Sovereign wealth funds (SWFs) are not to be feared, but, as they increase in number and size, there is an urgent need for governance structures.
This was the main message from a lecture at the University of Toronto’s Rotman School of Management in Toronto on Thursday by Keith Ambachtsheer, an adjunct professor and director of the International Centre for Pension Management (ICPM) at the school as well as president and founder of KPA Advisory Services. SWFs are funds used for investment purposes to benefit a country’s economy and citizens.
Speaking to a crowd of about 130, Ambachtsheer explained that countries that have SWFs—such as China, Russia, and the United Arab Emirates—have not yet clearly articulated to the global community what the purpose or mission of the funds are and how they fit into the economic plan of the countries.
“What we need to do is to encourage the governments to identify the motivations behind the funds,” he said. “What are their legal and governance structures? Are they actively or passively managed? Are they at arm’s length from the government?”
Once these questions are answered, the next step is to ask for full disclosure of holdings and investment results. This will create greater transparency and allow for comparison with other investment vehicles.
Ambachtsheer suggested the creation of a certification system or a “stamp of approval” for SWFs as a way for the investment community to measure the funds. He also says there is a need to “entice” SWFs to become more accountable and suggested the funds should be signatories to the United Nations Principles of Responsible Investment.
This desire for transparency and a clear mission seems to stem from a fear of the SWFs being motivated by something other than generating strong returns—possibly motivations that are geopolitical in nature.
Ambachtsheer warns that it is unfair to characterize SWFs as potential problems simply because they are not western. He sees no reason to fear them. “It could be a concern in the future, but it is not yet.” Instead he sees the funds “as an opportunity to enhance institutional capital.”
However, he does believe defensive rules need to be discussed and rhetorically asked the crowd: “What options are there if actions are not acceptable? What are the defences when needed?”
Ambachtsheer sees the governance structures he calls for as a way to reduce the potential concern around SWFs by bringing them up to speed with what other investment structures abide by.
Ultimately, he would like the investment community to continue discussions about SWFs and to be open to them. “What I don’t want to see is worldwide protectionist rules as a backlash to the emergence of SWFs.”
For some additional information on SWFs, click here.
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