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EBEC: 20210603020654

University of Amsterdam, Faculty of Economics and Business Professor S. Murtinu

25th of June 2021 Word count: 13273

The transparency paradox

How best to approach transparency within sovereign wealth funds?

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Statement of originality

This document is written by Loranne van Keulen who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

This thesis attempts to challenge the conventional view that the more transparency forthcoming from sovereign wealth funds (SWFs), the better for them. SWFs are investment funds who behave like global investors, are owned by governments, and nowadays comprise collectively, approximately $8.3 trillion dollars. SWFs have a history of disclosing little information about investment practices, which leaves ample room for speculation about their investment objectives. Currently, the literature has neglected that there are also certain costs involved when disclosing information. These costs can consist of being unable to protect a fund’s competitive advantage when disclosing investment details. The two faces of transparency are called in this study the transparency paradox. Since it is difficult to approach SWF managers or practitioners, the only way to explore this paradox is by qualitative research in the form of interviews, to disentangle the costs from the advantages of transparency. Several SWF experts have expressed their view on the paradox, leading to the following results: (1) in SWFs political influence must be separated from fund governance, (2) transparency progress should be monitored but there is no consensus on how to track this, and (3) lastly, because of the transparency paradox, a shift in the literature from transparency to good governance is needed.

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Table of contents

Abstract………...3

1. Introduction……….……….……….………....5

2. Literature review and conceptual framework……….……….…..6

2.1 The origin of the Sovereign Wealth Funds……….….6

2.1.1 The Dutch Disease……….………..6

2.1.2 SWFs: definition ……….…....7

2.1.3 Sizes and scopes of SWFs………9

2.2 The development of SWFs and the role of governments in global finance..9

2.2.1 The imposing growth……….…………...…………..10

2.2.2 The role of governments in global finance………12

2.3 SWFs distortions and transparency……….14

2.3.1 SWF distortions………..14

2.3.2 The need for transparency……….16

2.4 Measurement of transparency………..18

2.5 Identification of the research gap and conceptual model……….…..21

2.5.1 Research gap and the transparency paradox……….…21

2.5.2 The vicious circle of increasing levels of transparency……….23

3. Data collection and method………24

3.1 Qualitative research……….…24

3.2 The interviews………..24

4. Data analysis and results……….…25

4.1 Results……….….25

4.2 Analysis………....28

5. Conclusion and discussion………..34

Abbreviation list………36

References……….…37

Appendix A: Interview questions……….….41

Appendix B: Interview with Diego Lopez………42

Appendix C: Interview with Adam Dixon………...45

Appendix D: Interview with Patrick J. Schena………..48

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1. Introduction

One of the most overlooked trends in the past two decades in the global financial system is the rise of Sovereign Wealth Funds (SWFs). In a changing financial landscape, this type of investment fund has rapidly emerged (Ball & Nugent, 2019). A SWF can either be a stabilization fund, a saving fund, or a strategic fund. It consists of an accumulation of trade surpluses or an excess of currency reserves due to commodity exports (Aggarwal & Goodell, 2018). The growth of this new type of investment fund has mainly increased since the turn of the century and have become more than twice the size of global pension funds and are larger than hedge funds, which amount to more than $8.3 trillion dollars (Maire, Mazarei &Truman, 2021). What is alarming, is the sudden rise of these forms of investment funds, which do not have a great habit of disclosing investment details. This raises unfortunate suspicions among recipient countries, resulting in doubts of objectives other than commercial behind the investments. With approximately 146 SWFs in all shapes and sizes (GlobalSWF, 2021), the range of structures and governance behind these investment vehicles is broad. The main problem is that SWFs have a tradition of lack of transparency, but it is difficult to improve the transparency within the funds because there will not be one practice that all funds can adhere to (Bernstein, Lerner & Schoar, 2013). More transparency would mean a lower degree of financial protectionism and a better status as investment partner (Jen, 2007). With all the different types of SWFs that exist, who all value the concept of transparency differently, the following research question came into being: how best to approach transparency within sovereign wealth funds?

This study is structured as follows: after the introduction will follow the literature review, which will deep dive into the emergence of SWFs, their current size and scope, why transparency is important, and the issue of the transparency paradox. The data collection consists of semi- structured interviews with practitioners, who have an extensive history in working with SWFs.

Through careful analysis of the interviews by employing a thematic approach, an attempt is being made of finding trends or common lines of thoughts. The difference here is that practitioners will be involved, to provide a unique and pragmatic view on how SWF work in practice. Through the process of finding a pattern, will the rather organization-specific of the practitioners’ knowledge be generalized. The practical and societal relevance of this research concerns policymakers, capital market participants, fund managers, and their boards and investors. This group will be interested since SWFs have become large, unavoidable and

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important global investors. Investments forthcoming from SWFs have a substantial effect on financial asset prices around the world (Jen, 2007). The understanding of the SWF governance through more transparency, will lead to a contribution of a better assessment of SWF legitimacy and make SWF be more welcomed as a new type of investor. The academic relevance relates to the fact that no previous research has applied findings from practitioners to current literature to investigate the determinants of SWF governance and transparency. The only way to explore the costs of transparency is by interviewing SWF practitioners, who are difficult to approach.

This study has succeeded in including SWF practitioners, providing a new perspective on the issue of transparency within SWFs. A brief assessment is made whether what might enhance better governance of SWF. The research ends with an answer to the research question and a description of several limitations that were encountered.

2. Literature review and conceptual framework 2.1. The origins of the Sovereign Wealth Fund

2.1.1 The Dutch Disease

The phenomenon of the ‘Dutch Disease’ can produce several connotations in one’s head. Fortunately, it has nothing to do with the pandemic that has been wandering around, but it is referring to the fundaments of the Sovereign Wealth Fund. The mechanism behind this alliteration is the basis for this research, which will be explained further in detail. When a country receives annually large amounts of public revenue derived from its (natural) resources and these cash flows enter directly into the national economy, controlled by a central bank, the Dutch Disease might arise. The great inflow of revenues will result in an appreciation of the nation’s currency and in eliminating the national business of the country by becoming internationally uncompetitive. The Netherlands discovered this the hard way when they found gas in the North Sea in 1959 (Megginson & Fotak, 2014). The concept of the Dutch Disease was introduced by the British opinion journal the economist in 1977 after the Dutch manufacturing sector declined hard as a consequence of the high revenue inflow generated by the gas discovery. There is a causal relationship between the rise of revenues in a specific sector and a decline in other sectors. The mechanism behind this seesaw is that when the revenue increases in the growing sector, the local currency will appreciate. This results in more

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expensive other export products, making the other sectors internationally uncompetitive as import becomes relatively cheaper than export. Here originates the need of stabilizing large amounts of revenues within a certain time frame (Megginson & Fotak, 2014). These kinds of phenomena where large amounts of public revenues had to be regulated over time fairly, were the kind of incentives why national governments were forced to create new initiatives to store incoming money streams. To stabilize the influence of large amounts of public money in the national economy, a new type of investment fund was created, called a sovereign wealth fund.

2.1.2 SWFs: definition

Several characteristics apply to some but not all of the SWFs, making it difficult to determine what exactly a SWF consists of. According to the IMF (2008), there are several characteristics to apply to a SWF based on the following questions:

• What purpose serves the fund?

• What rules apply concerning the in-and outflow of revenue?

• What is the relationship with the budget?

• What structures determine the funds operations and discretion?

• What is the use of the funds resources?

• What is the value of the assets of the fund?

These rules are considered generic and might not make the clearest distinction, but they do provide an initial, tentative separation of different types of investment vehicles. The general question that then arises is as follows: what distinguishes SWFs from other types of investment funds? The early rise of SWFs originated mostly from natural resources exporting countries like the Arab Gulf countries, (ex)-Soviet nations and Norway (Megginson & Fotak, 2014).

However, a newer form of financing SWFs has emerged, among other reasons, because of trade surpluses derived from accumulated foreign currency reserves. This type of SWFs is mainly located in South-East Asia, where countries have a high level of export. This new form of financing a SWF, means that SWF are not (natural) resource-derived solely anymore (Felix et al; 2017). The difference in the funding of a fund may also manifest itself in organizational details. The organizational differences within a fund consist of the forthcoming investments, organizational structure, investment objective, financial transparency and compensation

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policies. The range of possibilities between the key details of a fund is large, and for this reason are heterogeneous funds quickly categorized as SWFs whereas if you were to take a closer look, they might come closer to another definition like a SEO (state-owned enterprise) for example.

In the article of Capapé and Guerro (2013) they emphasize how close the definition of a SWF is to a SOE since they share the important trait of being government-owned funds. Because both funds share the same important feature, they are often falsely used interchangeably by scholars, media or other practitioners (Balding, 2008) indicating how loose the boundaries of the definition of SWFs are.

The exact definition of SWF is undecided and despite the numerous variations of definitions proposed, a consensus has not been reached in the academic or practitioners’

literature (Grira, 2020). According to Megginson & Fotak (2014), SWFs are a heterogeneous group of funds, often evolved from larger and more established fund set up by governments.

The revenue streams within SWFs are dependent on the value of widely varying estimates of their assets to diversify investments to stabilize the influx of revenues of commodities. Their definition is fairly all-encompassing and their notion of inter-temporal stabilization also gets addressed by Kotter & Lel, 2014; Kern, 2007; Grira, 2020 and; Bernstein, Lerner & Schoar, 2013. A general consensus is also achieved regarding that SWFs are government-owned investment funds (Schwartz, 2012) without explicit liabilities other than internal to the government (Aguilera, Capapé & Santiso, 2016). Lastly, there is consensus on the type of investment forthcoming from SWF, which are generally undertaken as long-term foreign investments (Jen, 2007).

One research, specifically by Capapé and Guerro (2013) is worth some extra attention regarding SWFs definitions. They did extensive research on the definition of a SWF and eventually had to change the scope of their research since they felt that an all-embracing definition of the broad variety of sovereign funds would be unrealistic. They describe the construction of the definition with the metaphor of an onion. The onion consists of several layers varying from the inner shell with key elements to the outer shell with broad variations in possibilities. The only element they found that were agreed upon in the literature were: SWFs are state-owned and are investment funds. Underneath those two statements, are three layers that are more or less accepted; namely that SWFs act as international investors, the absence of explicit pension liabilities within SWFs and that SWFs can make high-risk investments. In the scientific community are the three latter propositions still open for discussion but can be used to distinguish SWFs from stabilization funds. In the jargon of Capapé and Guerro, this research will stick to the definition of a SWF concerning the layers at the onions’ heart. To conclude,

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there is general agreement upon the definition of SWF, which constitutes that they: 1. are publicly owned, 2. are necessary to stabilize large influxes of public revenue, 3. are an investment fund, 4. perform long-term investments that are long-term orientated to be a source of capital for future generations 5. have an absence of liabilities to individual citizens.

All in all, SWF are constantly evolving and are in any event expanding. Therefore, a comprehensive definition is troublesome, if not impossible. However, for this research, it is important to address the notion of different SWFs definitions. In this paper, there is interest in different approaches to definitions of SWFs because different types of SWFs might desire different types of transparency and governance, which will be discussed in detail later in this study.

2.1.3 Size and scope of SWFs

Sovereign wealth funds have reared their heads as global corporate investors in the past decades, but precise numbers of sizes and scopes are difficult. As described before, it is unclear when a fund is considered a SWF (Bernstein, Lerner & Schoar, 2013). Current numbers calculated that there are 146 SWFs (GlobalSWF, 2021). This number may vary if you would ask any other party, depending on their calculation method and the way one defines a SWF.

The location of the SWFs is most dense in the Gulf area and Asia, however SWFs appear everywhere around the world. The top twenty SWFs comprise 90 percent of the total number of SWFs assets. In the past three decades, the SWFs have increased more than tenfold from 500 billion in 1990 to more than eight trillion today (GlobalSWF, 2021). The current number of total value of assets of SWFs is an estimation, the number depends on the stock market volatility, the difficulty of where to draw boundaries to what is a SWF and what not, and the secrecy of the funds (Schwartz, 2012).

Regarding the scope of SWFs: there are two whales in a sea of SWFs fishes that are the China Investment Corporation (1.20$ trillion) and the Government Pension Fund of Norway(1.27$ trillion), the rest of the funds represent ‘’more an island of long-term investors in a sea of short-terminism ‘’(Dixon & Monk, 2012). Every fund under the big two owns up to half of their value and the lower on the list the faster the amount of total value of assets per fund reduces. Especially because of the many small funds, it is difficult to be accurate about the size and scope. SWFs hold a tradition of low transparency to the outside world and in particular among the small SWFs (Schwartz, 2012), as they are easily overlooked and therefore classified as less important.

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The rise of SWF took place in de past seven decades and the value of SWFs have increased rapidly over time. The growth of SWF is partly due to the rising petroleum price and has been concentrated in producer nations like Norway or the United Arab Emirates. SWFs consisting of other sources than natural resources came up more recent and consist of trade surpluses in producer countries like China. Instead of building up interest or putting reserves

‘under a matress’, these revenues are accumulated in SWFs to diversify their methods to deploy money streams (Bernstein, Lerner & Schoar, 2013).

With the emergence and growth of SWF in recent years, the need for regulation increased simultaneously. The lack of unity and law enforcement between SWFs have ensured that the funds have been able to take a free course allowing public funds to develop a sensitive spot, namely political influences. The following paragraphs will elaborate on how the rise of SWFs went and how the shortcoming of good SWF governance resulted in today’s jumble of publicly owned funds.

2.2 The development of SWFs and the role of governments in global finance 2.2.1 The imposing growth

SWF’s originate from the 1960s and are here to stay. To better understand the complete scope of a SWF, a brief overview of the development from their inception up to this point will follow. According to the conventional definition of a SWF, is in 1953 the first SWF established:

the Kuwait Investment Authority, after which adjacent oil-exporting countries in the Mid-East followed. But the funds are not geographically centered in the Middle-East, because sometime later, Norway followed in 1967 (Felix et al; 2017). Most of the funds that were founded before the 2000s, were commodity-based funds in Mid-East countrie, in Russia and in Norway, while funds founded after 2000 were more non-commodity orientated and located in Asia. After 2000 there was an upswing in terms of establishments of SWFs. Between 2000 and 2014, 46 SWFs were founded and from 2007-2014 the value of the assets under the management of SWFI doubled (Alhashel, 2014). This growth was inevitably due to (1) the rise of emerging market economies after 2000, (2) the global financial crisis from 2007-2009 and (3) the drop in commodity prices. It came down to a total asset worth of 500 billion dollars in the nineties, 2.5 trillion dollars in 2005, and nowadays more than 8 trillion dollars. When the first SWFs had been established, the concept of such a fund was relatively new and did not capture much money, therefore, together with its unfamiliarity was the need for regulation was low. But,

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Figure 1.

Comparison SWF Growth versus Worldwide

around the turn of the century, both the value in a SWF (see Figure 1.) and the number of SWFs began to grow rapidly.

These skyrocketing numbers and disproportionate growth made it hard for institutions to establish universally applicable regulations. The larger the numbers, the louder the call for unity and transparency regarding SWF practices. From a political-economical perspective, it is understandable that with the increase of the sizes of SWFs, some sort of power comes along. This can lead to troublesome situations, which triggers questions like what interests are exactly at stake when investing? The sources of financing of SWF have also changed over the years. Traditionally are SWF financed from natural resources, but nowadays the trend shifted more towards budgetary funds. However, due to as lack of obligated transparency, is the information on the source of financing imprecise. According to the 2019 SWF scoreboard does 44 percent of the funds not completely identify the source of their incoming money (Maire, Mazarei &Truman, 2021). With a greater reliance on other sources of energy than fossil fuels, the growth rate of natural resource-based SWFs will further decline. This trend pushes down their prices and if this trend continues, the growth rate of oil and gas-based SWFs will shrink in share and influence.

At the same time, an opposite trend takes place. While traditional SWFs lose value, do surplus-based SWFs win. SWFs in China and other East Asian countries are often trade surplus funded and not dependent on limited availability of resources provided by nature. Coming from great, emerging economies, these countries have meaningful capability to establish large SWFs.

However, due to the impact of Covid-19, it is expected that all types of SWF will decrease in value since they will draw on their resources in the fund to combat the economic consequences of the pandemic. While the growth of SWFs was accelerating, analysts predicted that in 2017 the total asset value of SWFs would have been $17.5, trillion, which did not happen. Maire, Note. Norges Bank of Investment (2020)

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Mazarei & Truman (2021) dare to make an updated estimation and estimate that in 2030 the total asset value of all SWF will be $15.8 trillion dollars. This implies an annual growth rate of 5.7 percent per year. The emergence of new SWFs and the increase in value of existing SWF have slowed down, and will most likely remain at a slower pace in the upcoming years (Maire, Mazarei &Truman, 2021). This will give policy-makers and academics more time to evaluate how to govern SWFs, provide sustainable growth, and to be resilient for market fluctuations.

The following section will elucidate what the role of governments is within SWFs and what the implications can be for all parties concerned.

2.2.2 The role of governments in global finance

The sovereign in the concept of sovereign wealth fund demands clarification. It is a given that Sovereign Wealth Funds are state-owned. Therefore, the authority to manage these funds lies with the national governments (Schwartz, 2012). However, the question to what extent can governments behave like investment fund managers remains unanswered. It could be argued that SWFs are vehicles for states to regain some authority over financial markets.

Especially in democracies, governments have an explicit duty to be transparent about their activities. If SWFs behave like fund managers in democratic countries, then logically flows from this task the need for transparency to the nation’s citizens in comparison to non- democratic countries. (Hollyer, 2011).

The role of governments in national economies differs over the decades. The Great Depression (1930) functioned as a catalyst for fundamental governmental change and from then on, governments either started producing public goods and services themselves or nationalized existing companies, often structured like a monopoly market. But the government’s output was often of poor quality, suggesting that the government is a bad ‘operational manager’. The opposite of nationalizing is privatizing, which governments had to adapt to continue providing proper public services and goods. This was an unpopular measure at the time, but with the years it gained in popularity, with nowadays being considered as a legitimate tool (Bortolotti, Fotak

& Megginson, 2014). This rise of privatization has been well documented, in contrary to SWFs.

The extent to which governments have been buying equity in listed and unlisted firms has not been precisely documented. This is an interesting contradiction because the privatized companies perform dramatically better, suggesting that governments could restrain their ownership of corporate equity. To sum up: there have been two phenomena going on simultaneously: on the one hand governments privatized business to private investors, and on

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the other hand governments started purchasing increasingly private corporate equity through SWFs. The financial globalization that has been going on together with the technological revolution, took away some authority over financial markets from sovereign actors. Although that is nothing new, within the ongoing economic globalization, interdependent parties give up a piece of sovereignty when trading (Dixon & Monk, 2010)

From a liberal approach, it can be argued that a sovereign wealth fund is a threat to the free market principles because states might exert political influence through the funds.

According to Hibou (2004) is the dichotomy between public and private ownership a power affair between state and markets unscientific. Increased state control over investments is a resource for governments to win sovereignty instead of a source of state power. Schwartz (2012) states: politics is about power, and SWFs are manifestations of efforts to create or maintain different forms of economic power. In short, politics is about power, and power is about money. A sovereign wealth fund is the opinion of Truman (2008) the perfect example of the revival of the government as the provider of public goods and the reversal of the trend towards privatization. But Schwartz (2012) contradicts this by stating that a SWF is not a uniform phenomenon and that increased state control over investments does not automatically mean an increase in state power. An argument put forward by Bremmer (2010) states the rise of state capitalism since the global financial crisis in 2008: the interference of governments in market economies to obtain political gain. A sovereign wealth fund is an example of an institution through which governments can exert influence and receive political gain. Perhaps it is not so coincidentally that between 2007 and 2014 so many new SWFs have been established, however, there is no scientific evidence to suggest a correlation between the rise of SWFs and the desire to exert more political influence through the establishments of SWFs.

Bortolotti, Fotak and Megginson (2015) find that SFWs are too politically constrained to form a serious threat for the corporate sector, but they can be a threat to democracy. They found no scientific evidence of political interference in the behavior of foreign targets in which SWFs invest. The same can be said for domestic investments, but the most fearful responses are triggered when investing abroad. When SWFs are properly organized and investment targets are insulated from political oversight, it might allow for government ownership without government management. But how often is this the case and how to accurately measure this?

If investments from SWFs are disconnected from political interference, they could be treated the same way as private equity investments. In theory, all investments forthcoming from SWF would be made from a commercial point of view. However, the following findings illustrate that the market perceives SWF investments differently. By measuring the fluctuating in stock

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price reaction to the news of a SWF investment compared to the news of private equity investments, the concept of the ‘SWF discount’ was born (Bortolotti, Fotak & Megginson, 2015). The discount means that the positive returns of the investment for the private equity sector are larger after the announcement than the returns for the SWFs in the same situation.

This discount has been documented, yet not fully explained. The quasi-public nature of SWFs logically will play a role, but is it the market reaction as a rational response to political interference or is it a reaction to the stigma associated with the sovereign origins of the funds?

The SWF discount teaches that SWFs are public from nature but their investments are inextricably linked to the corporate sector.

A paradox here arises: a SWF is state-owned, however, it is expected to behave like a participant with a commercial drive only in financial markets. The intermingling of politics within a SWF seems to be unavoidable, and therefore the trustworthiness of a SWF as an investment partner might shall be deducted relative to other investment funds like hedge funds.

Moreover, the rise of SWFs reminds us that collaboration between political and economic geographers is necessary to understand the changing geopolitical contours of the global financial system (Dixon & Monk, 2010). SWFs are in the global economy an important player and have an evolving nature of sovereignty in the changing financial landscape.

2.3 SWFs distortions and transparency 2.3.1 SWF distortions

The imposing growth of SWFs during the zeroes have been considerably covered up by the global financial crisis in 2007 (Dixon, 2014). This global event appeased the criticism that was raised by Western politicians towards SWF practices. These concerns existed of the

‘’intermingling of state interests like bankrolling or mercantilist industrial policies and gaining access to critical infrastructure or new technologies’’ (Dixon, 2014). These potential motives were linked to SWFs because they were not seen as independent financial institutes. Unlike the ideal private investor, who has exclusively commercial objectives and is constrained by profit motives, were SWFs viewed differently. It could be argued that SWF distort markets when they perform activities in a non-commercial way and therefore distort existing free-market capitalism and their functioning.

With the knowledge that most SWF are located in relatively under-developed countries, facing inequalities and lack of infrastructure and stabilization, one could reasonably argue that

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a SWF has more to offer next to being an investment fund. SWF can be divided into stabilization, savings or strategic funds (Lopez, 2021). However, besides enabling stabilization, financial returns and protection, funds could also promote a positive change in the further development of the state. But that does not exclude that SWFs have other political, financial or developmental motives. The main rationale behind investments forthcoming from SWFs can be multifold and therefore potentially distorting.

In general are SWFs seen as rational investment funds driven by economic motives such as wealth transfer and fiscal stabilization. According to Bismuth (2017) can the additional risks be classified into either political or economic of a kind. One example of a political distortion expresses itself in the China- Costa Rica conflict in 2007. If Costa Rica would break its diplomatic relation with Taiwan, China would provide $130 million dollars in financial aid and purchase $300 million of Costa Rican national treasury bonds from the State Administration of Foreign Exchange (SAFE, which is under control of the China Investment Corporation). Even without further background information (China trying to get a finger in the South-American pie to antagonize North-America to gain world power), it is clear that political interest are at the forefront here (Bismuth, 2017). Another example of an economic distortion would be the French SWF investing in its domestic market. SWFs do not exclusively invest abroad, but can also be used to invest strategically in its country of origin. The French SWF called Fonds Strategique d’Investissement invests in small and medium-sized domestic companies and in strategic sectors. The economic conditions under which these investments are done, are out ruling competition and protects therefore the local labor and secures the structure of their shareholding. This goes against the European law (Bismuth, 2017) as well as it goes against the principle of a free market system.

There has always been some controverse around sovereign wealth funds, since they interfere unfavorable with global financial systems and might have political purposes (Maire, Mazarei&Truman, 2021). The potential disturbing distortions that came along were, among other things, suspicious because of the country of origins the SWFs are located (Ball & Nugent, 2019). These are often in politically disputed, un-democratic countries like Qatar, Kuwait and China. The political systems in these countries make it difficult to untie SWF governance from political interference because politics and state are not separated. Aggarwall & Goodell (2018) indicate that the influence of SWFs is beyond economics or politics, and can also be social and geopolitical of nature. After researching 49 SWFs from 33 countries, they found that national culture has a significant impact and thus matters greatly on SWF governance. Also Daniel, Cieslewic and Pourjalali (2012) found that cultural practices influence the institutional

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environment. ‘’ The effects of national cultural and regulatory and other environments on corporate governance and transparency have also been considered in prior literature’’(e.g., Daniel et al., 2012, Gray, 1988, Hope, 2003). Another distortions addressed by Kotter & Lel (2011) is the concern that SWF are in the position of large shareholders and thus can relocate assets out of the country to expropriate wealth from the smaller shareholders. In line with political motives there is the concern that investment objectives in target firms will be made for personal gain because of highly connected individuals.

There are two strong positions in the current literature arguing whether SWF’s actually distort markets. Some argue, like the abovementioned authors, that SWF disturb the global market because of their political interference and their ability to exert financial influence. Other scholars argue that SWF are similar to any particular type of investing fund like a hedge fund or other large investors, so the distortion of the market is similar to the distortion that other funds bring along. The synthesis between these two position is due to the political nature of the fund. There is no real evidence that SWF distort markets, there is just the suspicion of political motivation. Besides, there is always the possibility to block an investment based on national securities reasons. All in all, there is an inherent political nature of SWF. As they are not bound to other legislation than national law, they reflect goings-on of their sponsors in regard to transparency.

2.3.2 The need for transparency

The financial crisis from 2007 raised the need for financial support and Western governments did welcome SWF investments (Dixon, 2014). SWFs play a significant role in international financial systems and economies can benefit much from openness to SWF investments flows. Historically have SWFs been seen as a threat to financial markets due to their market distortions and low degree of transparency, but with their rapid emergence and silent need for their investments and related opportunities, they have become nowadays unavoidable in the global financial system. There is a distinction to draw between transparency and disclosure. ‘’Transparency has a cultural, kind of orientating meaning, an institutional culture that suggests a degree of openness. Disclosure is what is regulated and legislated, secured in the law. Disclosure in this form is a part of transparency ‘’(Schena, 2021).

Consequently, the determinants of good governance are relevant to a broad range of practitioners like fund managers and their boards, capital market participants, investors and policy-makers and eventually the citizens of the country the fund resides in (Aggarwell &

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Goodell, 2018). The impact SWFs have on financial markets and society should not be underestimated and thereby comes the greater need for transparency. The concerns regarding investment objectives get intensified by the lack of transparency and raise suspicions and confusion. Not to mention that the investment activities of SWF often take place abroad, and thus represent the country’s foreign government ownership. As stated before, Kotter & Lel (2011) found that the announcement of SWF investment results in a positive market reaction, indicating that this form of transparency can have far-reaching effects.

As we know by now, democracies tend to be more transparent about their activities (Hollyer, 2011). However, most SWFs are located in non-democratic countries like China, Saudi Arabia, and Kuwait. Why do companies show a growing interest in investments forthcoming from SWFs from non-democratic countries? In comparison to other investment parties, are SWFs stable funds, with a broad investment horizon that can support companies in their development. Especially the long-term support is proven to be a necessity to induce positive outcomes. In other words, SWF investments are wanted because, they score high in terms of financial facility and trustworthiness.

‘’SWFs came under scrutiny in 2007-8 due in large part to the rapid growth in their assets after 2000, and the role that many of these funds played in the financial market of Western nations during and after the 2007 financial crisis’’(Ball & Nugent, 2019). From here on, became the call for transparency louder and louder. Various Arabic SWFs invested after the crisis in US banks when liquidity was vital. However, it made some US fund managers uncomfortable that so little information was available on the practices of Arab funds. Fear and distrust were expressed regarding the nature of these funds and their possible independent agendas which could undermine the receiving’s end national security (Ball & Nugent, 2019). This mistrust gave rise to indexes and principles, measuring the transparency and accountability of the funds.

Initially, these indicators were to hope to promote further transparency. In 2008, the first industry-leading set of rules were developed, called the Santiago Principles. Their description is as follows: ‘’a voluntary set of principles and practices that SWFs support and either have implemented or aspire to implement”, the Santiago Principles can be seen as a soft-law instrument (Bismuth, 2017), they cannot be legally enforced. The rise of performance and transparency measurement methods made it insightful to compare the SWFs against each other.

However, the increased popularity of SWFs combined with international pressure got more attention drawn to the topic of transparency. In the performance measurements methods of SWF are variables like transparency, accountability and disclosure critical for overall performance. Higher levels of transparency are associated with mitigating the risk of investment

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protectionism and the establishment of a being a reliable investment partner. The higher your accountability, the more trustworthy. Accountability brings trust, but the SWF market is also based on private information, if you are a manager and you disclose information that you want to invest in a particular company, under certain conditions keeping some information private brings an advantage for a fund. Or others can copy your investment strategy or scaling up investment strategies that only work with a smaller value of assets (Bernstein, Lerner & Schoar, 2015). This addresses the two faces of transparency, which will be discussed in greater detail in 2.5. SWFs could benefit greatly from increased levels of transparency, which in its turn increases the level of acceptability in recipient countries and improves legitimacy (Dehman, 2017). The disclosure of certain information is necessary to understand what investments are done and why. If this is clear, then it can be fairly assessed if SWF practices are legitimate and if the SWF is a reliable investment partner. If a fund does not match the requirements, then suspicions can lead to unfavorable associations like multifold motives behind the investments.

Right now, approximately do 60 percent of the SWFs show an index lower than six (out of ten) according to the Linaburg-Maduell Transparency index. The accumulated wealth of these SWFs together is $3.85 trillion dollars, of assets, which is almost half of SWFs total asset value (Grira, 2020). When quantifying the amount of transparency, the need for regulation will come naturally to mind.

2.4 Measurements of transparency

With the increase in influence and impact, became SWF more and more relevant, at a breakneck speed after 2000. Although the concept of a SWF is relatively new and with their existence of only two decades, governance of SWF is underdeveloped. There has been written a lot about in the academic literature, but with their short life-cycle is nothing set in stone. Through the emergence of SWF, a rise of measurement methods and principles has occurred as well on how to govern a SWF and how to measure their progress. How to define such broad concepts as governance, accountability and transparency? The generally accepted agreement indicates that governance is defined as: ‘’ the set of informal and formal rules of the game regulating and directing with transparency the deployment of distribution of organizational resources. ‘’

(Aggarwall & Goodell, 2018). To quantify good governance for SWF, several principles and scoreboards have developed over the years. The timing was not random because, the first guidelines were developed in 2007 when the development of SWFs were in a state of flux. A

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year before the Santiago principles were introduced, Truman (2007) came with the Truman Scoreboard, utilizing four simple categories: structure, governance, transparency and behavior which categorized 32 SWFs, able to score a result between 0 and 25. The mean was 10.7 and the highest score was for New Zealand with 24.7 and the lowest for the United Arab Emirates with 0.5. These numbers make the differences between the funds truly insightful. Truman’s scoreboard is a great step into the direction of enlightenment of SWF practices, especially because of the pragmatic nature of the questions, like is there an annual report of the results?

In the eye of reforming financial markets and the rapid growth of SWF size and scope, were in 2008 the Santiago principles developed, approved by all 26 members of the International Monetary Fund. This is a set of best practices that are rule-orientated to have a continuous impact on the governance, decision-making, and operations of SWFs (Norton, 2010). However, it serves as a voluntary body with no formal legal authority. A SWF is formally bound by the national laws in the country where the fund is domiciled. The principles do enable a better relationship between the fund managers and the fund owners, but the principles are useless concerning the interests of the host state (Bismuth, 2017). The main driver for SWF owning countries would be goodwill, mutual benefits, and the will to adhere to the principles to keep the funds running smoothly (Norton, 2010). For example, the Kuwait Investment Authority and the Qatar Investment Authority were among the initiators of the Santiago Principles but have never published an annual report ever since (Lopez, 2021). They did consent to the principles, but have shown little effort to implement them. The principles at that time functioned as a framework with generally accepted principles and practices, which opened up the door to an ongoing dialog on how to govern SWFs in the global financial system (Norton, 2010). With the door open, what are the following steps?

After the introduction of the Santiago principles, each fund could start applying the principles and evolve into a shape best for themselves. Because of the high variety of funds, sizes and scopes, each fund could follow its own path of progress. Over the years, the Santiago Principles have been critically examined. The main objection is that the self-assessment of adherence to the principles is low. To increase the effectivity, there are several steps crucial according to Behrendt (2016). These are (1) increase transparency practices (2) improve the self-assessment compliance (3) rely on third-party verifications of the Santiago principles and lastly (4), recognize certain SWFs as reliable investors as an endorser to adhere to the principles.

Also, it is difficult to undermine deep-rooted cultural values that originate from before the introduction of the Santiago principles (Tabellini, 2010). This custom often weighs more heavily and is therefore the preferred applied method from a SWF-perspective.

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Next to the Santiago Principles, are in 2008 also the Linaburg-Maduell Transparency Index developed at the Sovereign Wealth Fund Institute. It is a well-known score and has been increasingly used as a global benchmark by SWFs. On a scale of 0-10 is an index created that refers to the level of transparency from SWFs to the public. An eight or higher is assumed to be the minimum rating to indicate that there is an adequate level of transparency, which only three funds achieved in the period from 2008-2017 (Buteica & Huidumac, 2018).

This indicates that additional efforts are utterly needed, despite ongoing efforts from several funds to be more insightful and effectively transparent.

The Truman scoreboard gets updated yearly and in February 2021 have Truman and Bagnali published the latest 2019 scoreboard. The main differences are the addition of 27 new funds and the composition of the resources. Their latest conclusion is that on average, all SWFs have increased their accountability and transparency. However, the degree of progress varies widely among the SWFs as well as how much progress in total has been made.

The most recent SWF scoreboard is designed by Megginson, Lopez and Malik (2021) named the Governance-Sustainability-Resilience (GSR) scoreboard. This scoreboard attempt to focus more on the governance of SWFs rather than just all aspects of transparency. They believe that the three categories governance, sustainability and resilience are not mutually exclusive and should be considered jointly. This somewhat revolutionary approach serves as a progress check for SWFs and to measure their overall accountability performance. Within the three categories are 25 questions that weigh equally with a possible outcome between 0 and 25.

The Future Fund of New Zealand (FFNZ) scores currently the best, but plays a neck-and-neck race with the GPFN. The three pillars why the FFNZ performs better than the GPFN are that the FFNZ has a sound investing strategy through which it is obtaining higher financial returns, is pursuing a successful sustainable strategy at the same time and is substantially smaller than the GPFN so that their transparency does not compromise their size (GlobalSWF, 2020).

Lastly, there is a quantified method called the responsible asset allocator index (Tillemann & Kalb). This index helps to optimize financial returns and reduce risks by strategic investments in sustainable development. They focus solely on SWF and public pension funds (PPF) because of their long-term horizon and sustainable development objective. This indicator is used less compared to other quantifiable methods throughout the literature.

The best example so far would be the Government Pension Fund of Norway when it comes to good governance of transparency. In the Truman scoreboard it scored a 23, one point behind New Zealand. Through the eyes of the Linaburg-Maduell Transparency Index and the Truman 2019 scoreboard is the Norwegian fund the most transparent one, and often in the

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literature is the GPFN cited as exemplary (Bismuth, 2017). One disadvantage that emerges strongly with the NGPF is the size of the fund. The GPFN comprises more than $1.2 trillion dollars, and is the largest of all SWFs. Due to its size and transparency policy, there is a large quantity of information available which the fund discloses. This does not facilitate the search for specific information (Lopez, 2021) and the large amount of information puts transparency at risk again.

The main advantage of these tools and scoreboards is that the evolution of SWFs can be monitored concretely. As opposed to the Santiago principles, are all of the above-mentioned scoreboards quantifiable, and therefore provide a base to accurately track SWFs’ progress. The differences between SWFs are being ranked, and now with more precision, the finger can be put on the sore spot. Continuously, holding the SWFs practices in the light of scoreboards, is a great step towards monitoring but does not automatically promote greater transparency.

Quantifying and ranking SWFs show only one side of the story. The scores are determined by the type of questions asked, at certain moments under certain conditions. The number reflects the score given based on the scoreboard, but does not automatically reflect a SWEF’s governance and operations perfectly. The context in which SWFs are operating, is lacking. This downside of quantifying SWFs may lead to unfair comparisons.

2.5 Identification of the research gap and conceptual framework 2.5.1 Research gap and the transparency paradox

In the previous sections light has been shone on how the definition of a SWF is disputed, how different types of SWFs have emerged, distortions that SWFs potentially entail and why there is a need for transparency. With a funnel approach, an attempt was made to work towards the importance of transparency within SWFs. SWFs act as global investors by investing for example in private equity or unlisted property. With the little amount of information that gets disclosed regarding SWF investment, suspicions about the exact investment objectives are raised. The call for more transparency has led to much written literature, media attention, and is often a topic of discussion. The first step towards more transparency will be engaging in a dialogue. This research will build upon this by conducting interviews with SWF experts.

Based on the literature review, two forms of transparency are here distinguished.

Mandatory transparency appears when national legislation obligates a SWF to disclose certain information. This is for example the case in the united states, where if you have more than two

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percent in a listed company you need to be compliant in terms of producing documents.

However, this is not SWF-specific, every organization that moves around certain amounts of money is bound to legislation.

Voluntary transparency appears when a SWF discloses information not because they are legally obligated to, but because they feel natural to. This is the case for example for the GPFN, where they disclose a broad range of information, which makes them the leader in SWF transparency.

The upside of being transparent and disclosing the information is that the accountability of the fund can be assessed. Criticism can be voiced legitimately based on the disclosed information.

With the availability, or at a minimum the option, to look into SWF practices, can be decided if the SWF is a reliable investment partner and if the fund is accountable. Naturally, the recipient party want to prevent information asymmetry as much as possible. This study continuously points out the lack of the voluntary transparency.

However, transparency is often correlated with upsides, while the downsides should not be snowed under. Maintaining a high level of transparency can come at the expense of some side effects (Jen, 2007). To indicate that transparency is multifold, the example of cameras in the office will be illustrated. Full transparency of employee activities through cameras on the work floor, allows managers to keep an eye on the business. This could mean that every activity is done by the book, because the monitoring does not allow to circumvent the established order since that will be noted. But to what extent is this desirable? As a revolt, the employees can collaborate by jointly agreeing to work less hard or to pretend they do their jobs, but they are actually window dressing their activities. An increase in transparency does not equal necessarily a better outcome for all parties. If we move this from work floors to SWFs, what does transparency mean for all parties involved? To understand why a SWF undertake certain investments, it is necessary to disclose a specified amount of information. However, the SWF market is also based on private information. If a fund manager discloses that the SWF want to invest in a certain company, keeping some information under specified circumstances can bring an advantage to the fund. The secondary effects of transparency could discourage SWFs from disclosing information in great detail (Jen, 2007). So, transparency may have adverse effects attached as well. This will be called the transparency paradox, and this study attempts to contribute to the solvation of that paradox. In general, there has been written a lot about the set of formal and informal rules of the game regulating and directing with transparency, the deployment of distribution of organizational resources, and SWFs and their lack of transparency in the academic literature. As well, investment policies, market distortions and macro-economic effects of SWFs are often topic of studies. But fewer have researched the governance of SWF,

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and even less so have taken a look at the determinants of good governance. With the coming together of a pragmatic view complemented on the current literature, will it make a valuable addition to the current state of affairs. This has led to the following research question: how best to approach transparency within sovereign wealth funds? A conscious decision was made to not formulate hypotheses because then there should have been certain expectations in advance.

The point of a hypothesis is that the results of the research can be compared with the hypothesis to draw a conclusion. Comparisons in this study are explicitly avoided since that is perpendicular to the research purpose of obtaining fresh insights. This will prevent bias and preconceived ideas in the results and conclusion of this research. The output of the research will be inductive of nature because of the conducted interviews. The results of the data will provide an addition to the view on transparency within SWF’s in the current literature.

Especially the inclusion of practical implications from experts translated into generalized findings, adds to the understanding of good governance of SWFs.

2.5.2 The vicious circle of increasing levels of transparency

There are two forces that reinforce each other that work towards increasing levels of transparency. Transparency in a SWF context means revealing investment objectives and SWF activities and performance (Jen, 2007), governance in the same context means once again: ‘’

the set of informal and formal rules of the game regulating and directing with transparency the deployment of distribution of organizational resources.‘’(Aggarwall & Goodell, 2018).

Transparency is facilitated by proper governance, which leads to more transparency. The better a SWF is organized, the better they can disclose information, resulting in higher levels of transparency. This process is a positive vicious circle and its outcome like a positive upward spiral. These two variables are correlated and are visually displayed as following:

Figure 2.

The reinforcing powers of increasing levels of transparency Governance

Transparency

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3. Data collection and research method

3.1 Qualitative method

The data collected for this research is qualitative in nature. Through semi-structured, in- depth interviews, are the insights of various practitioners gathered. With semi-structured is meant that there were six predetermined questions, whereby it was free to deviate from. This allowed both the interviewer and the interviewee to have a free conversation and collect thoughts that might be very useful but not come up naturally when sticking to a script. The verbal conversation between the two people is to collect relevant information. The main source of data for this research are the responses from the interviewees and the principal task is to understand what is been said. The questions aim to retrieve insights and ideas of practitioners on why transparency is so important and how to optimally govern transparency within a SWF.

This to explore individual experiences, perceptions and practices in rich detail. ‘’ Ignorance is bliss, especially in the early stages. People who don’t know how things are ‘’ supposed to be’’

are not blinded by preconceptions. ‘’ (Sutton, 2001).

A pragmatic approach is used by asking for practical implications to implement within SWFs and what current struggles are regarding transparency for SWF’s to overcome. The main advantage of interviewing with this approach is that it allows to disconnect from the literature and be enriched with the practice. As it has been indicated by interviewee Diego Lopez: ‘’some people write all their life about SWF’s but have never dealt directly with a fund’’. There were six predetermined questions to retrieve the interviewees thoughts on the value of transparency, how to measure transparency and how they viewed the transparency paradox. This research approach tries to bridge the gap between literature and practice, by adding later on generalized insights derived from experts. The questions that have been asked can be found in Appendix A.

3.2 The interviews

Due to the pandemic, the interviews have taken place via Zoom. There have been three experts interviewed from various origins. All three interviewees have explicitly consented at the beginning of the interview that it is permissible to use their answers for this research. The transcribed interviews can be found in Appendix B, C and D.

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Table 2

Overview of Interviewees and their Origin

Interviewee Position Organization

Diego Lopez Managing Director GlobalSWF

Adam Dixon Principal Investigator SWFsEurope

Patrick J. Schena CO-Head The Fletcher Network for SWF and global capital

Striking about this research is the success of approaching SWF insiders, which in general are difficult to come in contact with. The researcher was able to connect with these practitioners and conduct interviews. During the interviews, notes have been made, and afterward the notes have been structured into complete answers. The answers to the questions in the appendix are therefore not the exact words that have been said but represent the spirit of the story. During the interviews, specific attention was paid to the individual’s thoughts, personal opinions, feelings and interpretations. This is done to understand the context and organization the interviewee operates in, explore issues in-depth and detail, and understand the complex processes that are present in the transparency context. This qualitative data analysis tries to describe several phenomena in detail, after which the differences or similarities between the cases are compared. Afterward, guidelines will be developed, based on the empirical data of the studied phenomena (Flick, 2013) all of the answers together analyzed, an attempt is made to highlight prominent themes and their explanation.

4. Results and analysis 4.1 Results

Gratefully, through the snowball effect, there have been three excellent experts in the area of SWF’s and their operations interviewed. The shape of the interview allowed to deviate from the predetermined questions and exploring unconsidered yet very relevant areas. For example, the idea on the importance of transparency, which differs remarkably among various SWFs due to several reasons. Through analyzing the transcripts, the researcher was forced to use an inductive way of coming up with themes (Eisenhardt, 1989). This means that at the start of the

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analysis there were no defined themes. After going through the transcripts, four empirically driven labels were created. This thematic approach was motivated by the respondent’s sayings.

The themes function as a guideline for analyzing the transcripts. The resulting themes are:

1. The Santiago Principles 2. Independence from politics 3. The transparency paradox

4. Transparency measurement method

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Table 2

Oversight of Answer to the Themes

Topic Interviewee

Diego Lopez Adam Dixon Patrick Scheena Santiago Principles Not quantifiable, too

principle-based

Became obsolete

Good guideline to compare a SWFs progress with

Common baseline, should be implemented to a reasonable extent by every SWF

Independence from politics

Most important part of being transparent

Decision making should be based solely on benefitting the SWF

Some base for interdependent governance, but

impossible for some SWFs Transparency paradox Transparency is too

subjective

Has become too popular

Not transparency is the end goal, but a properly

governed fund

SWF should not be too big and not extremely

transparent

Should not just measure transparency on

variables Quantifying transparency lacks context moderators There are certain types of transparency for certain investment objectives

Transparency is a culture, each fund has its own culture

Understand the need for transparency as a unique recipe for each fund Too much transparency becomes untransparent

Disclosure is part of transparency

Transparency

measurement method

Prefers the GSR scoreboard as a method to track

progress

Self-assessment as the best method to measure transparency progress

Necessity of all three methods: the Santiago Principles, scoreboards and self-assessment to track transparency

progress, holistic approach

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4.2 Analysis

Per theme will each of the viewpoints of the interviewees be considered and a reflection on the outcome will take place. An attempt will be made to look at the bigger picture after each theme, to work towards a more generalized view.

1. The Santiago Principles

All three take a quite different point of view on the Santiago Principles. Lopez argues that in the past decade the financial landscape changed, making the principles suitable for the time they were developed but obsolete in modern days. Indeed, the principles were developed during a global economic crisis and the past two decades were dominated by globalization and technological advances. Also, the whole of SWF’s have undergone some dramatic changes like an imposing growth in both in number and value of SWF’s, as touched on in paragraph 2.1.1.

It is feasible where Lopez comes from, however, does it necessarily make the principles irrelevant rather than outdated?

Dixon considers the Santiago Principle more as a general guideline for funds to hold on to. Compliance with Santiago Principles have been slow and incomplete, which underlines the inherently political nature of SWFs as they reflect the norms and conventions of their sponsors regarding transparency (Dixon, 2014). He promotes the dialogue on how non-disclosure in certain areas can lead to an increase of transparency in other areas: ‘’transparency is increased if dialogue on non-transparency and potential functional equivalencies is expanded’’ (Dixon, 2014). He puts the finger on the sore spot by emphasizing that a global definition or framework for transparency does and will not exist. Improvement though is possible, by enhancing the dialogue on ‘’the persistence of nondisclosure among some (if not many) of the signatories of the Santiago Principles’’ (Dixon, 2014).

Schena is also more convinced of the Santiago Principles but does address that we are sensitized to the role of the principles as a framework for transparency. He explicitly pulls in principle number 24, stating that the implementation of the principles should be reviewed consistently to monitor progress. Schena reviews the self-assessments of funds themselves regarding the implementation of the principles every year, thus works with the principles intensively.

Just like the Kyoto Protocol, are the Santiago Principles principle-based. As noticeable with the Kyoto Protocol, which became effective in 2005, it caused a lot of confusion and unimplemented guidelines. The protocol should have been implemented under the principles of

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common but differentiated responsibilities. This treaty was not legally binding and had as a result only a slight effect on decreasing the global carbon dioxide growth (Kim, Tanaka &

Matsuoka, 2020). The outcome of both agreements is not as effective as was conceived in advance, indicating how difficult it is to establish a global treaty that every member truly implements when it is principle-based instead of legally enforceable.

2. Political independence

Although there was a general consensus that in the ideal situation politics and economics would be separate from one another, there were slight differences in the explanation of why and how it would work in practice. Lopez is evident about this theme: a SWF should be independent of political bodies and influences. He cites the example of the Public Investment Fund (PIF of Saudi Arabia) where, in general, the influence from politics is inextricably linked with the national economy. The PIF aims to become the largest SWF and conduct an expansion- program to achieve this. However, the expansions is primarily motivated by the power politics carried out by their royalty (Roll, 2019). In certain cases it will be difficult to entangle politics from economics, especially if this habit is rooted in a nation’s culture like in Saudi Arabia.

Dixon agrees that both should be independent of one another. The oversight of a SWF should operate independent from political influences, which can be done by the parliament and not necessarily an independent board. However, he touches upon the reasoning behind the decision-making within a fund. Investments forthcoming from SWF’s should be based on commercial objectives. If an investment is commercially driven, its motive is based on opportunity costs, market allocation and efficiency. Investing commercially distorts the market mechanism the least.

Schena takes the broadest point of view of all, the extent to which a fund can have some basis for independent governance is critically important. An independent government consists of very different political and legal systems, the idea of having an independent board for example would be alien to Saudi Arabia. He changes the question by making it more pragmatic:

how do you put in place a governance structure that allows the fund to be depoliticized? The example that is called upon to is the Turkey Wealthy Fund, which has been making great steps in depoliticizing by replacing its board with fewer political figures.

Schena argues that the extent to which a fund has poor governance, allows it to be exploited for various kinds of political gains. The SWF of Angola (Fundo Soberano de Angola) has a relative poor governance. This makes the fund very vulnerable to political pressures from the outside. They might want to be more independent, but their governmental structure does

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not allow them to be. Imagine a request coming for a certain investment from a legislator, would they have the independent capacity to reject the deal? Finally, Schena distinguishes clearly that depoliticizing the fund in its management and investing with strategic intent for the state are two separate events and should not be lumped together.

It seems like two trends are going on simultaneously: you may be able to be independent but you do not want to, or you want to be independent but you cannot necessarily be. These two processes tend to be heavily dependent on the nature of the politics going on in the country of origin in the SWF. I argue that it is hard to point out what the exact objective is of an investment, which can be multifold as discussed in paragraph 2.3.1. Investments can be explained as commercial but also be politically advantageous at the same time. Or they might be politically driven but can be explained commercially very well. This is an opaque area and determining someone’s exact objectives is a challenge you might not even want to start. It will be impossible to suggest an optimal management practice that works for all funds, just as there is no such a thing as two countries with the exact same state form.

3. The transparency paradox

The transparency paradox is the consideration to what extent a certain amount of transparency is desirable. Too much or too little both can work counterproductive. All agree that transparency is subjective and can be explained differently in different contexts.

Lopez takes the size of the SWF into account. The larger the fund, the harder it becomes to move around. The GPFN is this large (1.3 trillion dollar) that they struggle to move around. In terms of financial returns has the New Zealand Superannuation Fund (NZSF) outperformed them. The GPFN also has very strict rules on investing in unlisted equity, their real estate investments for example in the USA are limited to four American cities, making them struggle to move money streams more efficiently. This complicates your investment strategy, thus size matter. Besides, he finds that the focus in the literature has been too much on the concept of transparency and pledges for a shift towards a focus on a well-governed fund.

Dixon’s point of view argues that the extent to which transparency is functional, is dependable on the state form: ‘’As the NZSF case illustrates, the demands for public transparency as a function of legitimacy are to be expected in the case of a representative democracy, but the demand for transparency, the international community notwithstanding, may not be significant in countries with notionally democratic regimes and non-democratic regimes’’ (Dixon & Monk, 2012). In other words, transparency is not equally valued around the world and its definitions depend on the culture and state form of the country the SWF is

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