Transparency International has expressed concern over the lack of transparency in sovereign wealth funds in its Global Corruption Report 2009. It says:
Sovereign wealth funds are entrusted with the current and future wealth of their citizens, their pension savings, foreign exchange earnings or natural resource revenues. Full public transparency and the strongest standards of public accountability are therefore essential. Citizens have the right to know that their wealth and savings are being managed properly and prudently.
The report was released yesterday along with its Corruption Perceptions Index which, it says, "indicates the perceived level of public-sector corruption in a country/territory". Singapore and Sweden are ranked as the third least corrupt countries on the index. New Zealand is seen as least corrupt followed by Denmark, and Switzerland ranked fifth out of the 180 countries surveyed. (See previous post.)
State investment firms are criticized in the Global Corruption Report in a chapter called Sovereign wealth funds: A challenge for governance and transparency.
It begins by noting:
The rapid growth of sovereign wealth funds (SWFs) in the past five years has changed the landscape of global asset ownership and established a number of emerging economies as significant players in global financial markets. SWFs are comprised of assets that governments keep separate from their regular budgeting and asset management processes. The major SWFs in the Middle East, Norway, Russia and a few regional funds are based largely on revenues from oil and other natural resources. China’s SWF draws mainly on foreign exchange earnings from its huge trade surplus. Others, such as Singapore’s Temasek Holdings, reinvest budget surpluses or privatisation proceeds. Of the estimated US$3 trillion under SWF management, an estimated US$2.2 trillion is managed by just seven funds – those in the United Arab Emirates, Norway, Singapore, Kuwait and China.
It goes on to say:
As with the recent boom in alternative investment assets — hedge funds and private equity — the global economic muscle of SWFs, in combination with their lightly regulated nature, if not outright opacity, has raised a series of public concerns, including:
- On the home country side, that public wealth and savings are not managed in a transparent and accountable manner and that investments are not made in line with basic ethical principles of the country; and
- on the recipient’s side, that sovereign wealth funds are misused as levers for politics, that they present confl icts of interest for governments that act both as investors and regulators, and that SWFs could be a poorly understood source of financial instability alongside hedge funds and other lightly regulated investments.
Transparency and accountability issues
Little is known about most SWFs’ investment policies, governance structures and accountability mechanisms. Only Norway and Alaska release audited financial reports to the public. In the case of the Kuwait Investment Authority (KIA), disclosure to the public of the funds’ assets is actually prohibited by law, and until June 2007 the KIA would not even reveal the total value of its holdings…
A study of twenty large SWFs found that more than one-fi fth were not accountable to the legislature and only 16 per cent were audited by the legislature.
Some SWFs have released their codes of ethics – including Singapore’s Temasek Holdings and Government Investment Corporation, Kuwait’s KIA and the United States’ Alaska Permanent Fund. None of the top 15 SWFs have developed compliance programmes for their ethical codes, however, with the notable exception of Norway.
The Norwegian Government Pension Fund – Global is the second largest pension fund in the world, with assets of around US$400 billion, and it sets standards for transparency and accountability by releasing extensive information on its investment strategy, its quarterly results and its stock and bond holdings of individual countries and corporations. Few other SWFs match these practices.
Norway’s SWF is also leading the way in investing the wealth of the citizenry in line with ethical investment principles. For example, it is among the signatories of the UN Principles for Responsible Investment,and divested from 16 companies for breach of its ethical guidelines, including a violation of core labour standards as defined by the International Labour Organization (ILO)…
The policy dialogue on SWFs does not come easily. Suspicions of ulterior motives seem to abound in every corner. Because the vast majority of SWFs are hosted by non-OECD countries, the apparent North–South dimension of the discussions does not help…
At the same time, any reforms should keep in mind the fact that SWFs are entrusted with the current and future wealth of their citizens, their pension savings, foreign exchange earnings or natural resource revenues. Full public transparency and the strongest standards of public accountability are
therefore essential. Citizens have the right to know that their wealth and savings are being managed properly and prudently.
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