The Generally Accepted Principles and Practices (GAPP) – widely known as the Santiago Principles – were agreed and adopted by an International Working Group of twenty-six sovereign wealth funds in October 2008. The purpose of the Santiago Principles is to define a practical framework for sovereign wealth funds for appropriate governance and accountability. All members of the International Forum of Sovereign Wealth Funds voluntarily endorse and apply the Principles to their governance structures, investment and risk-management processes and practices. Under Principle or GAPP 24, IFSWF members commit to undertaking a regular review of their implementation of the GAPP.
Beginning in 2014, the IFSWF instituted a self-assessment review process to support member efforts to review their implementation of the GAPP. The same year, the IFSWF was opened to new membership applications and a self-assessment of how applicants implemented the GAPP was made a formal requirement of the membership application process. In November 2014, 15 IFSWF members published their self-assessments. In 2016, the IFSWF published 12 case studies of IFSWF members’ experiences of applying the Santiago Principles. Then in February 2017, 29 IFSWF members published their self-assessments on the IFSWF website.
In the aftermath of the publication of the 2017 self-assessments, the IFSWF Secretariat worked with member funds to develop a set of guidelines to further assist them in preparing these documents. The guidelines were designed to promote a consistent interpretation across the membership, clarity of disclosure and comprehensive responses. They are based directly on the Santiago Principles and draw extensively from the commentary and explanations included in Part II: Discussion of the Santiago Principles. They were compiled by consensus and agreed formally by the membership in September 2017. They offer applicants, new members, and existing members, guidance in the self-assessment process.
The IFSWF’s publication of the 2019 IFSWF member Santiago Principle self-assessments represents a next step in the evolution of member disclosure. The publication of the 2016 self-assessments was the first time that most full IFSWF members made this document publicly available; in 2019, all full IFSWF members have revisited their self-assessments. This has, for the first time, enabling a complete and detailed comparison of follow-on reporting. Findings from this analysis reveal significant material improvement in the areas targeted by the guidelines – completeness, consistency, and clarity – and further institutionalisation of self-assessment review as reporting and disclosure process.
Approach and Findings
During this comparison process, we identified two categories of changes. First, we recognised significant and material changes including discrete changes in ownership, governance, investment mandate, funding matters, investment policies and practices, risk management, or broadly the scope of reporting. Second, we highlighted minor changes in scope and materiality: improvements to the clarity of disclosure, such as including links to relevant online materials, for example, legislative and organisational documents, financial reports, codes of conduct, investment policies, asset allocation, risk management, and shareholder engagement. During this process, we found that almost 60% of funds reporting in both 2017 and 2019 – had significant and material changes in their self-assessments, while seven reported minor changes in both scope and materiality. Thus, approximately 85% of these institutions have provided material updates in their implementation of the GAPP via the self-assessment process.
Across all submissions, the 2019 self-assessments reflect marked improvements in clarity and depth of reporting over prior versions. Sovereign wealth funds are increasingly using online platforms to provide a wide range of financial and legal information to their stakeholders and counterparties, as indicated by the number of official documents linked to in the 2019 self-assessments. Some of this information highlighted relatively nuanced changes in investment mandate and organisational detail, including to investment and risk management policies, that reflected either a government-mandated change in investment objectives or organisational adjustments to investment or risk policy deliberation. Sovereign funds are dynamic, continually evolving institutions. A comparative review of the self-assessments enables us to monitor this ongoing evolution and provides primary references with which to assess fund-level transitions. We offer several discrete illustrations below.
Self-Assessment as a Process
The relative completeness of the 2016 self-assessment process provided a baseline from which to assess members’ understanding and interpretation of the Santiago Principles. A key theme of our last review was the obvious diversity of the sovereign wealth fund community. This extended in part to the interpretation of and completeness in reporting on certain GAPP (e.g. GAPP 3 - macro-economic integration). Conversely, in 2019 we observe greater continuity in the interpretation of the Santiago Principles among IFSWF members and a far greater commitment to include a formal response for each GAPP if even to report it to be under formal review.
This point concerning completeness also demonstrates a greater member commitment to a process of regular review of how they implement the Santiago Principles, which is advised under GAPP 24. Many funds report a formal annual or biennial review of their self-assessment. This trend implies greater institutionalisation of self-assessment reporting as a “process” across the IFSWF membership. It also points to its integration by members into their disclosures and periodic reporting as a lens into changes and official updates to – and details of – key elements of ownership, formal structures of governance, mandate, investment and risk policies and practices, etc.
Details and Selected Cases
Selected cases serve to illustrate the diversity of scope and scale of material change reflected in the 2019 self-assessments. We have chosen these examples to highlight how certain members’ discrete challenges and the resulting structural impacts have been captured and reflected in the self-assessments. These case studies have been previously disclosed and reported widely.
Concerning changes in ownership, for example, the Russia Direct Investment Fund (RDIF) in its 2019 self-assessment reported that its sole owner was the Federal Agency for State Property Management, on behalf of the Russian Federation. This reflects the 2017 transfer of ownership from State Corporation Bank for Development and Foreign Economic Affairs (VEB), an entity – as is The RDIF Management Company – that is on the US Treasury’s Sectoral Sanctions Identifications List.
On matters of legal basis, structure, and governance, the 2019 self-assessment of the Fundo Soberano de Angola (FSDEA) was significantly revised to reflect July 2019 legislation to restructure and enhance its governance practices in the wake of the dismissal and arrest of its chairman, José Filomeno dos Santos, son of the former president of Angola, on charges of corruption, criminal association, money laundering and fraud. The treatment of these changes is clear and succinct and includes reference links to source materials that facilitate a detailed analysis of their impacts on the Fund’s organisation and governance.
Concerning investment policy and mandate, the National Development Fund of Iran (NDFI), in its self-assessment, highlights a change in its mandate that includes a stabilisation function integrated into a revised budgetary system that includes implementation of a fiscal rule. This results from pressure on Iran’s oil exports and a deepening budget deficit resulting in part from a widening sanctions regime imposed on the country.
Khazanah Nasional Berhad’s self-assessment also reflects a significant corporate restructuring and reorganisation conducted in 2018 that resulted in leadership changes at both the Board and Management levels in the wake of far-reaching changes to Malaysia’s political leadership. The changes “refresh” Khazanah’s mandate in the aftermath of the 1MDB matter to sustainably increase the value of its assets, while “safeguarding capital contributions”. This is clearly articulated in a formal Investment Policy Statement (IPS) to which reference links are provided in the self-assessment. The IPS is comprehensive in scope with coverage that includes not only mandate, but also investment philosophy and structure, sourcing of funding, and governance.
In addition to examples of substantive change linked discretely to factors attributable both directly or indirectly to members, other examples represent the material policy or process changes that may not have received wide global attention, but are nonetheless important to understanding the evolution of both governance and investment practices of sovereign investors. The Alaska Permanent Fund Corporation’s submission, for example, offers a detailed view into the fund’s organisational and operational structure, complemented with data on the fund’s reporting timelines, processes, and requirements as well as additional details related to its objectives, governance structures, investment policy, and funding sources, citing precise statutory provisions both in-text and in reference. Similarly, the Abu Dhabi Investment Authority added considerable clarity to the description of its investment policies and practices, including specific organisational changes at the committee and department levels that affect the governance of its investment processes. The Ireland Strategic Investment Fund (ISIF) significantly revised its self-assessment to add further detail to its description of governance structures, including those related specifically to its investment process. Especially interesting is the self-assessment’s detailed coverage of the change in the ISIF’s mandate prompted by growth in the Irish economy and strong capital flows.
Likewise related to investment practices, several funds used the self-assessment process to highlight formal commitments to sustainable and responsible investing, including commitments to integrating environmental, social, and governance factors (ESG). The New Zealand Superannuation Fund, for example, cites specifically its adoption of a “climate change investment strategy” to enhance the resilience of the fund to climate change. The Qatar Investment Authority highlighted its role as a founding member of the One Planet Sovereign Wealth Funds Working Group, emphasising its goal to reduce its carbon footprint. Khazanah, a 2017 signatory of the UN’s Principles of Responsible Investing since its last self-assessment, cited this adoption and its expressed commitment to integrating ESG factors into its investment process.
The 2019 IFSWF Santiago Principle self-assessments include entries from all current full IFSWF members. The inclusiveness of these submissions has allowed a detailed comparative analysis across the documents to assess Member completeness in document preparation, consistency in interpretation of the GAPP, and clarity in disclosure related specifically to implementation. The breadth and depth of participation acknowledge the need for global markets to better understand SWF behaviour. Moreover, the institutionalisation of the review and reporting process can enhance the disclosure credentials of IFSWF members across all stakeholders in well-functioning global capital markets. The extent of material improvements across member submissions suggests an ongoing commitment to the self-assessment process. Notwithstanding, the overall quality of the submissions is not uniform and so offers members, working with the IFSWF Secretariat, ample opportunity to continue to enhance and expand the role of the self-assessment as a key component of their disclosures.
This paper was independently authored for IFSWF by Prof. Patrick Schena, adjunct assistant professor of international business relations at The Fletcher School, Tufts University with the assistance of Ms Needika Adhikari (Fletcher LLM), Mr Felix Manzi (Fletcher LLM), and Mr Saba Sadri (Fletcher MALD, Harvard Law School JD).