Euromoney, October 2018
The Santiago Principles have elevated governance in sovereign wealth funds – but not consistently across its membership
Among the many crisis-related anniversaries that are passing by in October, one should not be forgotten.
On October 11 it will be 10 years since a press conference at the IMF annual meeting in Washington DC unveiled the Santiago Principles, designed to reframe international perceptions of sovereign wealth funds around the world and to elevate them to a greater level of governance.
It is a useful moment to take stock of what they did and didn’t achieve, and what ought to come next.
First the plus side.
It is easy to forget now the scale of suspicion that existed around sovereign wealth through 2007 and early 2008. The oil price was high, foreign exchange reserves were soaring and these little-understood state vehicles were placing more and more of their assets across borders, notably in the US. Who were they and what were their intentions?
The Santiago Principles, which grew originally from US Treasury official Clay Lowery asking Singapore’s GIC and the Abu Dhabi Investment Authority (ADIA) to help draft a combined statement of practices, were initially designed to reassure the world that these vast funds understood their systemic significance and would behave accordingly.
They were partly about lifting governance and transparency, but more than anything they were to convince an uncertain world that these funds weren’t about to upend global markets with their heft, particularly under political motivation.
In this respect the principles worked, but the global financial crisis completely changed the world’s relationship with sovereign funds anyway. Between 2007 and 2008 they went from being seen as shadowy political actors to the saviours of global banking, as they poured vital funds into everyone from Merrill Lynch to Citi, Barclays to UBS.
Even without that shift in positioning, there is no question that trust in sovereign wealth funds and the understanding of what they seek to do have improved since the principles were adopted.
Also significant has been the scorecard that was adopted to measure the transparency and accountability of sovereign wealth funds. In truth transparency varies dramatically in the sovereign wealth world: there is just no comparison between Norges Bank and the Qatar Investment Authority (QIA) in terms of disclosure. (The QIA’s website has a section called ‘QIA Review’ that has contained the words “Coming Soon” for so long now it has become an industry in-joke.)
But the overall trend has been positive. Khazanah Nasional in Malaysia saw its score increase six percentage points after joining the forum in 2014; Nigeria’s Sovereign Investment Authority shot up from 18% to 76%. If we accept that the improvements in governance and practice in these funds has been a consequence of joining the International Forum of Sovereign Wealth Funds (IFSWF), the industry collective linked to the Santiago Principles, then it has been to the good.
Equally, however, there are many who feel that the principles ought by now to be demanding a greater level of transparency across the board.
Norges Bank (which runs the Government Pension Fund Global, probably the world’s largest sovereign fund) quit the IFSWF in 2016, saying it “has not met our expectations as an organization with sufficiently strong progress in the implementation of principles,” specifically mentioning transparency. Temasek has gone too, albeit apparently for different reasons.
One can see Norway’s objection. The fund discloses down to the last krone the market value of its holdings. It discloses all of its investments, its portfolio techniques, its position around corporate responsibility and its internal governance. Yet many of its peers during its time as member, among them ADIA, the QIA and GIC, won’t even disclose their total assets.
Why not require, as a matter of membership, that funds disclose their size or standardize the timeframe over which they report their returns? Why is it OK that the QIA publishes nothing of its returns, but Australia’s Future Fund provides every last detail? Why does Adia only offer 20 and 30-year returns when the Korea Investment Corporation does it annually?
Well, the argument is: why should they? They are not accountable to shareholders, are instruments of the state and don’t need to do anything anyone else tells them to do. One can argue it is a matter of the public interest for the citizens of states with sovereign wealth funds to know where the money is going, but in the Gulf states leaders have a rather different view of what right to information that confers, compared with Europe or even Asia.
But this is surely the next phase for the Santiago Principles to address. It has lifted the bar for sovereign wealth governance and has improved the public image of the whole sector, restoring faith in its intentions in the global financial system. But its membership has not reached common ground in its efforts and some are getting the positive sheen of being signatories without doing enough to deserve it.