The Generally Accepted Principles and Practices (GAPP), sometimes referred to as the Santiago Principles, is a set of standardized business procedures that govern the operations of Sovereign Wealth Funds (SWFs) across the globe. Formulated in response to growing concerns over transparency and governance within the SWF sector, these principles aim to ensure that these investment vehicles prioritize financial agendas over political motivations while contributing to a stable global financial system.
Background of GAPP
In October 2008, the International Working Group of Sovereign Wealth Funds (IWG) convened to discuss increasing concerns surrounding the transparency and governance of SWFs. This group, comprising representatives from 23 countries with active sovereign wealth funds, recognized the necessity for a framework that would reassure investors and regulators. The subsequent adoption of the Santiago Principles not only addressed these concerns, but it also presented a unified approach for SWFs globally.
Objectives of GAPP
The GAPP framework is constructed around four guiding objectives:
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Maintain a Stable Global Financial System: SWFs aim to contribute positively to the financial landscape by ensuring consistent capital flow and investment opportunities, which, in turn, fosters stability in global markets.
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Compliance with Regulatory Requirements: SWFs are expected to follow all relevant regulatory and disclosure mandates in the countries where they invest. This commitment enhances credibility and ensures that their operations are recognized as lawful and transparent.
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Investment Based on Economic Considerations: The principles encourage SWFs to make investment decisions primarily based on economic and financial risk and return, thereby emphasizing the importance of rational and calculated financial strategies over political undertones.
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Transparent Governance Structures: GAPP advocates for sound governance frameworks that facilitate operational controls, comprehensive risk management, and accountability. This transparency is vital for gaining the trust of stakeholders and the general public.
The Santiago Principles
The underlying framework of GAPP is detailed in the 24 Santiago Principles. These principles are organized across three essential domains:
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Legal: This pertains to the legal framework that governs the establishment and operations of SWFs. A well-defined legal structure is crucial for the legitimacy and stability of investment strategies.
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Institutional: This includes the organizational setup, management practices, and organizational culture within SWFs that support effective decision-making and responsible management.
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Investment and Risk: This domain focuses on the investment policies and practices of SWFs, including risk assessment and management strategies that contribute to the sustainability of returns.
The Santiago Principles are not mandatory but serve as a voluntary framework that encourages sovereign wealth funds to adopt best practices tailored to their specific contexts. The International Forum of Sovereign Wealth Funds (IFSWF) is responsible for promoting these principles and ensuring their continued relevance in the evolving financial landscape. As of 2021, the IFSWF included more than 30 sovereign wealth funds, representing a diverse range of countries and investment philosophies.
Significance of GAPP
The adoption of GAPP has significant implications for the global financial ecosystem:
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Enhanced Trust: By promoting transparency and responsible governance, GAPP fosters trust among investors, regulators, and the public, which is essential for maintaining confidence in sovereign wealth funds.
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Risk Mitigation: By emphasizing financial evaluations over political considerations, the principles help mitigate risks associated with politically motivated interventions in financial markets, which can lead to economic instability.
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Global Cooperation: The GAPP framework encourages cooperation and dialogue among sovereign funds worldwide, leading to a harmonized approach to investment practices and regulations.
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Accountability: With established governance structures, SWFs are held accountable for their investment decisions and the impact these decisions may have on both domestic and global markets.
Conclusion
The Generally Accepted Principles and Practices (GAPP) represent a pivotal step toward enhancing the governance and transparency of Sovereign Wealth Funds worldwide. By adhering to the Santiago Principles, these funds can help foster a stable global financial environment, comply with regulatory demands, and safeguard the trust of investors and the public alike. As the financial landscape continues to evolve, the principles outlined in GAPP will likely play an essential role in guiding sovereign wealth funds toward sustainable investing and responsible governance.