SWF Radar AccountabilityAndTransparency

Gordon Brown, the British prime minister, writes that, “The growth of Sovereign Wealth Funds (SWFs) is one of the most notable characteristics of the current wave of globalisation. The UK government welcomes the positive role that SWFs such as those in the UAE and Qatar have in the efficient allocation of capital and the benefit that they bring to the global economy by taking a long-term view of their investment decisions. To ensure a transparent environment that supports SWF investment, we have fully endorsed the lead taken by the IMF to develop a common set of principles. And, of course, the UK, with its history of open investment, will continue to be a natural place for SWFs to invest.”

Emirates Business 24/7 reports that, “Abu Dhabi Investment Authority (Adia) – rated the world’s largest government fund – has started plans to enhance disclosure of its operations in line with an agreement with the IMF last week.”

This is quite a result for the IMF.

IMF Survey has published an article on the new GAPP guidelines for sovereign wealth funds.

Edwin Truman of the Petersen Institute writes that, “The GAPP is a solid piece of work that should help to dispel some of the mystery and suspicion surrounding SWFs. The International Monetary Fund deserves substantial praise for facilitating an agreement in the IWG in a remarkably short period of time.”

GAPP 19 states that investment decisions by SWFs should be based on economic and financial grounds:

GAPP 19. Principle

The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

And Subprinciple 19.2 states that SWFs should follow standard asset management principles:

GAPP 19.2 Subprinciple The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.

Subprinciple 19.1, however, makes it clear that the “based on economic and financial grounds” does not mean “exclusively based on economic and financial grounds”:

GAPP 19.1 Subprinciple If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

This certainly leaves the door open for some use of non-financial investment criteria – no doubt so as not to rule out the kind of SRI of which Norway’s Government Pension Fund–Global is very keen. But the demand for transparency and the demand that all investments must be based [also] on financial criteria makes it unlikely that an SWF could adhere to GAPP, make a substantial politically-influenced investment (other than for relatively benign social or environmental reasons), and still fail to provoke an outcry.

(Update a couple of minutes after initial post: The full report makes clear that this is indeed targeted at SRI-type investments (page 22 of the report, 29 of the PDF): “Some SWFs may exclude certain investments for various reasons, including legally binding international sanctions and social, ethical, or religious reasons (e.g., Kuwait, New Zealand, and Norway). More broadly, some SWFs may address social, environmental, or other factors in their investment policy. If so, these reasons and factors should be publicly disclosed.”)

Meanwhile, GAPP 20 states that SWFs must keep their distance from their respective governments:

GAPP 20. Principle

The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

And other protections against the kind of political investing that many lawmakers and commentators fear from SWFs are contained in GAPP 21, which rules out any kind of value-eroding shareholder activism on the part of an SWF:

GAPP 21. Principle

SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

Scotland on Sunday writes that, “One of the new battlegrounds… is likely to be the trade-off between an impoverished West’s need for capital and the wealthier East’s willingness to be more transparent in their dealings. The outcome, however, will be a shift of power in the world economy.”

The Financial Times reports that, “One fifth of sovereign wealth funds are not accountable to their domestic legislatures, according to a new survey [conducted under the auspices of the IMF by the international working group of sovereign wealth funds (IWG) as part of a process towards drafting a set of principles for them]. The survey of 20 such funds found that 21 per cent were not accountable, while 58 per cent reported to their legislatures through a board chair or minister of finance.”

The Financial Times writes that, “For critics of governments that throw their financial weight around to achieve political ends, the revelation of the activities of China's State Administration of Foreign Exchange (Safe) will be yet more cause for alarm. Even more disturbing is that such activities will be left untouched by an international drive towards transparency and accountability of sovereign investors [the IMF’s International Working Group of Sovereign Wealth Fund’s (IWG) proposed Generally Accepted Principles and Practices (GAPP)] that has been making some progress.”

David Robertson of The Times writes at Emirates Business 24/7 that, “Large secretive bodies are usually just bureaucratic, not evil, and that is why I find it hard to believe the conspiracies that surround sovereign wealth funds (SWFs).”

The Times of India writes that, “Another advantage that might accrue from [the IMF] guidelines [for SWFs] will be that this model will serve as a starting point for a similar deal with another secretive pool of capital - hedge funds.”