Title: Generally Accepted Principles and Practices (GAPP) — The Santiago Principles: What They Are, Why They Matter, and Practical Steps for Implementation
Introduction
The generally accepted principles and practices (GAPP), widely known as the Santiago Principles, are a set of voluntary, best‑practice guidelines for sovereign wealth funds (SWFs). Adopted by the International Working Group of Sovereign Wealth Funds (IWG) in October 2008, the Principles aim to reassure global markets that SWF investments are made on an economic and financial basis—not for political objectives—and that SWFs operate with appropriate transparency, governance, and risk management (International Working Group of Sovereign Wealth Funds, 2008; Investopedia).
What GAPP / the Santiago Principles are
- Definition: GAPP (Santiago Principles) are 24 voluntary principles that provide a framework for the legal, institutional, and investment practices of SWFs (International Working Group of Sovereign Wealth Funds, 2008).
- Purpose: To promote sound governance, transparency, and accountability of SWFs so that investors, host countries, and markets have confidence in SWF activities.
- Scope: Apply to “special purpose investment funds or arrangements, owned by the general government,” i.e., public funds investing in a range of assets on behalf of a government (IWG, 2008).
Why they were created
- Background: In 2008, concerns rose among investors and regulators about SWFs’ transparency, political independence, and governance. The IWG produced the Principles to address such concerns and reduce the risk of political friction and market disruption.
- Endorsement and upkeep: The International Forum of Sovereign Wealth Funds (IFSWF) now maintains and promotes the Santiago Principles. As of 2021 the forum represented more than 30 sovereign wealth funds (Investopedia; IFSWF).
The structure of the 24 Principles (high‑level summary)
The 24 Principles are typically grouped into three broad areas:
1. Legal and Institutional Framework
- Clear legal basis for the SWF and defined public policy purpose.
- Recognize the ownership and safeguard the assets’ public policy objectives.
2. Governance and Institutional Framework / Operational Independence
- Effective governance structures (board, committees).
- Clear lines of accountability and operational independence from political interference.
- Conflict-of-interest rules and disclosure for governing bodies and staff.
3. Investment and Risk Management
- Transparent investment frameworks and risk management policies.
- Sound asset allocation, due diligence, and performance measurement.
- Appropriate reporting, disclosure, and external audit practices.
Benefits of following the Santiago Principles
- Builds credibility and trust with host countries, counterparties, and markets.
- Reduces reputational and political risk for the SWF.
- Encourages better governance, internal controls, and risk management.
- Facilitates cross‑border investments and reduces the risk of protectionist responses.
Common criticisms and limitations
- Voluntary: No formal enforcement mechanism; adherence varies across funds.
- Ambiguity: Some principles are high‑level and allow wide interpretation.
- National security concerns: Host countries may still restrict investments for strategic reasons.
- Implementation gap: SWFs differ in how fully and transparently they implement the Principles.
Practical steps for sovereign wealth funds to adopt and implement GAPP
Below is a step‑by‑step implementation roadmap and checklist that SWFs can use to adopt and operationalize the Santiago Principles.
Phase A — Governance & legal setup (0–6 months)
1. Legal foundation and mandate
- Ensure legal instruments clearly state the SWF’s purpose, ownership, and governance.
- Publish a mandate that distinguishes commercial objectives from fiscal or policy roles.
2. Board and governance structure
- Establish a formal board with a written charter defining roles, duties, and delegation.
- Set up committees for audit, risk, and remuneration where appropriate.
- Adopt conflict-of-interest and ethics policies and require periodic disclosures from board and senior staff.
3. Operational independence
- Document decision rights and operational independence from political interference (investment decisions, staffing, vendor selection).
Phase B — Investment, risk management & operations (3–12 months)
4. Investment policy and risk framework
- Publish an Investment Policy Statement (IPS) with objectives, time horizon, permitted instruments, concentrations, and risk limits.
- Implement enterprise-wide risk management (market, credit, liquidity, operational, reputational).
- Establish internal compliance, legal, and operational controls.
5. Performance measurement and benchmarks
- Define performance benchmarks and attribution methodologies aligned with the IPS.
- Report risk‑adjusted returns and explain deviations from strategic asset allocation.
6. Reserves, liquidity, and contingency planning
- Define liquidity needs and stress‑testing frameworks.
- Maintain contingency funding plans for market shocks.
Phase C — Transparency, reporting & external assurance (6–18 months)
7. Reporting and disclosure
- Publish an annual report with audited financial statements, governance disclosures, investment strategy summary, and core risk metrics.
- Consider periodic public disclosures on asset allocation ranges and large exposures consistent with risk/market sensitivity.
8. External audit and reviews
- Obtain annual external financial audits and periodic independent governance/risk reviews by third parties.
- Publish results of external assessments and an implementation plan for recommendations.
9. Stakeholder communications
- Maintain a public website with mandate, governance documents, annual reports, and contact details.
- Develop a communications policy addressing media, host governments, and investors.
Phase D — Continuous improvement and peer engagement (ongoing)
10. Formalize adoption of the Santiago Principles
- Publicly endorse the Santiago Principles and consider joining IFSWF.
11. Peer reviews and benchmarking
- Engage in peer reviews and share best practices across the SWF community.
12. Monitor and update
- Regularly review governance, risk policy, and disclosures as the fund grows or markets evolve.
Practical steps for host governments, regulators, and counterparties
- Request documentation: mandate, governance charter, IPS, auditor’s reports.
- Evaluate governance: board independence, conflict‑of‑interest rules, external audit arrangements.
- Assess transparency: frequency and depth of public reporting; responsiveness to queries.
- Use formal tools: adopt investment screening policies that apply equally and transparently to all foreign investors while avoiding arbitrary discrimination.
- Engage constructively: pursue dialogues with SWFs, encourage adherence to IFSWF practices, and make regulatory requirements predictable and proportionate.
Implementation checklist (short)
- Publicly state mandate and legal basis
- Board charter and committee structure in place
- Conflict‑of‑interest and ethics policies adopted
- Investment Policy Statement published
- Risk management framework operational
- Annual audited financial statements published
- Periodic independent governance/risk review completed
- Public endorsement of Santiago Principles and IFSWF engagement
Performance indicators (examples)
- Time to publish annual report after fiscal year end (target: ≤ 6 months)
- Percentage of board members with independent status (target: fund-specific)
- Frequency of external audits and governance reviews (audit: annually; governance review: every 3–5 years)
- Timeliness of responses to regulatory enquiries (target: as defined by host jurisdiction)
Examples and evidence of uptake
- Many major SWFs publicly endorse and report against the Santiago Principles; the IFSWF promotes their implementation and facilitates peer engagement. As of 2021, the IFSWF represented more than 30 SWFs worldwide (Investopedia; IFSWF).
Further reading and core references
- International Working Group of Sovereign Wealth Funds, “Sovereign Wealth Funds: Generally Accepted Principles and Practices (the Santiago Principles),” October 2008. (IWG PDF) https://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf
- International Forum of Sovereign Wealth Funds (IFSWF) — Santiago Principles and membership information: https://www.ifswf.org/santiago-principles
- Investopedia, “GAPP (Generally Accepted Principles and Practices),” summary and context: https://www.investopedia.com/terms/g/gaap-santiagoprinciples.asp
Concluding note
The Santiago Principles are a practical, consensus‑based framework designed to align sovereign wealth fund operations with international expectations for governance, transparency, and financial focus. Because they are voluntary and intentionally high level, real market confidence depends on how concretely and transparently individual funds implement the Principles, and on constructive engagement between SWFs, host states, and the broader investor community.
If you’d like, I can:
- Produce a one‑page implementation plan tailored to a specific SWF size and mandate (e.g., stabilization vs. savings).
- Draft a sample Investor/Stakeholder Disclosure template aligned with the Santiago Principles.
- Create a governance checklist for board reviews and external assessors. Which would you prefer?