Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
Sovereign wealth funds have existed since the 1950s. Their asset size and clout in the investment community have grown dramatically over the past 10 to 15 years, however. Last year, Singapore's Temasek Holdings bought a $4.4 billion stake in Merrill Lynch, while Abu Dhabi bought a $7.5 billion stake in Citigroup.
The International Monetary Fund (IMF) estimates the total asset size of sovereign wealth funds at around $2 trillion to $3 trillion, with the potential to grow to between $6 trillion and $10 trillion by 2013.
In a statement after meeting government officials from Singapore and Abu Dhabi and representatives from these countriesÆ sovereign wealth funds last week, US Treasury Secretary Henry Paulson said such funds are welcome to invest in the US. Paulson and US Deputy Treasury Secretary Robert Kimmitt met with Singapore finance minister Tharman Shanmugaratnam, SingaporeÆs Government Investment Corporation deputy chairman Tony Tan, Abu Dhabi executive council member Hamad Al Hurr Al Suwaidi, and Abu Dhabi Investment Authority executive director Hareb Masood Al-Darmaki.
Those present in the meeting agreed on five policy principles for sovereign wealth funds:
1. The sovereign wealth fundsÆ investment decisions should be based solely on commercial grounds and not based on geopolitical goals of the controlling government.
2. There should be greater information disclosure by sovereign wealth funds in areas such as purpose, investment objectives, institutional arrangements, and financial information û particularly asset allocation, benchmarks, and rates of return over appropriate historical periods.
3. Sovereign wealth funds should have strong governance structures, internal controls, and operational and risk management systems.
4. Sovereign wealth funds and the private sector should compete fairly.
5. Sovereign wealth funds should respect host-country rules by complying with all applicable regulatory and disclosure requirements of the countries in which they invest.
They also agreed on four policy principles for countries receiving investments from sovereign wealth funds:
1. Countries receiving investments from sovereign wealth funds should not erect protectionist barriers to portfolio or foreign direct investment.
2. Recipient countries should ensure predictable investment frameworks. Inward investment rules should be publicly available, clearly articulated, predictable, and supported by strong and consistent rule of law.
3. Recipient countries should not discriminate among investors. Inward investment policies should treat like-situated investors equally.
4. Recipient countries should respect investor decisions by being as unintrusive as possible, rather than seeking to direct investments from sovereign wealth funds. Any restrictions imposed on investments for national security reasons should be proportional to genuine national security risks raised by the transaction.
In a related development, the IMF approved last week plans to develop best practice guidelines for sovereign wealth funds and is planning to meet with such funds next month.
IMF director of monetary and capital markets, Jaime Caruana, says the IMF will set up an international working group of sovereign wealth funds. The April meeting is aimed at focusing on technical details of the best practices guidelines. The first draft of the guidelines is expected to be completed by October. The guidelines are intended to allay concerns about the increasing size of wealth funds, many of which tend to keep quiet about their investment strategies and assets.
In a background paper, the IMF estimates the size of the Abu Dhabi Investment AuthorityÆs assets at $250 billion to $875 billion, and SingaporeÆs Government Investment Corporation at $100 billion to $330 billion. Based on the upper range of the IMF estimates, that places the Abu Dhabi Investment Authority on top with the largest asset size, and the SingaporeÆs Government Investment Corporation third in asset size, next to NorwayÆs Government Pension Fund, which is estimated to have $380 billion in assets.
While acknowledging in the past that the sovereign wealth fund investments have raised the issue of the expanded role of governments in international markets and industries, the IMF notes in its statement last week that ômany have welcomed the recent role of sovereign wealth funds in providing capital to several large banks affected by the subprime mortgage crisisö.
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