Although SWFs have been around since the sixties of the last century, much is still unknown and unregulated. Since the turn of the century, SWFs became an actual topic of discussion due
to their accelerating growth both in size and scope. This process increased their political scrutinization from which logically flowed an increased demand for transparency. The issue of transparency is raised in relevance by the low level of disclosure forthcoming from SWFs while at the same time SWFs as investment funds rapidly expanded. This raised suspicion among recipient countries and created the suggestion of hidden motives, untrustworthiness and vague practices. Multifold objectives, with political gain as the most often suspected objective, lowered the general feeling of SWFs as a reliable investment partner. Although SWFs are often stable funds with a long-term vision, their low level of transparency led to unfavorable associations. The attention that is drawn towards SWFs by being in the global spotlight, led to the development of several frameworks to monitor and compare SWFs progresses. Over the years, a trend has been shown that SWFs indeed became more transparent (Schena, 2021), however, each fund travels its own route towards more transparency. Therefore, are scoreboards and self-assessments, not the single, best method to keep track of progress. The nature of the questions can be subjective and depends on what the creator considers as important and relevant. It might feel natural that more transparency is better, however, this is how the transparency paradox was created. The less transparency, the little is known, the more transparency, the more is shown. But, it is not always desirable to disclose every detail of your business. It might stand in the way of your investment strategy and it does not necessarily make a business more accountable; it can repel people. These two faces of transparency lead to a certain balance of what information to disclose and what not. This study has challenged the conventional view on transparency and explored the transparency paradox based on the following question: how best to approach transparency within sovereign wealth funds?
The data collection for this research consists of interviews conducted with practitioners in the area of SWF progress measurements frameworks. Derived from their insights, the common path indicated that it can be concluded that the focus in the current literature should shift from transparency towards best practices of good governance of SWFs, that a preferred requisite for transparency is a separation between politics and the governance of a SWF and that there is agreement on that we should monitor the progress on transparency but that there is an ongoing heterogeneity on how exactly to measure this progress. The aim of this study is not to suggest optimum management practices, as each fund comes from a different starting point. The suggested guidelines are highlights which came forward after identifying common line of thoughts. To improve transparency, a SWF should have a reference point to which it may move, complemented with the findings of this study.
The contribution of this research for academics in the area of SWF transparency is clear. The relevance of transparency is exceeded by good governance. It is difficult to compare such a different range of funds, where transparency is valued differently per fund. Transparency is not the goal anymore, but an individual construction of best practices is, where it becomes clear what investments are done and why. The route to this structure is a tailor-made one per fund, and can be guided by the for example the Santiago Principles. Future research can explore more in detail how to design these tailor-made structures to optimize per fund its governance and transparency.
The other group this research contributes to consist of fund managers and their boards, policy-makers, capital market participants and investors since SWF have become large and important global investors. To improve the status as an accountable, reliable investment partner, should all these parties increase their efforts to improve the governance of SWFs. Despite that the nation’s culture where the SWF is located is reflected in its governance, would a more global approach to the world outside the fund be suited. SWFs invest large amounts of money globally, thus a more modern and globalized way of working would fit such an international-orientated investment form. Besides SWFs, could the proposed guidelines also apply for other types of investment funds that struggle with transparency and accessibility of insiders like hedge funds, SEO’s, pension funds or private equity funds.
The most prominent limitation of this study is the recruitment and number of participants for the interviews. The interviewees are either professional acquaintances or work alongside each other, this is in a way a disadvantage of the snowball effect. The danger of this limitation is that the answers given are too streamlined, forthcoming from the same line of thoughts. However, the interviewer was surprised by how divergent the answers sometimes turned out to be. What builds on the interviewees background is that their output is organization-specific and they might have an interest in minimizing transparency in SWFs for client’s benefits. This narrows down the opportunity to have a more broad orientation on the transparency paradox. An attempt was made to disconnect from the current literature by asking for personal perceptions, this will have contributed to more outlying views in comparison to what has been written on this topic. To mitigate the effect of tunnel vision, more participants with a more diverse background in different sectors could make a difference in the results.
A second limitation would refer to the subjective interpretation of the interviews. This indicates that the credibility is up to discussion. The researcher aims to link the study’s results with reality, to demonstrate the truth of the research study’s findings. To meet the reality check, an attempt has been made to generalize each of the themes. Further credibility is build up
through engagement in the field, which takes time, but in this research, time was limited and the engagement of the interviewees in the field has been included. The dependability is enhanced by adding the transcripts of the interviews in the appendix (B). For future research, it would be a valuable addition to visit a SWF or be directly in contact with a SWF to include their side of the story.
All in all, nothing is set in stone on how to properly govern a SWF or when transparency is optimally processed in a SWFs’ governance. As long as the dialogue continues on how to keep making progress, there will be an improvement. Especially it will be important to not forget that this investment form comes in a broad variety of sizes and shapes, and will never have a one size fits all structure.
Abbreviation list
GPFN: Government Pension Fund of Norway GSR: Governance Sustainability Resilience NZSP: New Zealand Super Fund
PPF: public pension funds
RAAI: Responsible Asset Allocator Index SOE: State-Owned Enterprise
SWF: Sovereign Wealth Fund
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Appendix A
1. What is the value of transparency within a SWF for you?
2. How do you think transparency should be measured?
3. What is your personal opinion regarding transparency within a fund?
4. What would be your recommendation regarding transparency within a fund? Any practical implications (for SWF managers)?
5. How would the perfect SWF look like in an ideal world?
6. What are struggles within the transparency paradox?
Appendix B
Interview Diego Lopez 29/04 2021 15.00
1. What is the value of transparency within a SWF for you?
Transparency is subjective. Even when it is mandatory, they still try to avoid these measures by investing Cayman islands. Transparency means something different for different type of countries. Public pension funds are more located in democratic countries, they have more accountability to their stakeholders (citizens), but this is different for SWF because most of the SWF are located in autocratic countries. There are a few exceptions like the GPFN. That fund is the most accountable and they feel responsible for their stakeholders. The Norwegian parliament has a weekly session to check what GPFN is up to. The fund here is owned by the monarchy. There is a difference between transparency and accountability.
In Cuwait the SWF only has one client, the ministey of finance. They SWF only has to be transparent towards them, they are not obligated to be transparent to anybody else. They feel transparency to anybody else is not that much needed.
So transparency is subjective.
2. How do you think you should measure transparency? GSR-scoreboard, a certain score?
Transparency has become too popular, the focus has been traditionally on transparency. I prefer a fund to be well governed rather than transparent. Good governance can be divided into legitimacy (do you use the money for the right purposes), accountability and
transparency. That transparency is the ultimate goal, as often decribed in the literature, is not necessarily true.
A perfect fund = properly governened fund, is sustainable and resilient to market fluctuations.
3. What is your personal opinion regarding transparency within a fund?
So not transparency is the key, but a good governed fund.
4. What would be your recommendation regarding transparency within a fund?
Any practical implications (for SWF managers)?
The most important one is indepence from political influence and bodies. For example, all of the board members of SWF in the Middle East are from the royal family who play a large role in national politics. The Arab funds are not separated from political influences.
Second, the 4 lines of defense existing of: control, internal audit, external audit … and. Report on this comes out later in May 2021.
Third, a good governance consisting of accountability, legitimacy and transparency.
5. How would the perfect SWF look like in an ideal world?
To answer this question we look at the New Zealand fund. Their SWF is not too big, with 35 billion, and they are highly independent from politics. They manage the capital indecently, are very sustainable and have achieved great financial returns.
6. What are struggles within the transparency paradox?
When you are too transparent, it becomes harder to move. Let’s take the largest fund, the GPNP, they are 1.3 trillion worth. They struggle to move more efficiency, they are simply too big to move, so size matters. In terms of financial returns has New Zealand outperform them.
FE: Norwegian has strict criteria for investing in unlisted properties like real estate. They can only invest in real estate in 4 American cities. Makes it extremely hard to invest.
The Norwegian fund is the most transparent one and they are constantly being monitored the Norwegian citizens, the pressnd, NGO’s. Because of that they are also less flexible to move and can’t invest in certain things like carbon. They are hugely scrutinized.
Other funds who are less transparent, are able to move more.
Another example: within the Norwegian fund, are all salaries of employees disclosed. Well maybe you don’t want your salary to be publicly disclosed so you rather work somewhere else. You want as a SWF to attract the best human capital, but this way you maybe also scare them away. A disadvantage of transparency.
Don’t foret that SWF is a new industry, I wouldn’t be afraid of making my own points, or what is written in some of the articles, nobody has the whole package.
For example, Truman is the father of SWF, however he has never dealt with them directly. So he writes a lot of in the literature but he does not know everything. Nothing is written in stone.
Appendix C
Interview Adam Dixon 10th of May 12.30
1. What is the value of transparency within a SWF for you?
The value of transparency is understanding why and how decisions are made. Understanding what an organization or any corporation is doing and allowing other actors to monitor these firms, in order to drive efficiency.
2. How do you think you should measure transparency? GSR-scoreboard, a certain score?
The problem with measuring transparency based on variables is the lack of context a SWF is operating in. SWF are not comparable, and therefore is the number that a country receives, derived from a certain scoreboard not very significant. Most SWF from the Middle East receive low scoreboard scores, however they have certain legislation that SWF need to stick to but that makes them score low within the scoreboards. But that does not mean they are not a viable investment partner. The context of the country is missing.
Furthermore, within the current scoreboard the interviewee addresses that the Truman scoreboard is the best since they are independent game makers.
3. What is your personal opinion regarding transparency within a fund?
Decision making should not be based on anything else than benefitting the firm. The owner of the fund is the state, and if the fund is transparent than other actors can be confident that the investments are based on commercial criteria. If the fund is not transparent, they can assume that the criteria of investing is based on other criteria than commercial.
What if investments are not commercial ?
Take for example China investing in Europe. This might benefit the Chinese companies and China itself, this can be considered a risk for European economic sovereignty. It enables an
uncompetitive market because China subsidies their companies and Europe companies do not.
So non-commercial investing can be a threat to free financial markets. However, there exist all kind of support, not just investments forthcoming from SWF but from all kind of
organizations like free trade agreements.
It should not be about what is a fund investing in but why are they investing in certain projects? What is the mission of the fund, what is the strategy? There are different types of transparency for different objectives. You want to understand what the mandate of the fund is, how is it governed? Who are the people on the board and what is their qualification? Are they independent, do they have a sense of what they are doing? What is the policy framework.
If there is political coordination, is it justifiable?
4. What would be your recommendation regarding transparency within a fund?
Any practical implications (for SWF managers)?
It is important for national governments to have their own investment criteria.
Funds should follow best practices and communicate clear who they are. The oversight of a fund should be independent, which can be done by the parliament, you do not need
necessarily an independent board.
5. How would the perfect SWF look like in an ideal world?
What should be transparent is that other actors understand why investments are made and how they are made. You want to know what is going on and why.
A perfect SWF is difficult, because they are very country specific. There are certain types of transparency for certain different investment objectives.
6. What are struggles within the transparency paradox?
It is hard to identify a funds exact motives regarding a specific investment. If an investment is commercially driven, then it is about opportunity costs, market allocation and efficiency. If you invest commercially, you are not distorting markets.
However, everybody has conditions under which to receive or to lend money. It is not just China asking Costa Rica to break political relation with Taiwan is exceptional, the nature of the request is different than financial motives. If you are not financially independent, you will give a bit of your sovereignty away.
Appendix D
Interview Patrick Schena 17th of May 17.00
1. What is the value of transparency within a SWF for you?
I draw a distinction between transparency and disclosure. Transparency to me has more of a cultural kind of orientation meaning an institutional culture that suggests a degree of openness.
Disclosure is what is regulated, so in the case of USA, when you hold more than 5 percent in listed equity you need to disclose your holdings. On the other hand, if you own less than 5%
you are not obligated to disclose anything. So the question is, if you want to be transparent and you own less than 5%, should you just basically publish your portfolio and disclose the entire holdings?
With regard to transparency, I view transparency in a broader context, that includes disclosure.
But it also includes providing more information about investment policy or investment strategy.
Providing an outlook, guidance, viewpoints, as a practical matter these are investment institutions, which means they operate in global markets. So there is an obligation as large players in global market to not be destabilizing and so to be able to share and provide information that stabilizes markets. Many of these countries do not have a tradition or culture of transparency in any way, some do
2. How do you think you should measure transparency?
We have been sensitized to the role of the Santiago Principles as a framework for transparency and disclosure. There were only 35 members and there were twice as much SWF’s. My work with the form consist a fair amount of time reviewing the self-assessments that the members do. In fact I have written the 2 reviews of the last 2 self-assessments that has been done. It is a tedious exercise, what I am gonna suggest because you have to look at each one of the self-assessments. And to me one of the best dares of transparency is the extent to which funds are becoming more open again, the way they are describing their investment policies, investment practices and their operating practices. You might say they are obligated to do this under the Santiago Principles. The reality is that the sacred terry has worked, institutions are in no obligation to publish portfolio’s at the security level. In effect, most investors typically won’t do that and sometimes they don’t do that for very practical reasons related to holdings and