Generally Accepted Principles and Practices (GAPP)

Introduction

The Generally Accepted Principles and Practices (GAPP), also known as the Santiago Principles, are a set of guidelines and principles geared towards fostering transparency, good governance, accountability, and prudent investment practices within Sovereign Wealth Funds (SWFs). The GAPP was initially developed by the International Working Group of Sovereign Wealth Funds (IWG-SWF) and later endorsed by the International Monetary Fund (IMF) in 2008.

SWFs are state-owned investment funds that manage a vast array of assets and investments. These funds are usually derived from the country’s reserves, which accumulate from sources such as revenues from natural resources, trade surpluses, fiscal surpluses, or foreign currency operations. The GAPP aims to ensure these funds operate in a manner that promotes global financial stability while serving the economic needs of their respective nations.

Objectives of the Santiago Principles

  1. Promote Transparency: The principles aim to enhance the transparency of SWFs by encouraging disclosure of investment objectives, strategies, governance frameworks, and financial performance.

  2. Foster Accountability: GAPP encourages SWFs to account for their activities and performance to the governments and the public of their respective countries to maintain legitimacy.

  3. Ensure Sound Governance Structures: Implementing robust governance structures with clearly defined roles and responsibilities is an essential objective of the principles.

  4. Encourage Prudent Investment Practices: The guidelines advocate for risk management and strategic asset allocation to ensure the long-term sustainability and growth of the funds.

  5. Facilitate Global Financial Stability: By promoting best practices among SWFs, the GAPP contributes to the stability of the global financial system.

Key Elements of GAPP

Principle 1: Clear Objectives

SWFs should have well-defined investment objectives disclosed to the public, ensuring clarity in their operations and purposes.

Funds should operate within a transparent legal framework that establishes clear guidelines and boundaries for their operations.

Principle 3: Public Disclosure

SWFs should be responsible for regular public disclosures of their activities, governance structures, investment strategies, and performance metrics.

Principle 4: Sound Governance

Instituting a governance framework that includes a clear separation of roles and responsibilities among the funds’ management, the government, and other stakeholders is paramount.

Principle 5: Investment and Risk Management

SWFs should adopt solid investment policies and risk management frameworks to safeguard and grow the assets while minimizing risks.

Principle 6: Ethical Conduct

Funds are encouraged to observe the highest ethical standards in conducting their operations, often including environmental, social, and governance (ESG) criteria in their investment strategies.

Historical Context

Origin of SWFs

The first SWFs were established in the mid-20th century, with countries like Kuwait and Norway creating funds to manage revenues from oil exports. Over time, especially in the 2000s, the number of SWFs grew significantly as more countries, particularly those with surplus reserves, sought to manage and invest their wealth prudently.

Genesis of GAPP

The need for a coherent set of principles for SWFs gained momentum following concerns about the transparency and objectives of these funds. The financial crisis of 2008 further highlighted the importance of having a standardized framework. Consequently, the IWG-SWF was formed in 2008, comprising representatives from 23 countries, to develop best practices for managing SWFs. The resulting Santiago Principles, or GAPP, were formally introduced in October 2008.

Implementation and Impact

Adoption by SWFs

Most major SWFs have adopted the Santiago Principles, demonstrating their commitment to transparency, accountability, and good governance. For instance, Norway’s Government Pension Fund Global (GPFG) link and the Abu Dhabi Investment Authority (ADIA) link are two examples of funds that adhere to GAPP.

Enhancing Credibility

By committing to GAPP, SWFs enhance their credibility and legitimacy globally. This adherence helps in mitigating fears that SWFs might make investments based on political motives rather than economic and financial principles.

Integration into National Policies

Countries often integrate GAPP into their national policies, thereby ensuring that their SWFs align with international best practices and contribute positively to their national economies.

Challenges and Criticisms

Implementation Variability

While many SWFs commit to GAPP, the extent of implementation can vary. Some funds may have differing levels of disclosure and governance standards, which could affect the overall effectiveness of the principles.

Geo-Political Concerns

Despite adherence to GAPP, concerns about geopolitical motives behind certain investments by SWFs persist. Countries receiving investments may question the underlying intentions, especially if the investments align with strategic national interests of the investing country.

Dynamic Financial Environment

The financial environment is constantly evolving, and SWFs must continually adapt to new challenges and risks. This dynamic nature requires the Santiago Principles to be regularly reviewed and updated to remain relevant and effective.

Future Prospects

Increased Adoption and Refinement

Going forward, there is an anticipated increase in the adoption of GAPP by emerging SWFs. Alongside this, regular refinements and updates to the principles will be necessary to accommodate new financial challenges and innovations, such as technological advancements and shifts in global economic power.

Integration with ESG Standards

As environmental, social, and governance (ESG) considerations gain importance, SWFs are likely to integrate these aspects more comprehensively into their investment strategies. GAPP can be expanded to include explicit guidelines on ESG, which will further encourage responsible and sustainable investment practices.

Enhanced Collaboration and Knowledge Sharing

The future also holds potential for enhanced collaboration and knowledge sharing among SWFs. Establishing platforms for regular dialogue, best practice sharing, and joint initiatives can strengthen the implementation of GAPP globally.

Conclusion

The Generally Accepted Principles and Practices, or Santiago Principles, serve as a foundational framework for the sound and transparent management of Sovereign Wealth Funds. They play a vital role in promoting good governance, accountability, and prudent investment practices, contributing to both national and global financial stability. As the financial landscape continues to evolve, the principles will need to adapt to remain effective and relevant, ensuring that SWFs can meet the challenges and opportunities of the future.