This white paper sets out the basis and rationale for the introduction of a new market reference for the governance, sustainability and resilience efforts undertaken (or the lack thereof) by certain institutional investors, namely Sovereign Wealth Funds (“SWFs”) and Public Pension Funds (“PPFs”). During the past 12 years, a series of events in the global markets have stimulated these discussions and switch in focus; however, we believe that these three themes are not mutually exclusive and must be considered jointly.
Governance has been closely looked at since the early 2000s, when certain shifts in corporate control activism and hedge fund activity were spurred on by the emergence of an agency-cost, fiduciary paradigm. A few years later, DP World’s blocked takeover of certain US ports in 2006 and the global financial crisis pushed the agenda that paved the way for the Santiago Principles, under the patronage of the IMF. However, the 24 voluntary standards for investment practices, governance and accountability have not changed since 2008 and supporting members are now effectively under a self-regulation regime under the IFSWF. Endorsing the GAPPs is neither a necessary nor a sufficient condition for a SWF to be well governed, and key founding members such as Norway’s NBIM and Chile’s ESSF/PRF have left the Forum.
Over those past 12 years, a number of expert academics and practitioners have attempted to quantify the intentions and actions of asset owners on these fronts. Ted Truman (PIIE) worked on a scoreboard for the transparency and accountability of SWFs (and some PPFs) that was widely welcomed and published during 2007-2015. Sven Behrendt (Geoeconomica) rated the actual compliance of IFSWF members to the Santiago Principles in 2013-2014. Others like SWFI and NRGI opted to publish more basic evaluations.
Sustainability is an increasingly important topic for investors, especially since the UN’s adoption of the 2030 Agenda and the Sustainable Development Goals by the UN in September 2015. There is mounting pressure for asset owners to be not only transparent but also responsible. Some of these investors are now signatory members of the UN Principles for Responsible Investing and of the One Planet SWF Group framework. Only one SWF, the NZ Super, is an endorsing member of all three bodies: IFSWF, UNPRI and OPSWF.
UNPRI produces an annual qualitative assessment (“A” to “D”) of their signatory members, who may choose to make it public or not – in fact, only a few asset owners, such as NZ Super, do so. More recently, New America and Bretton Woods II developed the Responsible Asset Allocator Index (RAAI) that ranks 197 SWFs and PPFs based on ten core principles and criteria. It is unclear whether this effort will be continued over time, or whether the RAAI will be expanded to include elements other than Sustainability.
Resilience has now become a crucial element among the SWF / PPF community. Despite taking a long-term view, these investors have grown in sophistication and internal capabilities. They often seek to ensure that rising costs are justified by the ability to outperform the markets – or taking the hit better than others. Current market volatility is proving the importance of a balanced allocation and fiscal discipline especially among those PPFs that may be underfunded and cannot afford large losses, such as the US’s CalPERS.
Resilience can also be viewed as a function of Governance and Sustainability: only the most robust and responsible funds will be able to survive. Overall, we believe the combination of these three elements is a much more powerful analytical tool than as individual indicators. It is only with a comprehensive and regular analysis that we will be able to see the virtues – and vices – of each of the Top 100 SWFs and PPFs.
The Governance, Sustainability and Resilience Scoreboard (“GSR Scoreboard”) serves as a reality check for asset owners to measure and improve performance. It also enables asset managers and other relevant parties to stay informed of important aspects of their partners’ and stakeholders’ operations. The rating system is transparent, rigorous and straight-forward, providing market participants a critical tool of analysis.
The GSR Scoreboard is comprised of 25 different elements, 10 of them related to Governance issues, 10 of them related to Sustainability issues, and five related to Resilience issues. These questions are answered binarily (Yes / No) with equal weight and the results are then converted into a percentage scale for each of the funds. The study is applied to a universe of 70 SWFs and 30 PPFs (“Global SWF Top100”) and repeated annually. For a list of the 100 institutional investors and countries, please refer to Appendix 1.
Governance (10 elements):
#1 – Mission & vision: Does the Fund clearly state its mission, objective or purpose?
This is by far the most commonly tackled issue. Even those Funds that do not maintain a website state their mission through the website of their shareholder (Ministry of Finance) or manager (Central Bank). Only four Funds fail to communicate their mission or vision: AustralianSuper, Softbank IA, SAMA and FHF.
#2 – Deposit & withdrawal rules: Does the Fund clearly state how it is funded and possibly withdrawn?
This question is closely related to legitimacy and to element #23. We explore the presence of a publicly disclosed deposit and spending rule, regardless of whether it is sufficient to avoid the depletion of the Fund. For PPFs, we ask for a statement of the annual contributions from and distributions to pensioners.
#3 – External manager reputation: Is there a robust process to select external managers, if any?
SWFs and PPFs do not generally have the bandwidth nor the desire to carry out all investments by themselves and need to rely on external managers. In that context, a rigorous selection process is paramount to avoid embezzlement cases such as 1MDB-Jho Low and FSDEA-Quantum Global.
#4 – Internal & external governance: Does the Fund provide clarity of its governance structure?
Similarly, SWFs and PPFs are asked to have a sound governance framework both externally (with other public and private parties) and internally (within the different bodies and executives). The Board of Directors will ideally maintain some degree of independence from the Government and from the Monarchy, if any.
#5 – Investment strategy & criteria: What kind of assets does the Fund seek to invest in?
One would think it is in the Fund’s best interest to disclose what sort of assets they are seeking to deploy the capital into, in order to enhance their deal origination funnel – yet, 31% of the SWFs fail to convey their investment strategy or criteria – 11 among those are from the Middle East.
#6 – Structure & operational data: How is the Fund structured as an investment organization?
SWFs and PPFs are not only “funds” and “investors” but also “organizations” and “companies”. The way they are organized internally can play a role in their investment decision process and portfolio. Highly transparent funds such as NBIM, ESSF, Alaska and Temasek fail to exhibit a single organizational chart.
#7 – Annual accounts audited: Are financial statements audited and in the public domain?
Almost two-thirds of the funds disclose their audited financial statements. Some of them are revised by the State Auditor only, however the majority engage a reputed international firm among the “Big 4”. PPFs are much more likely than SWFs to disclose their accounts publicly.
#8 – AuM figure public: Does the Fund provide clarity on how much capital it manages?
There are several SWFs that still adamantly refuse to disclose the actual size of their balance sheets. Nine large SWFs, in particular, have often been the subject of speculation by expert academics and practitioners over time: ADIA, EIA, KIA, NDFI, OIA and QIA in the Middle East, and BIA, GIC and SAFE in Asia.
#9 – Details of investment portfolio: Does the Fund provide clarity on what assets it currently holds?
Very few SWFs and PPFs provide a granular and comprehensive view of their portfolio, arguably to avoid losing competitive edge against other investors. Some others like NZ Super and Japan’s GPIF are extremely transparent and allow website visitors to download an Excel file of every position in their portfolio.
#10 – Annual vs LT return: Is the most recent year’s return provided?
In times of uncertainty and in the midst of volatile markets, certain SWFs including ADIA and GIC, try to avoid the short-termism and the pressure from stakeholders and international commentators, by providing rolling returns (generally over a 10- or 20-year period) only, as opposed to the most recent annual return.
Sustainability (10 elements):
#11 – Ethical standards & policies: Does the Fund have a code of conduct or conflict of interest policy?
Some of the Funds have started to publish investment exclusion lists of companies due to various ethical, environmental and legal concerns – some investors such as the Swedish PPFs and NBIM are advised by their Council of Ethics. More broadly, some of the funds maintain a strict ethical code as an organization.
#12 – Stewardship team in place: Does the Fund employ a dedicated team for Responsible Investing?
This question tries to identify those funds that, despite claiming that Environmental, Social and Governance (ESG) factors are integrated into their investment decision process, would not have a single expert in ESG issues among its employees. Ideally, the stewardship function would oversee all asset classes and regions.
#13 – Economic mission: Does the Fund seek economic advancement?
The new breed of SWFs is comprised in its majority of Sovereign Development Funds that pursue not only financial but also economic returns. On top of them, there are several Savings Funds such as Alaska PFC and Australia’s Future Fund, and PPFs such as CDPQ and CalPERS that pursue economic development.
#14 – Economic impact & measure: Are ESG key metrics or figures provided?
Funds with economic, social and environmental goals have started to define and report appropriate benchmarks, targets and KPIs. These figures would ideally include job creation, reduction of gas emissions by portfolio companies or contribution to long-term sustainable growth, as measured by Ireland’s ISIF.
#15 – ESG annual report: Does the Fund produce an annual ESG report?
A few years ago, there were just a few funds that produced a standalone dedicated sustainability report, or a meaningful section in their annual report. Today, this figure has grown to 35%, with a great majority of them being PPFs. Only 12 SWFs provide a relevant annual update when it comes to Responsible Investing.
#16 – Reference to SDGs: Is the Fund a UNPRI signatory member or does it invest in SDGs?
While 38 of the 100 funds are signatory members of the Santiago Principles, only 37 are signatory members of the United Nations’ Principles for Responsible Investment. 20 additional funds claim to pursue Sustainable Development Goals in their annual reports or websites, but without any specific commitment.
#17 – Partnership & memberships: Does the Fund collaborate with international investors or bodies?
Several funds, from Mubadala to RDIF to NIIF, now pursue fundraising from other SWFs and PPFs. When funds seek investors and partnerships internationally, they gain visibility and certain degree of accountability. This question goes beyond membership to IFSWF, UNPRI or any other particular body.
#18 – Emerging markets / managers: Does the Fund invest in emerging markets and/or managers?
Exactly half the Top 100 Funds originate in an emerging economy, and many of them invest at home, which makes them sustainable investors using SDG broader definition. Others, including number of US PPFs, have started to diversify fund allocations to gain exposure to emerging markets and/or managers.
#19 – Role in domestic economy: Does the Fund invest in the domestic economy and businesses?
In line with question #13, the Fund not only seeks to pursue economic advancement, but also aims to develop the domestic economy and businesses with a dedicated investment program or department, e.g. Alaska’s In-State Investment Program, QIC’s State Investments and CDPQ’s Québec Investments.
#20 – ESG risk management: Does the Fund accept and address climate change and other ESG risks?
While decarbonizing their portfolios is a good start, it is not the only ESG-related risk for investors. SWFs and PPFs need to accept those additional risks before being able to address them. Some of them may not be ready or have a dedicated ESG team, but they do acknowledge the risks of not doing so.
Resilience (5 elements):
#21 – Risk Management policy: Does the Fund have a robust risk management framework in place?
Most funds talk about risk management in their annual reports and websites, but one has to drill down and look at their framework and suitability of their risk mitigation strategies. While most PPFs have achieved this objective, only half of the SWFs provide a full view of their approach as risk managers.
#22 – Strategic asset allocation: Is there proper thought behind the asset allocation of the Fund?
During the current crisis, the importance of maintaining appropriate levels of liquidity in the portfolio is increasingly important (“cash is king”). Despite being highly significant and acquisitive funds, only 59 of the Top 100 have a proper Strategic Asset Allocation and the ability to adapt to the market cycle.
#23 – Policy for withdrawals: Is there a mechanism to avoid the depletion of the Fund in the long term?
This is perhaps one of the most crucial questions to address, and one that funds often miss. Only 16 of the 70 SWFs talk about eventual withdrawals and measures to overcome them, while only 15 of the 30 PPFs are fully funded, meaning they would be ready to face significant distributions with the portfolio as is.
#24 – BCM / Crisis team in place: Does the Fund employ a dedicated Operational Risk team?
In line with question #21, funds need to manage not only investments but risks. Only a third of the Top 100 have a dedicated Operational Risk team that would look at Business Continuity and Resilience issues. Some of them have been hired only recently, in response to the Covid-19 crisis.
#25 – Speed & discipline: Is the Fund generally well placed for its long-term survival?
This is perhaps the most subjective of all questions and is based in our insights into the funds’ operations. Some of the funds have demonstrated their ability to adapt to unexpected withdrawals or crisis, while others do not inspire confidence and could face depletion, merger or, in cases of poor governance, embezzlement.
Per region of origin: We have found the most transparent, sustainable and resilient funds are in Oceania, where the presence of Australia’s Future Fund and NZ Super drives the average scores up. This is followed by North America and Europe, due to the heavy weight of PPFs, which normally score much higher. The worst region is the Middle East, which performs especially badly in G & R.
Per mission / type of fund: PPFs score on average much higher than SWFs in any given category. Among SWFs, Savings Funds tend to be more transparent and resilient, but less responsible, while Development Funds put much effort on the Sustainability side given their domestic agendas.
Per source of wealth: Again, funds whose wealth comes from pensions tend to score much higher than others. Among SWFs, those sourced from reserves rank better than those from commodities.
Per size: Large funds (up to $240b AuM) perform much better than the very large ones. The smallest funds represent the worst quintile, although small does not necessarily mean less resilient.
Per age: The most mature funds have had the time to address GSR issues and are in better shape than those established more recently, during the past 15 years.
Per illiquidity: Those funds that are more illiquid (over 63% of portfolio) struggle, particularly with resilience issues. Those allocating 23% to 41% to private markets perform the best.
We rated 25 elements for every one of the Top 100 Funds, obtaining 2,500 data points and highly perceptive results. Only one fund achieved a perfect score: Australia’s Future Fund. Despite keeping a low key when compared to Norway’s NBIM and to NZ Super, we believe Future Fund is an exemplary fund when it comes to GSR issues. This fact, along with a sound investment strategy, has historically yielded excellent results and allowed the Fund to make money for the nation's citizenry in both rising and falling markets.
Following those three SWFs are six PPFs (three from Europe and three from North America) that perform very well too: Denmark’s ATP and PensionDanmark, Sweden’s AP-Fonden, Canada’s CDPQ and USA’s CalSTRS and NYSCRF. Alongside them with a score of 92% is Temasek, the highest ranked Asian fund. The Singaporean investor excels when it comes to Sustainability (10/10) and Resilience (5/5) efforts.
Not surprisingly, Middle Eastern funds rank much lower with the highest scoring fund, UAE’s Mubadala, in position #35. Only Abu Dhabi-based Mubadala (72%) and ADIA (52%), and Dammam-based APICORP (68%) score 50% or more. The other 18 funds from the region perform poorly, especially with Resilience.
Resilience is an issue of mounting concern. The average score of the Top 100 Funds is 2.4 out of 5, which demonstrates that institutional investors still have a lot of work to do when it comes to legitimacy, discipline, spending control, strategic asset allocation and crisis management. In other words, we might see several Government withdrawals, liquidity struggles and some merger even after the COVID-19 pandemic is over.
The road ahead is especially promising for four SWFs: Brunei’s BIA (in line with their hosting Government), Libya’s LIA (which may improve their scores after the sanctions are lifted), and IFSWF’s newest members Cyprus’ NIF and Mongolia’s FHF. We will be examining whether their scores improve when they become full members and are therefore required to undertake self-assessments of the Santiago Principles.
Overall, the Top 100 Funds have had many years to work on Governance (score 6.6/10) but will have to up their game with their Sustainability (score 5.2/10) and Resilience efforts (score 2.4/5). Only time will tell if they start taking these issues seriously and continue to advance as leading investors. We will be watching.
Appendix 1: Global SWF Top 100 SOIs
|NZ Super Fund
|Silk Road Fund
|China – HK
|Trinidad & Tobago
|UAE - Abu Dhabi
|UAE - Abu Dhabi
|UAE - Abu Dhabi
|UAE - Dubai
|UAE - Dubai
|UAE - Dubai
|New Mexico SIC
Appendix 2: Detailed Scores