Prof. Adam Dixon, Adam Smith Chair in Sustainable Capitalism
In an era of rising geopolitical tensions, expanding investment screening regimes, and growing scepticism toward foreign capital, the Santiago Principles—once a beacon of financial transparency and international cooperation—are facing their toughest challenge yet.
When first introduced, the Santiago Principles reflected a vision of liberal internationalism, where capital mobility and open markets were seen as pathways to greater global integration. They were never designed as rigid rules but rather as a framework to encourage transparency, good governance, and clear investment objectives for sovereign wealth funds. In return, the implicit promise was that recipient countries would keep their markets open to these state-backed investors.
Yet, that grand bargain is now under strain. Global rivalries, economic nationalism, and the increased use of financial sanctions have all contributed to a more fragmented investment landscape. Countries are erecting new barriers—both regulatory and political—that restrict the flow of foreign capital, particularly when that capital originates from state-affiliated entities. As a result, sovereign funds now operate in an environment where even the highest standards of governance and transparency may not be enough to guarantee access to key markets.
Paradoxically, sovereign wealth funds remain committed to the Santiago Principles despite these rising hurdles. The global investment climate has grown more restrictive, with recipient countries tightening foreign investment reviews and imposing new merger controls. While these measures primarily target state-owned enterprises, the increased scrutiny of foreign direct investment raises transaction costs for sovereign funds, complicating their decision-making and risk management. The risk of regulatory rejection, or even just prolonged review, makes certain investments less attractive, deterring funds from deploying capital in specific markets.
This changing landscape reinforces the very premise of the Santiago Principles: that strong governance, transparency, and disclosure are essential for maintaining investor credibility. In an era where foreign investment is viewed with growing suspicion, sovereign wealth funds must double down on these principles—not just for their own benefit, but for the stability of global financial markets.
One of the biggest emerging risks is the impact of investment screening on co-investment strategies. Many sovereign funds rely on partnerships with institutional investors or other sovereign entities to lower costs and diversify risk. But as scrutiny increases, funds associated with weaker governance may inadvertently create frictions for their co-investors. Instead of reducing barriers to investment, opaque or ineffectual governance structures could raise costs for all involved.
Despite these challenges, the Santiago Principles remain relevant precisely because they are not static. The global sovereign fund landscape has evolved significantly since the introduction of the Santiago Principles, with funds expanding their mandates to include strategic investments, sustainability priorities, and developmental goals. While their governance practices vary widely, the unifying thread is the need for strong institutional structures that ensure independence and accountability.
Strategic investment funds, a distinct subset of sovereign wealth funds, occupy a unique space at the intersection of finance and national development. Unlike conventional asset allocators, these funds are explicitly designed to advance domestic economic objectives, often pursuing a “double bottom line” that balances financial returns with broader policy goals. In the broadest sense, all sovereign wealth funds serve as instruments of national economic policy—whether for fiscal stabilisation, monetary management, or long-term development. However, this does not imply that sovereign funds operate under political influence, with policymakers directing investment decisions. Rather, it underscores the critical role of strong governance in ensuring the independence and credibility of these funds.
For strategic investment funds in particular, the strength of their governance frameworks directly impacts their ability to attract foreign and private capital. The mandates of many newly inducted members of the International Forum of Sovereign Wealth Funds reflect this reality, highlighting the continued emphasis on institutional integrity and political remoteness as prerequisites for effective investment.
The resilience of the Santiago Principles in the face of shifting geopolitical and economic realities underscores their importance. But their continued relevance will depend on the willingness of sovereign wealth funds to embrace not just the letter, but the spirit, of these principles. In a world where barriers to capital flows are mounting, the Santiago Principles offer the best chance to preserve trust in state-backed investment and ensure that sovereign wealth funds remain a stabilising force in the global economy.