When Elon Musk wanted to finance the acquisition of the other shareholders of Tesla, he turned to the Saudi Public Investment Fund. The Arab kingdom is increasing the investments of this fund from 100 to 300 billion dollars.
TSLA, + 1.90%
is just one of many companies around the world looking for SWF investments. According to the SWF Institute, the assets of these funds rose from $ 1 trillion in 2000 to $ 7.8 trillion in mid-2018, and are expected to reach $ 10 trillion by 2020.
Sovereign wealth funds perform important functions for the sponsoring countries. Many of these funds help Middle East energy producers recycle their current account surplus into diversified global portfolios. Many of these funds, in Canada and South Korea, for example, help governments meet their pension obligations. More generally, sovereign wealth funds are considered as long-term investors that can contribute to the stability of the global financial system.
The width of some sovereign wealth funds is, however, darker – a meaning that demands greater transparency on their part in order to mitigate potential threats to the IP or national security of recipient countries in which SWFs make significant investments. . Officials in these countries are increasingly concerned about the true motivations and potentially negative effects of sovereign wealth funds. The United States and Germany, for example, have come to the question of whether sovereign wealth funds are operating as intended – independent entities making commercial investments to maximize long-term financial returns. Some sovereign wealth funds may rather quietly seek to advance the goals of their sponsoring governments – for example, by investing in Western companies to obtain important information on advanced technologies or critical infrastructure.
However, policy makers and investors in recipient countries face daunting challenges in assessing the local impact of most large sovereign wealth funds. Most SWFs claim to invest only to maximize financial returns, without recognizing the likely influence of social or political policies of their sponsoring governments. Most only disseminate general information about their investment objectives and asset allocation, rather than the extent of their holdings in specific companies.
In 2008, large sovereign wealth funds developed and adopted the Santiago Principles, a set of best practices for these funds. However, these principles do not address two key informational needs of beneficiary countries: ie when a sovereign fund invests to achieve a non-financial objective of its sponsoring government and what are the significant holdings of the sovereign wealth fund in beneficiary countries .
To illustrate the legitimate concerns of recipient countries regarding the transparency of SWFs, take a look at the China Investment Corporation (CIC), the world's second-largest sovereign wealth fund, with assets of nearly $ 1 trillion. The information disclosed by CIC is minimal compared to the disclosure practices of the Norwegian Pension Fund – the largest sovereign wealth fund with over $ 1 trillion in assets – that addresses the concerns of recipient countries. In our view, the Santiago Principles should be revised to recommend that all SWFs comply with the publication practices of the Norwegian Pension Fund.
Consider: In its 2017 Annual Report, the CIC reiterates its usual goal of investing on a commercial basis to maximize financial returns. Yet in the same report, CIC stated that the Fund had "aligned our investments and services with the Belt and Road Initiative" (CIC Annual Report 2017, p.3). The Belt and Road initiative, launched by Chinese President Xi Jinping, is widely seen as an effort to strengthen China's influence in Southeast Asia and other regions. The belt consists of building land infrastructure linking 60 to 70 countries along the historic Silk Road. The road involves the connection of maritime corridors in the South China Sea, the South Pacific Ocean and the Indian Ocean.
The Belt and Road initiative offers interesting investment opportunities, but it is about big projects that can be more political than financial. With few exceptions, its annual report does not indicate when CIC is committed to pursuing the geopolitical goals of this initiative or other non-financial policies of the Chinese government.
In the 2017 Annual Report, CIC also stated, "The recipient countries … greatly value our efforts to provide timely and comprehensive disclosure" (CIC Annual Report 2017, 25). However, the annual report for 2017 does not include a list of significant investments that CIC has made in public or private equity actions outside China. Based on our review of CIC's annual reports over the last decade, it has ceased to include a useful list of its major equity investments outside of China after 2012. CIC can now make most of its investments in international actions with or through third party entities, where it is difficult to monitor the extent of CIC 's actual holdings.
On the other hand, the Norway Fund clearly indicates when it departs from its general objective of maximizing financial returns to comply with the instructions of its government sponsor. The Fund explains in particular why it excludes investments in certain companies on the basis of ethical criteria established by the Norwegian Parliament. Similarly, the Norway Fund Annual Report is a useful transparency model on its holdings: it shows both the Fund's largest holdings as a percentage of its assets and the companies in which the Fund holds the highest percentage. of their outstanding funds.
The contrasting information from the CIC and the Norway Fund is representative of more general trends. The disclosures of sovereign wealth funds in many Middle Eastern countries, such as Oman and Qatar, are even less revealing than those of the CIC. On the other hand, information provided by sovereign wealth funds in Australia and Singapore is rated as well as Norway's in relation to the Linaburg-Maduell Transparency Index.
Nevertheless, the CIC and the sovereign wealth funds of the Middle East can claim to conform to the principles of Santiago as they are currently written. More importantly, Principle 11 calls for the establishment of an annual report focusing on audited financial statements, rather than on a specific list of significant investments made by a sovereign wealth fund. . Principle 22 recommends that sovereign wealth funds provide their owners with a complete list of their assets, ie the governments sponsoring them, and not the investors or officials of the recipient countries.
In short, sovereign wealth funds control huge pools of assets that can have significant consequences for businesses and countries. To allay the legitimate concerns of investors and recipient country managers, all sovereign wealth funds with assets over $ 100 billion should follow the Norway Fund's disclosure practices by issuing a comprehensive list of their significant investments, and specifying when these investments are made for the purpose of: government policies (other than maximizing long-term financial returns). These best practices should be included in a revised set of principles of Santiago, which should be endorsed by all sovereign wealth funds.
Robert C. Pozen is a senior lecturer at MIT Sloan School of Management and a senior non-resident researcher at the Brookings Institution. Pablo Egana del Sol is a professor at the Sloan School of Management at MIT and an assistant professor at MIT's Asia School of Business.
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