A common European approach to Sovereign Wealth Funds

The Commission proposes that the European Union adopts a common strategy aimed at enhancing the transparency, predictability and accountability of SWF operations.

ACT

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 27 February 2008 – ‘A common European approach to Sovereign Wealth Funds’ [COM/2008/ 115 final – Not published in the Official Journal].

SUMMARY

Sovereign Wealth Funds (SWFs) are state-owned investment vehicles, which manage a diversified portfolio of domestic and international financial assets, and generally accept a high level of risk in search of higher returns. SWFs have grown rapidly in recent years and today, more than thirty countries have created them. This is not a new phenomenon. The creation of the first SWF goes back to 1953. The assets managed by these funds represented, according to estimates, between 2000 and 3000 billion dollars worldwide and this volume should increase further in years to come. Sovereign Funds can be distinguished from other investment funds by the fact that they are state-funded from the foreign exchange reserves of their sponsor countries.

Up to now, SWFs have played a positive role, in particular by participating in the recapitalisation of a certain number of financial institutions in difficulty. SWFs have thus helped to strengthen the global banking system and confidence in the international financial system as a whole.

SWFs raise concerns however, in particular with regard to the opacity of the way in which some of them function and the non-commercial use that could be made of them. These SWFs sometimes trigger protectionist reactions. Some are concerned that their investments are aimed at taking strategic control of technology or expertise, or even that they may be used by certain governments as a means of pressure.

The European approach

The Commission presented the common European approach to SWFs in a Communication of 27 February 2008. The Communication is the result of an approach aimed at promoting cooperation between SWFs, sponsor countries and recipient countries in order to establish a series of principles that guarantee the transparency, predictability and accountability of investments.

According to the Commission, the common EU approach to the treatment of SWFs should be based on the following principles:

• commitment to an open investment environment: in line with the Lisbon Strategy, the EU should reaffirm its commitment to open markets for foreign capital and to an investor-friendly investment climate;
• support of multilateral work: the EU should actively drive forward work carried out by international organisations and instigate dialogue with SWF owner countries;
• use of existing instruments;
• respect of obligations related to the EC Treaty and international commitments;
• proportionality and transparency: the measures adopted should not go beyond what is necessary to achieve the justified goal.

An international debate

The question of SWFs is also subject to international debate. Recipient countries have thus stressed their wish that SWFs should base their decisions strictly on economic and not political objectives, and have called for greater transparency on the part of the funds. Sponsor countries, under the aegis of the IMF, have developed a code of conduct for sovereign funds with voluntary application. This code, called the Generally Approved Principles and Practices (GAPP) – or even the ‘Santiago Principles’, was published in October 2008. The Commission has contributed actively to the writing of these principles and considers that they represent a further contribution to similar work undertaken at the OECD. Recipient countries of investments undertaken by SWFs adopted the Declaration on sovereign wealth funds and recipient country policies in June 2008. This Declaration lays out the principles for policies to be applied to investments by SWFs in the recipient countries. These principles reflect long-term commitments made by the OECD to promote an open global environment for international investment.

With regard to the European contribution to work carried out on a global scale to establish a common framework for sovereign fund investments, the Commission considers that two elements play a fundamental role in the response to concerns about this question:

• governance: the degree of possible political interference in the operation of SWFs must be assessed. Principles of good governance include in particular the allocation and clear separation of responsibilities in the management body, the preparation and publication of an investment strategy and the existence of operational autonomy.
• transparency: this allows investors’ activities to be monitored and ensures that they do not deviate from their stated objectives. The Commission considers that transparency promotes accountability. Practices such as the annual publication of investment positions and asset allocation, the publication of information on the source and size of resources could be envisaged.

Context

Despite the debate on good governance of SWFs, they do not operate in a legal vacuum. The Commission recalls that investments made in the EU by SWFs are subject to the same rules and controls as any other form of investment, where the rules of free movement of capital (Article 56 EC) apply. The free movement of capital is however not absolute and may be regulated under Article 57 (2) EC. Member States can also take measures to protect their interests by virtue of the Regulation on Concentrations. They also have national instruments which could be used to control SWF investments.

The European Council of 13 and 14 March 2008 welcomed the Commission’s proposals and invited it to continue the work being done in this field.

Last updated: 08.10.2008