Sovereign Wealth Funds and Principles for Peer Learning
by Adam Robbins
Many academic studies of the Santiago Principles, a set of good practices for sovereign wealth fund (SWF) governance, aim to assess whether SWFs fully comply with the Principles. Scholars tabulate whether and how many of the Principles have been implemented and explain why. The aim of the exercise is to extrapolate SWFs’ perceived level of compliance, and how such compliance successes or failures might impact the global financial system.
While assessing how SWFs have implemented the Santiago Principles is certainly useful, it is more worthwhile to consider how the Santiago Principles have become such a salient governance measure for SWFs. Why do the 30 members of the International Forum of Sovereign Wealth Funds (IFSWF), from six continents, ranging in size from $700 million to over 1000 times larger, with varying economic objectives, investment strategies, and political contexts, deem this set of practices most useful?
The Santiago Principles were created by a diverse group of SWFs at a time of rapid change in the international investment environment. In 2007, the International Monetary and Financial Committee of the International Monetary Fund (IMF) called for a set of best practices on key issues faced by SWFs and the recipients of their investment flows. Facilitated by the IMF, an eclectic group of SWFs from 26 countries coalesced to draft the Principles. This newly formed body of SWFs emerged from a variety of geographies, institutional structures, governance environments, and investment objectives. To achieve consensus within such a diverse group, the process necessarily favored broadly defined principles over specific policy requirements. The formal title of the Santiago Principles—the Generally Accepted Practices and Principles—reveals this preference, and makes no claims to specificity or prescription.
Criticism of the Santiago Principles often focuses on the established preference for transferability and acceptability among SWFs: they are too vague to meaningfully measure compliance or precisely guide an SWF’s behavior. Yet such criticisms fail to understand how SWFs use the Principles. Local policymakers strive to achieve the ideals of the Principles, but adapting a state-owned investment institution to match a set of international practices is no easy task, and may be limited by political and economic realities. SWFs are inherently products of their local governance environments. They have arisen in countries wealthy and poor, large and small, near and far from global financial centers. Building a government-owned investment institution is a difficult, technical process even in a well-resourced environment, so it should be no surprise that Santiago Principle implementation, while improving, is not yet complete.
Those outside the SWF community may favor a more rigorous or prescriptive governance standard, but such a bar may be counterproductive. In some jurisdictions, policy formation, transparency standards, rule of law, and human capacity may prevent local policymakers from applying some of the Principles. An outsider may be able to gain some insight into SWF governance capacity by examining the Worldwide Governance Indicators or similar measures of the country, but any analysis would be imprecise given the complexity of operating an SWF.
While not useful as prescriptive tools, the broadly defined Santiago Principles do create opportunities for knowledge sharing and peer learning. Multilateral organizations such as the World Bank, and peer organizations such as IFSWF, use the Santiago Principles framework to help SWFs pool experiences and develop a deeper understanding of one another’s contexts while collaboratively working to improve their organizations.
As an example of this work, IFSWF members have created an internal working group to strengthen SWFs’ implementation of the Santiago Principles, and have published 15 case studies to publicly demonstrate SWFs’ commitment to the Santiago Principles. The benefits of such publications extend beyond the SWF community to all global investors, as these case studies provide a diverse set of good governance successes in varying global contexts.
To help improve SWF governance, organizations such as the World Bank and IFSWF should continue to provide forums for peer learning and assist SWFs in benchmarking their practices against peers. As SWFs proliferate globally, new funds should be proactively incorporated into the global SWF community. While some scholars and recipient country policymakers may favor more prescriptive governance standards, these are unhelpful in guiding governance improvements in complex political and capacity-constrained environments. Peer learning, driven by a transferable and flexible set of good practices such as the Santiago Principles, provides the surest, albeit gradual, path to better SWF governance.
The views expressed above are those of the author and do not necessarily reflect the position of the IFSWF.
Image Courtesy of the Author
About the Author
Adam Robbins is Senior Membership Manager at the International Forum of Sovereign Wealth Funds, based in London. He is also a Research Affiliate with the Fletcher School’s SovereigNET, an academic network focused on SWFs, and a Fellow at Bocconi University’s Sovereign Investment Lab. Before joining IFSWF, Adam worked with the World Bank’s Sovereign Wealth Fund Secretariat. He has also worked with Amundi Asset Management’s Sovereign Wealth Fund Research Initiative and Columbia University’s Committee on Global Thought. Adam earned a Master of International Business degree at The Fletcher School, Tufts University, and graduated summa cum laude from Colby College with a B.A. in Cultural Anthropology.