Funds to Follow Santiago Principles

Emerging Markets, IMF editions, Emerging Markets

The chairman of Australia’s Future Fund sovereign wealth fund has called for greater recognition of the institutions that observe the Santiago Principles, the framework for governance and best practice at sovereign funds worldwide – as distinct from those funds that signed up to the principles, but don’t observe them.

Peter Costello, who was Australia’s longest-serving Treasurer under the John Howard government before becoming chairman of the future fund, made his comments at a time when concern is growing that many of the 31 signatories to the Santiago Principles, created by a working group of sovereign wealth funds in 2008, are making little or no attempt to implement those principles, raising the question of whether they have any actual use.

“The ability of a fund to demonstrate its application of the Santiago Principles is an important signal that the fund complies with applicable regulatory and disclosure requirements, that it invests on the basis of economic and financial risk and that it has appropriate governance arrangements in place,” said Costello.

“It is my view that sovereign wealth funds that implement the Santiago Principles should be recognised and acknowledged. The principles are designed to enhance transparency and to demonstrate that investments are made for financial reasons and not as an arm of some other political objective.” Compliant funds should have “smoother access to investment markets,” he said.

Costello’s remarks were interpreted either as an effort to galvanize non-compliant signatories – notably the Qatar Investment Authority and other GCC funds – or to make a clear distinction between those funds and the ones that do largely comply, such as the funds of Norway, Australia and New Zealand.

The research group GeoEconomica, based in Geneva, studies the level of compliance of signatories and ranks them a grade. Grade A, including most developed-world funds, denotes full compliance; B, such as Singapore’s Temasek, the Korea Investment Corporation, and funds in Azerbaijan and Nigeria, is for broad compliance; and C represents partial compliance, including the Government Investment Corporation of Singapore, Abu Dhabi Investment Authority and China Investment Corporation. The only signatory ranking a D grade, for non-compliance, is the Qatar Investment Authority, which does not publish an annual report of any kind (though is rumoured to be planning one).

“There is an assumption that you sign up to these principles and it gives you a carte blanche,” said GeoEconomica managing director Sven Behrendt. “I sign up, therefore I am transparent. But we find that there are a few doing quite well, a few in the middle and some who couldn’t care less.

“I’m fascinated by the Santiago Principles per se: a voluntary code of conduct that everyone has agreed on, including developed and emerging economies. But then you have to implement them, and act upon them. What is the point of signing up to voluntary principles if you don’t intend to implement them?”

Costello specifically addressed the question of what the principles mean from an investment point of view. “That is not to say the Principles provide carte blanche for any and all investments,” he said. “Countries will always retain the right to protect national security but this is a much more limited area than the broad sweep of the economy.”

If recipients of SWF investment were to recognise those who comply with the principles (presumably over those who don’t), “this will help to promote free flowing investment, contribute to a stable financial system and enhance global growth, while supporting the achievement of important national economic objectives,” he said.

Behrendt noted that it could become embarrassing for developed-world, transparent sovereign funds like the Future Fund to be bracketed with those who do not comply. “At some stage it becomes a reputation risk for them,” he said. “They’re standing there firm for the Santiago Principles, but what about the others?”