October 13, 2009
Sovereign Wealth Funds Are Slow to Adopt Santiago Principles
by Robert Kropp
Report from the Investor Responsibility Research Center Institute and RiskMetrics Group finds low
levels of disclosure among the ten largest SWFs, and little evidence of ESG considerations.
In October, 2008, the International Working Group
of Sovereign Wealth Funds (IWG) published the Santiago Principles, a set of 24
voluntary principles designed to ensure transparent and sound governance structure, and compliance
with applicable regulatory and disclosure requirements in the countries in which they invest, by
sovereign wealth funds (SWFs).
SWFs are defined by the International Monetary Fund (IMF) as "special purpose investment
funds or arrangements, owned by the general government." Their investment strategies include
investing in foreign financial assets. The assets under management of SWFs currently exceed $2
trillion, and are estimated to grow to about $6-10 trillion within five years, according to the
One year later, a report by the Investor Responsibility Research Center Institute (IRRCi )
and RiskMetrics Group finds that "there
has been little analysis of the actual influence of the SWFs on the companies in their portfolio
and the related risks and opportunities for the investment community." The report, entitled An Analysis
of Proxy Voting and Engagement Policies and Practices of the Sovereign Wealth Funds, is the
first comprehensive analysis of the engagement and proxy voting practices of the ten largest SWFs,
according to IRRCi.
"The goal of this report was to demystify the role of sovereign wealth
funds in global capital markets," said Jon Lukomnik, program director for IRRCi. "There have been
lots of received wisdom and very few facts about the role of SWFs. This is the first comprehensive
report to provide benchmarking of the levels of transparency and opacity at the funds."
Foreign investment by SWFs has raised concerns in some quarters regarding issues of national
security, and activities by some SWFs in the aftermath of the economic crisis may have exacerbated
those concerns. Two such investments referenced in the IRRCi report were the acquisition by the
China Investment Corporation (CIC) of a $5 billion stake in Morgan Stanley, and the $7.5 billion
stake in Citigroup acquired by the Abu Dhabi Investment Authority (ADIA).
In May, 2009,
the Government Accountability
Office (GAO) addressed these foreign investments in US-based financial institutions by
reporting, "if a company's stake exceeds 25% or the company would control the bank, the company
must receive prior approval and become regulated by banking regulators and would be limited in the
types of nonbanking activities in which it can also invest."
Lukomnik observed, "We found
no instances of inappropriate engagement for one country's political ends to the detriment of other
owners or investors. However, we found a general lack of disclosure around engagement and proxy
According to Afshin Mehrpouya, a Senior Analyst at RiskMetrics and the
primary author of the report, concurred with Lukomnik's observation, saying, "In all cases we found
low levels of disclosure regarding proxy voting policies. Half have low levels of compliance with
the Santiago Principles."
But Lukomnik said of the adherence of SWFs to the Santiago
Principles, "This was a self-imposed code of conduct. Some sovereign wealth funds take disclosure
and the Santiago Principles seriously. About half of the ten largest SWFs have achieved some level
of meaningful disclosure."
According to the ICCRi report, fears that the investment
activities could lead to excessive foreign political influence over corporations have been widely
reported in the media, but are exaggerated. In fact, the report finds, "our estimate of the total
international equity investments of the ten largest SWFs is about half of the figures generally
reported in the media." The report estimates current foreign investments by SWFs to total less than
Most SWFs practice active investment management strategies, the report found.
Especially in cases where SWFs acquire large stakes in companies, "it is important that they
clarify the principles underlying their engagement practices and, ideally, provide engagement
records." One of the Santiago Principles states, "There should be clear and publicly disclosed
policies, rules, procedures, or arrangements in relation to the SWF's general approach to funding,
withdrawal, and spending operations." But the IRRCi report found that disclosure of engagement
policy or performance data was rare among SWFs.
Also highlighted in the Santiago
Principles was the area of governance, in which "a clear and effective division of roles and
responsibilities in order to facilitate accountability and operational independence" should be an
essential part of the governance framework. While the report did not find it unusual that
government officials would be included on the boards of SWFs, given the fact that SWFs are owned by
governments, it did find that independent boards and senior management could lead to improved
Of the ten SWFs analyzed in the report, only the Norwegian
Government Pension Fund (GPFG) publishes any proxy voting records. But because of their size and
active ownership practices, disclosure by SWFs of proxy voting activities "would provide other
investors and corporate managers with adequate information to evaluate the funds' intents and
Given the fact that most SWFs identify themselves as long-term investors, the
responsible investment community would consider it to be of importance that these influential funds
begin to adopt environmental, social, and governance (ESG) considerations into their investment
strategies. However, the IRRCi report found little evidence of such activity. GPFG was found to be
the only SWF with explicit ESG policies.
"Many SWFs are long-term investors who should
have interest in the level of integration of ESG risk," Mehrpouya of RiskMetrics said. "But none
of them showed strategic interest in these criteria. Many did practice negative screening according
to national values."
In addition to CIC and GPFG, the SWFs analyzed by the report were Abu
Dhabi Investment Authority (ADIA), Australian Government Future Fund (AGFF), Government of
Singapore Investment Corporation (GIC), Kuwait Investment Authority (KIA); Libyan Investment
Authority (LIA), Russian Reserve Fund and National Wealth Fund, Qatar Investment Authority (QIA),
and Temasek Holdings (Temasek).