2021 GSR Scoreboard Governance, Sustainability & Resilience of State-Owned Investors

At the beginning of 2021, nine funds exited the Top 100 and nine funds entered it. The newcomers include Abu Dhabi’s ADQ and Indonesia’s INA and are, for the most part, newer funds that are still building up their scores. If we were to remove those nine funds, and compare the other 91 with how they did last year, the results would be highly reassuring in all three sections, and in the overall score too (from 57% to 59%).

There are marked differences between funds. Of those 91 funds rated in both years, 36 improved their scores, 21 stayed the same and 34 saw worsening performance. This is especially worrying as declining performance around governance, sustainability and resilience is not acceptable. For example, the big three Middle Eastern funds seem to be getting worse at inspiring trust. ADIA lost two points over its increasingly opaque annual report, which no longer includes details on its relationship with the government or an organizational chart. KIA provides less and less clarity around its two funds and how liquidity is affecting them. And QIA has removed several important indicators from its website. Interestingly, all three funds continue to be important members of the IFSWF, which promotes good governance and transparency.

Most funds with decreasing scores have issues with transparency (e.g., Malaysia’s KWAP and Russia’s RDIF have not published an annual report since 2018) or with liquidity and spending control (e.g., Canada’s OMERS  remains underfunded, and Agaciro has stopped receiving contributions from the Rwandan diaspora).

On the positive side, we also have many examples of funds getting better. Funds like Libya’s LIA and Angola’s FSDEA have taken positive steps to solve very difficult situations. The former engaged with auditors, issued a portfolio valuation and ensured adequate availability of information. The latter parted ways with the Dos Santos clan and Quantum and resumed the release of annual accounts. Others like South Africa’s PIC created a Head of Ethics position, and India’s NIIF issued audited accounts for the first time.

Without a doubt, the majority of funds that improved scores did so through Sustainability and ESG, which is an increasing priority at a Board level. Korea’s KIC published its first Sustainability report, Panama’s FAP became a signatory member of the UN PRI and Saudi Arabia’s PIF started building an ESG team. 2020 also saw nine more Sovereign Funds sign up to the OPSWF initiative, although we are yet to see any practical actions. In any case, we believe that SOIs’ future is green, and while we have our doubts about the “R” score, we expect the “S” to keep rising and to eventually catch up with the “G” in some of our future assessments.

The GSR Scoreboard was introduced by Global SWF in 2020 as 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 13 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 been modified since 2008 and supporting members are now effectively under the IFSWF’s self-regulation regime. Simply endorsing the GAPPs is neither a necessary nor a sufficient condition for a SWF to be well governed, and of the 29 founding funds, less than half remain in their original form and as signatory members of the set of guidelines.

Over the past 13 years, several expert academics and practitioners have attempted to quantify the intentions and actions of asset owners on these fronts. Mr. Edwin Truman (Peterson Institute for International Economics) developed a scoreboard for the transparency and accountability of SWFs (and some PPFs) that has been widely welcomed and published since 2007. Earlier this year, Mr. Truman published the latest update of his scoreboard, finding a strong correlation between his results and the 2020 GSR Scoreboard.

Sustainability is an increasingly important topic for investors, especially since the UN’s adoption of the 2030 Agenda and the Sustainable Development Goals 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 Principles for Responsible Investing, of the One Planet SWF Group, and/or of the Net Zero Asset Owner Alliance, among others. The PRI 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.

Resilience has now become a crucial issue among the SWF / PPF community. While 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 balanced allocation and fiscal discipline, especially among those PPFs that may be underfunded and cannot afford large losses, such as California’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 any of them considered on standalone. It is only with a comprehensive and regular analysis that we will be able to see the virtues – and vices – of the world’s major Sovereign Investors.

Universe of Funds:

Global SWF studies 415 State-Owned Investors (“SOIs”), including Sovereign Wealth Funds (“SWFs”) and Public Pension Funds (“PPFs”), which jointly manage circa US$ 30 trillion in assets. SOIs are no longer defined simply as government-owned vehicles investing their capital overseas. Today the industry is highly complex, with mixed forms of legal structure, ownership and portfolios, and we define four major groups of SOIs according to their investment mandate: Stabilization, Savings, Strategic and Public Pension Funds.

We are generally flexible in our definitions, which are driven by market interest. If we are too academic and rigorous, for example, using IMF’s definition of SWF, we risk leaving out some of the funds that we deem highly interesting, acquisitive and comparable in behavior to pure SWFs, including India’s NIIF, Morocco’s Ithmar Capital or even Singapore’s Temasek, which insists in not being called a “Sovereign Wealth Fund”.

We also must bear in mind that certain SOIs are actually asset managers that invest capital on behalf of asset owners: Canada’s AIMCo manages different pension plans (which comprise most of its capital), and a SWF, AHSTF; Netherlands’ APG mixes ABP with seven other pension plans; Wafra invests on behalf of Kuwait’s pension PIFSS; and Australia’s VFMC manages ESSSuper among other public sector pools of capital.

Lastly, we include certain investable portfolios of Central Banks, which can be considered “accounting entries”, including China’s SAFE (Investment Company), Hong Kong’s HKMA (Exchange Fund), Kazakhstan’s NBK (including NOF and NIC) and Botswana’s Pula Fund. In 2021, we decided to exclude Saudi’s SAMA / SCB.

Out of the 415 SOIs, we define a “Top 100” list, which can be found in Appendix 1 and allows us to focus our efforts on the 70 most sizeable and active SWFs and the Top 30 most sizeable and active PPFs. This sample serves as a fair representation of the heterogenous SOI universe in all six continents. Both the 415 universe and the Top 100 are dynamic lists, which we keep updating as new funds are established and old funds get depleted.

The Rating System:

The GSR Scoreboard serves as a reality check for asset owners to measure and improve best practices. It also enables managers and other relevant parties to stay informed of important aspects of their partners. The 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’s Top 100”), generating 2,500 data points, and repeated annually. For a list of the 100 SOIs and countries, please refer to Appendix 1.

Governance (10 elements):

#1 – Mission & vision: Does the Fund clearly state its mission, objective or purpose?

This criteria is often fulfilled. Even the funds that do not maintain a website state their mission through the website of their shareholder, of their manager or via the IFSWF – incl. Mongolia’s FHF and Cyprus’ NIF.

#2 – Deposit & withdrawal rules: Does the Fund clearly state how it is funded and possibly withdrawn?

This question is closely related to legitimacy. For SWFs, we seek a publicly available indication of a deposit / spending rule. For PPFs, we ask for a statement of the annual contributions and distributions to pensioners.

#3 – External manager reputation: Is there a robust process to select external managers, if any?

Most SOIs rely on external managers, in different degrees. In that context, a rigorous selection process is paramount to avoid recent embezzlement cases such as 1MDB-PetroSaudi and FSDEA-Quantum Global.

#4 – Internal & external governance: Does the Fund provide clarity of its governance structure?

We seek a sound governance framework both externally and internally. The Board of Directors should ideally maintain some degree of independence from the Government or, if relevant, from the Monarchy.

#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 capital into, in order to enhance their deal origination funnel – yet 15% of the funds fail to convey their criteria.

#6 – Structure & operational data: How is the Fund structured as an investment organization?

SOIs are increasingly complex organizations and the way they are structured can play a role in their investments. Highly transparent funds such as Alaska PFC, NBIM and Temasek fail to exhibit an org chart.

#7 – Annual accounts audited: Are financial statements audited and in the public domain?

Two-thirds of the funds disclose their financial statements, audited by the State Auditor or by a major audit firm, including 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. Ten large SWFs are often the subject of speculation: ADIA, ADQ, BIA, EIA, GIC, KIA, NDFI, OIA, QIA and SAFE IC.

#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 GPIF are extremely transparent.

#10 – Annual vs LT return: Is the most recent year’s return provided?

In times of uncertainty and volatile markets, certain SWFs including ADIA and GIC, try to avoid the short-termism and the external pressure by only providing rolling returns, as opposed to single-year 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 concerns. More broadly, some of the funds maintain a strict ethical code or code of conduct 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 ESG factors are integrated into their investment decision process, do not have an internal team looking at these issues across the board.

#13 – Economic mission: Does the Fund seek economic advancement?

The new breed of Strategic Funds pursue not only financial but also economic returns; either at home (see question #19) or overseas, such as the case of China’s CADF in several African countries.

#14 – Economic impact & measure: Are ESG key metrics or figures provided?

Funds with ESG goals should report appropriate KPIs. These figures would ideally include metrics like job creation, reduction of gas emissions by portfolio companies or contribution to long-term sustainable growth.

#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 37%, two thirds of which are PPFs.

#16 – Alignment with SDGs: Is the Fund a UNPRI signatory member or does it align with the SDGs?

While 41 of the 100 funds are signatory members of the Santiago Principles, only 34 are signatory members of the UN’s PRI, and 9 more funds seem to be aligned with SDGs without any firm commitment with the network.

#17 – Partnership & memberships: Does the Fund collaborate with international investors or bodies?

Several SOIs now pursue equity and/or debt fundraising, which gives them visibility and certain degree of accountability. This question goes beyond membership to IFSWF, OPSWF, UNPRI or any other particular body.

#18 – Emerging markets / managers: Does the Fund invest in emerging markets and/or managers?

Half the Top 100 Funds originate in an emerging economy and invest at home, which makes them sustainable investors. Others have started to diversify 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, e.g., Alaska PFC or CDPQ.

#20 – ESG risk management: Does the Fund accept and address climate change and other ESG risks?

Decarbonizing is not the only ESG-related issue, and SOIs must acknowledge all risks before addressing them. Some of them may not be ready or have a dedicated ESG team, but they 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 websites, but one must look at their framework and suitability of their risk mitigation strategies. Only 68 of the Top 100 provide a view of their approach as risk managers.

#22 – Strategic asset allocation: Is there proper thought behind the asset allocation of the Fund?

During Covid-19, the importance of maintaining appropriate levels of liquidity in the portfolio was paramount. Only 56 State-Owned Investors have a proper 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?

If question #2 looks at the existence of fiscal rule, this one looks for a limitation on spending, i.e., an assurance that the capital will not be depleted in case of market turmoil. For PPFs, we seek fully funded status (100%).

#24 – BCM / Crisis team in place: Does the Fund employ a dedicated Operational Risk team?

Funds need to manage not only investments but risks. Only a third of the Top 100 have a dedicated Operational Risk team that looks at Business Continuity and Resilience, most hired recently in response to covid-19.

#25 – Speed & discipline: Is the Fund generally well placed for its long-term survival?

This answer is based on our insights into the funds’ operations: some of them have been able to adapt to unexpected crises, while others do not inspire confidence and could face depletion, merger or embezzlement.

Per mission: PPFs score on average much higher than SWFs in any given category. Among SWFs, Savings Funds tend to be better governed but less responsible, while strategic funds put more effort on the Sustainability side.

By nature, pension funds are usually more transparent and accountable than SWFs, given the presence of liabilities and stakeholders. Newer strategic funds, such as Indonesia’s INA, Egypt’s TSFE and Turkey’s TVF need to build a robust governance structure if they would like to raise capital from other market players.

Stabilization funds are, in general, much better governed but their footprint on sustainability issues is much more limited. Chile’s ESSF, Ghana’s GSF and Azerbaijan’s SOFAZ are examples of very transparent and well functioning funds that have not done much progress on ESG yet.

There is no doubt that Covid-19 has been an eye opener for funds around resilience issues. We have seen some progress especially from stabilization funds and savings funds, but strategic funds are still behind.

Per size: Large funds (between US$ 82b and US$ 260b 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 10 years.

Per illiquidity: Those funds that are more illiquid (over 60% of portfolio) struggle, particularly with resilience issues. Those allocating 35% to 60% to private markets perform the best.

For second year in a row, the Future Fund is the only State-Owned Investor to achieve a perfect score (25 of 25 elements) in our GSR Scoreboard. The Australian investor has performed well in both rising and falling markets for the past 15 years, while pursuing excellence in transparency, responsible investing, and resilience. We had the immense pleasure of discussing the results of the new assessment with Will Hetherton, the fund’s employee number 5 and current Head of Corporate Affairs.

[GSWF] Future Fund’s size has tripled, from an AU$ 60.5 billion initial injection to today’s AU$ 178.6 billion, in only 15 years. How did you guys do that and what would you say your main success factors are?

[FF] We were blessed with starting with excellent clarity of purpose and statutory framework: very clear return and risk parameters that have allowed us to establish the independence of the organization. Building up a clear investment governance and a strong culture has also been crucial and brought us together as a team. Additionally, we continue to think about how the world is changing and how we need to evolve accordingly: we must not rest on our past performance but look at how things are changing and how we need to evolve towards that.

[GSWF] Future Fund’s asset allocation seems to have stabilized at around 43% of alternatives (RE, Infra, PE and HF), which is high among global savings funds; do you see this changing in the near future?

[FF] Every fund is different and has to run its own race – for example, we like Australian infrastructure given the way it links to our CPI-based mandate, and we believe venture capital is an important tool to access innovation and companies of the future. High returns are getting harder to achieve and alternatives provide us with the opportunities we need to create value. We are also trying to be more granular and to focus on specific themes within each asset class.

[GSWF] We understand that most of your portfolio is invested by external managers, who have consistently outperformed your target returns – do you expect to internalize any of the asset management?

[FF] We operate a hybrid model and our legislation requires us to use external asset managers, which we see not as a restriction but as a potential advantage. We work very closely with our partners to create opportunities, we tap into them for macroeconomic perspectives and insights into particular markets, which we can then act on. Partnering with external managers allow us to focus on the bigger, portfolio-wide issues rather than becoming overly distracted by the nuts and bolts of particular investments. This works for us and we will  continue to operate with this hybrid model.

[GSWF] Your structure is fairly slim with less than 200 employees, all based out of Melbourne, with what we assume is a very low churn rate – would you expect to open any office overseas in the future?

[FF] We expect to grow from 200 towards 350 staff in the next while, partly shifting from using contractors to bringing those roles in house and partly to adapt to the investment environment we see ahead This growth is a result of our business strategy and intent to sustain the success we have had into the future. We do have an office in Sydney but are wary of expanding further afield largely because of the risks to culture, which is a key building block for our organization.

Governance (“G”):

[GSWF] The Future Fund Management Agency invests six different pools with very different risk profiles, asset allocations and target returns – how do you ensure independence and balance of all funds?

[FF] Within those six funds, three have the same risk-return mandate, but it has indeed been a challenge to think through how to allocate opportunities and how to manage governance and equity across the different funds. On the flip side, scale is an advantage and combining these pools of capital allow us to access opportunities they could not otherwise access individually.

[GSWF] Future Fund has co-invested with several funds including CIC and OMERS (Port of Melbourne) and ADIA, CalPERS and NPS (Gatwick Airport) – what is your take on global strategic relations?

[FF] We really value our relationship with our peers and Covid-19 has been a challenge for the lack of travel. The value we get is  less on co-investments and more on broader insights on governance, macro issues, risk management, etc.

Sustainability (“S”):

[GSWF] While Future Fund is a founding member of the IFSWF, it seems to have shied away from public initiatives (e.g., OPSWF, PRI, NZAOA) when it comes to Sustainability. What is the rationale behind this?

[FF] ESG and Sustainability are important issues to us, and we recognize they can have an impact on performance. We aim at collaborating regardless of membership and we are always cautious on what we can fully commit into and add value to. We are still very active in ESG issues, e.g., in the recent prominent issue of Rio Tinto, which caused a destruction of indigenous heritage in W. Australia, we took a view and articulated our expectations to the company very clearly.

[GSWF] Your exclusion list seems to focus on tobacco and military weapons companies so far. Do you expect it to include other ESG issues such as coal-based energy and human rights in the future?

[FF] We have a clear framework based on our legislation and investment strategy and Australia’s treaties that drives our exclusion list. We value diversification and while we do have exclusions our focus is on engagement and on integrating ESG risks into our investment decisions.

Resilience (“R”):

[GSWF] We understand that the first withdrawal from the Government, expected to happen in July 2020, was pushed to at least 2027 (despite Covid-19); when is the fund expected to reach its peak in terms of AuM?

[FF] That will depend on a range of factors, but we expect the Future Fund to continue to grow for years to come.  Importantly, what this does is  allow the Fund to continue to do what it was set up to do, i.e., to strengthen Australia’s balance sheet and long-term financial position.

[GSWF] As employee #5, you have seen a lot in the past 15 years. What do you expect to see in the next 15?

[FF] The organization today is different to what it was 15 years ago but at its core it has the same purpose and culture. We had a blank sheet of paper and we have done the best we could to take advantage of that great starting position. We are implementing a new three-year business strategy that will shape our future and that focuses on four distinct elements:

1. Refreshing our investment model, to respond to the shifts we have seen in the investment  environment;

2. Maturing the organization, building resilience and efficiency as we continue to grow;

3. Preserving our legacy, taking the best of our culture and evolve that for the future; and

4. Expanding our voice and building our networks in order to firm up our position with stakeholders and as a global institutional investor.

I think those areas will really help shape what we look like in a decade or so.

Appendix 1: Top 100 SOIs

Appendix 2: Scoring Matrix

Appendix 3: GSR Scores vs Financial Returns

We studied the relationship between high governance and sustainability standards and superior financial returns, based on the latest results of our GSR Scoreboard and the average returns over 2015-2020, for 60 different State-Owned Investors.

We have found a “moderate positive relationship”, with a correlation coefficient of 0.30, between the two variables. In other words, those funds that do not look after proper governance and sustainability post lower returns. This is true for ADIA, Khazanah and PIF, and could also be the case for KIA, OIA and QIA whose returns are unknown.

Interestingly, the strongest correlation is found between the “S” component and the financial returns of the funds – i.e., increasing efforts when it comes to Sustainability, including investing in green companies, pays off in the long term.

There are some exceptions, e.g., Mubadala manages to perform well despite having a lower-than-average GSR. On the flip side, funds like ISIF, GPIF and Temasek have high GSR standards but show lower-than-average financial returns.

Finally, there are no surprises in the “best in class” category. NZ Super, Future Fund and NBIM lead the SWF pack, while AP Funds, CPP and CDPQ show the way for pension management. When it comes to SOIs, doing good is good for business.

Appendix 4: About Us

Global SWF is a financial boutique that was launched in July 2018 to address a perceived lack of thorough coverage of State-Owned Investors (SOIs), including SWFs and PPFs, and to promote a better understanding of, and connectivity into and between global investors. The company leverages unique insights and connections built over the years and functions as a one-stop shop for some of the most common SOI-related services, including:

• Consulting Services, helping governments establish or reformulate their investment and strategic funds.

• Data Services, running the ultimate database of investment portfolios and execs at the world’s largest SOIs.