On October 11, 2008, the International Monetary Fund (IMF)-convened International Working Group of Sovereign Wealth Funds (IWG-SWF) formally launched the Generally Accepted Principles and Practices (GAPPs), also known as the Santiago Principles. Fifteen years later, the 24 guidelines are in dire need of a comprehensive reformulation.
The world has changed significantly since 2008, and so has the SWF industry. Back then, the IMF and the IWG-SWF defined sovereign wealth funds as “special purpose investment funds or arrangements that are owned by the general government and are created by general government for macroeconomic purpose, to hold, manage, or administer assets to achieve financial objectives, and to employ a set of investment strategies that include investing in foreign financial assets”; and estimated their assets under management between US$ 2.1 and 2.9 trillion. Today, the industry is significantly more heterogenous and sizeable, with more than US$ 11 trillion in combined assets.
In recent years, several governments have established “quasi-SWFs” without much capital, not with the objective of investing overseas, but with the mission of managing domestic assets and/or attracting foreign direct investing – which poses a very different set of challenges to the focus of the IWG-SWF in 2008. Additional considerations such as the climate and environmental crises, the rise of geopolitical tensions and social inequalities, and the importance of private equity and real assets in their portfolios have made this group of sovereign investors increasingly complex, and the Santiago Principles, increasingly unfit.
The Main Issues
Coordinating the governance efforts and formulating a common understanding of agreed best practices among such diverse pool of government-owned investment or strategic vehicles hailing from dozens of countries is not an easy task. Kudos must be given to the IWG-SWF and its successor the International Forum of Sovereign Wealth Funds (IFSWF) for facilitating dialogue and best practices, and for providing visibility to the industry through the promotion of the Santiago Principles. However, today’s practices present serious shortcomings that must be addressed.
First, IFSWF Limited is a London-based private company no longer associated with the IMF that charges membership fees to SWFs that would like to claim adherence to the Santiago Principles, a registered trademark. In calendar year 2022, the company received US$ 1.1 million in fees, i.e., an average of US$ 30,000 from each of the 37 full members. This presents a potential conflict of interest, in which the promoting body is remunerated by the signatory members.
Second, the Santiago Principles are, by design, non-quantifiable and non-enforceable. There have been three rounds of “self-assessments” (2016, 2019, 2022), in which SWF members claim adherence to the 24 principles sometimes in a wordy and vague manner. The IFSWF provides neither its opinion nor scores for self-assessments, which makes it difficult to assess progress. For example, there are several SWFs, including past and present members of the board, that are yet to publish an annual report or meaningful financial data, which is encouraged by GAPPs #5, #11 and #12.
Lastly, the 24 principles are solely focused on transparency, accountability, and legitimacy, and have not been modified in 15 years. Global events like the 2008 financial crisis, the 2015 oil crisis, the 2020-21 Covid pandemic, and the 2022 market crash are game-changes and call for a revision of the principles. Governance guidelines must be complemented by other important considerations such as sustainability, stewardship, responsible investing, behavior, and resilience.
The Consequences
Some of the key countries and SWFs that contributed to the draft of the Santiago Principles have now voluntarily left the Forum. These include Norway’s Government Pension Fund Global (arguably, the world’s largest and most transparent SWF), Chile’s Sovereign Wealth Funds (which gave name to the principles), and Singapore’s Temasek. All in all, 15 SWFs that were at some point signatories of the Santiago Principles, are no longer IFSWF members.
During the past 15 years, three signatories were fully depleted due to government withdrawals; three other signatories were subject to international sanctions; and the chief executive of another signatory was prosecuted and jailed over corruption charges. Other signatories have seen layoffs at management level, in an allegedly arbitrary manner, by their boards. Adherence to the Santiago Principles did not prevent or mitigate such unfortunate events.
The Alternatives
Several other organizations, including think tanks, academic institutions, and commercial entities, have tried to come up with alternative solutions and approaches to assess the progress of the industry’s best practices over the years.
The first approach by leading economist Edwin Truman was developed in parallel to the Santiago Principles and enhanced over the next decade. In its most recent version, the Truman Scoreboard presents the scores for 64 SWFs according to 33 different elements relative to structure, governance, transparency and accountability, and behavior. The report found that 2019 average scores improved from 2015 and that IFSWF members had an average that was higher than that of nonmembers, but lower than that of the seven founding SWFs that had left the IFSWF.
Another approach was proposed by German scholar Sven Behrendt, who came up with a Santiago Compliance Index (SCI) that verifies and quantifies the quality of the commitments of SWFs to higher governance and transparency standards. In its last version in 2014, SCI concluded that the commitment of the SWF industry to the substance of the Santiago Principles was still uneven and that numerous funds still needed to substantially advance their financial disclosure policies, which were essential to maintaining the legitimacy of the Santiago Principles themselves.
A more straight-forward approach was proposed by the Sovereign Wealth Fund Institute with the Linaburg-Maduell Transparency Index (LMTI), based on 10 essential questions that depict sovereign wealth fund transparency to the public. The most recent LMTI scores show an average of 7.0 for IFSWF members, and a 7.4 for nonmembers, according to the classification and universe of state-owned investors tracked by the IFSWF.
Lastly, Global SWF came up with a comprehensive assessment tool combining 25 elements related to governance, sustainability, and resilience (GSR scoreboard). In its first edition in 2020, the industry specialist found a slightly higher average governance score for IFSWF members (5.9/10) than for nonmembers (5.5/10), following IFSWF fund universe. Since then, both groups have improved their governance scores by 25%, to 7.3/10 and to 6.8/10, respectively.
These approaches do not necessarily solve the mentioned issues and, if anything, they highlight the shortcomings of the Santiago Principles as the sole set of guidelines for sovereign wealth funds at global level.
The Challenge
It is time to reformulate and update the Santiago Principles. The reformulation presents an opportunity for SWFs to embrace a more transparent, social, climate- and nature- related reporting, in alignment with their hosting governments’ commitments regarding international climate and biodiversity agreements. A combination of SWF representatives, policy makers, academicians, and commercial actors will need to formulate an adequate, comprehensive update.
One potential addition to the revised principles would be calling for external, third-party audits of governance and sustainability practices at SWFs. For example, an agreed list of metrics and auditing procedures could be established to serve as a tool for assessment by an internal or external auditing body. Such audits could be entrusted to a multilateral or non-profit institution, avoiding the pitfalls of self-assessments and the conflicts of interest arising from having a private company reviewing compliance with the guidelines.
Sovereign wealth funds may not perceive this as a pressing matter where they need to spend efforts or resources. However, the reputational risks associated with a lack of, or decreasing, trust in the Santiago Principles as indicators of best practices is likely to be damaging in the long-term, especially in the current context of geopolitical tensions.
Call for Action
As leading economists and experts from around the world, we urge the reformulation of the Santiago Principles and the establishment of an updated, independent, compelled, and quantifiable framework aligned with the current challenges facing the sector.
SIGNATORIES
Edwin M. Truman, research fellow at the Mossavar-Rahmani Center for Business and Government at Harvard's Kennedy School and former assistant secretary of the US Treasury for International Affairs.
Nasser H. Saidi, founder and president of Nasser Saidi & Associates and former Minister of Economy and Trade and Minister of Industry of Lebanon.
Kristian Flyvholm, inaugural chief executive officer of the IFSWF and SWF expert formerly with the IMF.
Larry C. Backer, professor of law and international affairs and Penn State University Ombudsperson.
Sara Bazoobandi, Marie Curie fellow at the German Institute for Global and Area Studies and non-resident fellow at the Arab Gulf States Institute in Washington.
Sven Behrendt, managing director of GeoEconomica and partner at Berlin Global Advisors, and former head of mining and metals at the World Economic Forum.
Gordon L. Clark, emeritus professor and director, Smith School of Enterprise and the Environment, Oxford University.
Louis de Montpellier, chair of the board of rePLANET and former global head of official institutions at State Street Global Advisors.
Nuno Fernandes, full professor of finance at IESE Business School, managing partner of Odgers Berndtson Board Solutions and former chairman of the Supervisory Board of the Portuguese Central Bank.
Alicia García-Herrero, chief economist for Asia Pacific at Natixis and senior fellow at European think-tank Bruegel.
Salar Ghahramani, associate professor of business law and international law & policy at Penn State University.
Eliot Kalter, president of EM Strategies and co-head of SovereigNet at the Fletcher School of Law and Diplomacy, Tufts University, and former assistant director at the IMF’s Monetary and Capital Markets Department.
Guan Seng Khoo, adjunct lecturer at Singapore Management University and former senior director at Temasek Holdings and VP/Head of GRC/ERM at Alberta Investment Management Corporation (AIMCo).
Stefano Lugo, associate professor of finance at Utrecht University School of Economics.
William L. Megginson, George Lynn Cross professor of finance, Price College of Business at Oklahoma University.
Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington and adjunct professor at Georgetown University.
Ana Nacvalovaite, research fellow at Kellogg’s Centre for Mutual & Co-Owned Business at Oxford University.
Paul Rose, associate dean for strategic initiatives and J. Gilbert Reese Chair in contract law at Ohio State University.
Dini Sejko, lecturer at the Hong Kong University of Science and Technology, Business School.
Diego López, founder and managing director of Global SWF, and author and organizer of this statement.
