Sovereign wealth funds (SWFs) have been active in global financial markets for more than half a century. In the early 2000s, high commodity prices and favourable balances-of-trade increased surpluses of resource-rich and export-oriented countries. The role of SWFs expanded to diversify their holdings of foreign reserves. By 2007, a climate of rising protectionism drew attention to the growth of central bank and SWF assets. Public discourse raised questions about the role of sovereign wealth funds in international finance, theorising that they could be used by their governments as a way of wielding influence over companies and markets.
By 2008, sovereign wealth funds had become acutely aware that this idea was exerting a powerful hold on the collective imagination of public and private financial actors, government and multilateral institutions. Early that year, a constructive dialogue started between the governments of countries receiving sovereign wealth fund investment and those owning the funds. After extensive dialogue and information sharing, that included representation from the World Bank and the International Monetary Fund, twenty-six SWFs – the International Working Group of SWFs – established a set of Generally Accepted Principles and Practices (GAPP) that was intended to guide SWFs as responsible financial institutions.
In September 2008, the International Working Group met in Santiago, Chile, to finalise the GAPP, which have since become known as the Santiago Principles. Following an April 2009 meeting in Kuwait City, the Working Group was formally organised as the International Forum of Sovereign Wealth Funds (IFSWF) – a voluntary organisation of SWFs whose members agreed to “uphold, in all material respects, the Santiago Principles” under the Kuwait Declaration.
Intent of the Santiago Principles
The primary objective of the Santiago Principles – still paramount for the IFSWF today – is to help maintain the free flow of capital and investment needed for a stable global financial system.
By implementing the Santiago Principles, IFSWF members seek to achieve this goal by demonstrating their commitment to professional, independent, and commercially orientated investment management as they seek, on a voluntary basis, to fulfil the mandates set for them by their owners. The Santiago Principles set out fundamental principles and practices for sound and transparent sovereign wealth fund governance, grounded in professional investment industry standards for operational controls, risk management, and accountability. Importantly, the act of voluntarily implementing the Santiago Principles enables a sovereign wealth fund to assure governments of recipient countries that it will comply with all applicable regulatory and disclosure requirements required of all international investors in those markets.
Implementing the Santiago Principles
In the nine years since the Santiago Principles were first drafted, the membership of the IFSWF has grown and has become significantly more diverse. Its founding members were large, established funds, the clear majority of which had either a savings stabilisation and/or foreign exchange holdings diversification mandate. Today, the Forum is an expansive group of large and small funds with a wide range of remits, encompassing investment strategies from the most global and liquid and to the most local and highly illiquid.
Applying the Santiago Principles in practice is a dynamic process that must accommodate local legal structures and traditions. In fact, ongoing monitoring and review are hard-baked into the Santiago Principles, through the implementation of GAPP 24. For these reasons, the IFSWF advises caution in attempts to compare and order the implementation experiences of SWFs. Resulting measures often abstract, oversimplify, or mask the unique organisational, institutional, and cultural challenges that each member faces.
IFSWF members commit to implementing the Santiago Principles over time as a process, as required by the members’ agreement. The IFSWF Board assesses each new applicant for membership based upon their progress in applying the Santiago Principles at the time of application. The Board also requires an extended commitment by the applicant to explore new ways to further incorporate the Principles into their governance and operational structures.
Each member begins the process of implementing the Santiago Principles from their own unique starting point, depending on their history and legacy structures and subject to their mandate. Consequently, the path to implementation will not be the same for every member. Nevertheless, all members aspire to establish the best possible governance, accountability, and operational methods to enable them to fulfil their mandates in the best interest of their owners and national citizenry – their ultimate stakeholders.
A key role of the IFSWF is to be an organisation that supports members in their own process of implementing the Santiago Principles. The Forum does this by facilitating knowledge- and experience-sharing opportunities, but also through member workshops and other continuing activities of the Secretariat. The Forum’s Governance Committee serves as a sounding board that can offer new members guidance from their own experiences.
Thus, the membership of the IFSWF views the Santiago Principles not as “rules”, but rather as guiding principles and practices to be implemented according to local institutional structures to progressively enhance and improve sovereign wealth fund investment governance in accord with global professional standards.
Self-Assessment: A Window into the Implementation Process
The IFSWF – working with the membership – has sought to address some of the challenges of Santiago Principles implementation. For example, working under the guidance of the Governance Committee, the IFSWF has changed its assessment procedures, moving from a quantitative approach to a structured methodology that accommodates the diversity of member implementations and allows for contextualised measures of progress.
The Forum has also expanded its publication of information on member self-assessments. Currently, the IFSWF publishes case studies of implementing the Santiago Principles based on members’ self-assessments, as well as 31 members’ self-assessments of Santiago Principles’ implementations on its website. This is an increase from 15 members who originally prepared case studies on their implementation experiences. The self-assessment documents offer a unique window into the implementation process from the perspective of each member and provide primary information on members for recipient countries, analysts and other practitioners, and scholars.
In 2018, the Governance Committee will further enhance the self-assessment process by providing members with a set of guidelines to assist in their preparatory work. These advisory principles are intended for use by both new and existing members and are designed to facilitate self-assessment reviews and communication of relevant practices vis-à-vis the Santiago Principles.
Moving forward, the IFSWF is committed to the on-going support of members in their self-assessments to extend and improve the implementation of the Santiago Principles within their organisations.
Beyond the Membership
The IFSWF believes that the Santiago Principles are primarily a tool to assist members to become better long-term investors. The Forum nevertheless acknowledges that the Santiago Principles are also important to non-members – recipient country governments, investment partners, lenders, etc. – because they can serve to establish the professional credentials for the members with whom they engage.
Recent legal commentary has increasingly drawn parallels between the Santiago Principles, and the organisational role of the IFSWF, and other frameworks of international financial regulation affected through the adoption of principles and practices. Such interpretations of the Santiago Principles can extend their scope beyond that of the original intent of the Principles’ authors.
The IFSWF respects the diversity and independence of its membership and is committed to fulfilling the original purposes of the Santiago Principles. As such, the Forum will continue to improve communications about its initiatives, assist members in applying the Santiago Principles to their organisations, and support them in integrating the Principles into their governance and investment-management processes. In so doing, the IFSWF seeks to reinforce the confidence in the global community of SWF stakeholders as responsible investment partners.