IMF creates standards for sovereign wealth fundsJuly 2008
A code of conduct for sovereign wealth funds (SWFs) is being drawn up by one of the world's most powerful economic institutions.
The final document, which the International Monetary Fund hopes to produce by the end of autumn, is expected to contain recommendations on disclosure, governance, stakeholder engagement and reputational risk. The code, which the IMF has decided to produce amid mounting concern over the role of SWFs in investment markets, is likely to take account of whether a sovereign fund should:
declare its investment policies
disclose the general principles of its relationships with government authorities
explain its internal governance and risk management policies
annually publish investment positions and asset allocations.
An international working group of SWF representatives will finalize the code by October.
SWFs are state-controlled investment vehicles funded by foreign exchange revenues, typically from oil. There are more than 30, the biggest sponsored by China, Kuwait, Norway, Russia, Saudi Arabia, Singapore, and the United Arab Emirates. SWFs have existed since the early 1950s but have gained prominence recently by buying up assets during the recent financial turmoil. Total assets under management now stand at $4trillion (£2tn).
The current concerns mirror those over the hedge fund and private equity sectors, which recently agreed standards for greater transparency. However, an added dimension has been the fear that sponsoring states might use the SWFs to exert political influence. Only one large sovereign fund sponsor - Norway - is generally considered to be democratic.
The Co-operative Bank turned away £10million of loan applications last year from three businesses controlled by SWFs - on the grounds that the countries where the funds originate are 'not free'. The bank has not named the funds, but they are thought to be in China, Qatar and Saudi Arabia. The UK-based bank automatically turns away any business more than 20 per cent-owned by a sovereign wealth fund that it has concerns about.
The European Commission has said it does not regard the growth of SWFs as a significant threat but added that 'concerns are inevitably fuelled by the opaque way in which some of them operate'.
Simon Johnson, until recently the IMF's research director, said the concerns should be kept in proportion. 'Many of these funds are long-established, have a strong track record, and have been very responsible over the years', he said. 'The IMF is actively engaged in a dialogue with the large sovereign wealth funds, and that has been very constructive so far.'
Muhammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency, complained at the Davos World Economic Forum that 'the attitude seems to be that sovereign investors are guilty until proven innocent'.
Tom Powdrill, senior policy officer for institutional investment at the UK's Trades Union Congress, said it would be 'misleading' to treat SWFs as a homogenous group. 'They have different histories, different investment objectives, and... originate from countries of varying politics', he said.
The Norwegian Government Pension Fund, the second largest SWF with $397billion in assets, is an SRI leader and is used by the Sovereign Wealth Fund Institute to benchmark best practice in transparency (see table below).
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