Santiago Principles: “It is all about trust”

By Ashby Monk

The International Working Group of Sovereign Wealth Funds (IWG) released the Santiago Principles on Saturday–also referred to (confusingly for anyone with an accounting background) as GAPP, or the generally accepted principles and practices.

The IWG–and by extension the GAPP-is based on building mutual understanding between SWFs and SWF investment receiving countries. The latter have generally been concerned about the influence of government sponsorship on the former’s investment policies–this concern has led some to consider new, protectionist policies geared towards dealing with a perceived ‘SWF threat’.

The release of these principles is an important step towards resolving any remaining distrust or confusion surrounding SWFs (and their agendas). Indeed, according to IWG Co-Chair Hamad al Suwaidi, of the Abu Dhabi Investment Authority, “this process is about one word, it is all about trust.” This was echoed by David Murray of Australia’s Future Fund, the Chair of the IWG’s Drafting group, who noted, “…we had to establish trust in recipient countries that the activities of sovereign wealth funds were all based on an economic orientation.” Recipient countries need to trust that SWFs are investing in their economies to achieve economic and financial ends; political ends would be perceived as illegitimate.

The 24 principles have four general goals: First, they ask sovereign wealth funds to meet local recipient regulatory requirements and make certain public disclosures in a variety of areas; these disclosures are nevertheless mindful of the competitive position of SWFs in the marketplace. Second, the principles seek to ensure that SWFs invest on the basis of economic and risk and return considerations. Third, the principles seek to instill transparent and sound governance structures. Finally, the principles will contribute to stable financial markets and avoid any protectionist policies targeting SWFs.

The GAPP is voluntary, and its implementation is subject to the application of home country laws. Nevertheless, the ADIA has already indicated that they fully support the GAPP and will begin implementation. They have even established an inter-departmental committee to oversee compliance with the GAPP and further suggested that an independent auditor to verify compliance is under consideration. Singapore has also indicated that it supports the principles in full.

Given the state of financial markets and a clear need for long-term investors with ample liquidity, it is in the interest of all parties to make the Santiago Principles a success. The outlook is positive; even funds that have inspired some concern in the West–such as the China Investment Corporation–participated in this process and thus should (by extension) be willing to implement GAPP.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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