The rise of sovereign wealth funds as an important investor class in international finance has been a source of concern for a number of industrialised economies who feared that these funds’ investments could compromise their economic competitiveness and national security. Reacting to steps – some real, some threatened – in recipient countries to enact regulation against sovereign investment, sovereign wealth funds responded by developing their own set of “industry standards.” In October 2008, the International Working Group of Sovereign Wealth Funds published the Generally Accepted Principles and Practices (GAPP), more commonly known as the Santiago Principles.
The purpose of the Santiago Principles is to identify a framework of generally accepted principles and practices that reflect appropriate governance and accountability arrangements, as well as prudent investment practices by sovereign wealth funds. Three aspects relating to the Santiago Principles warrant closer examination and will be discussed in this article: first, why did sovereign wealth funds find it necessary to develop and associate themselves with the Santiago Principles? Second, what is the status of the principles as a new approach to global financial governance? And third, how robust are the Santiago Principles and can they contribute to a stable global financial system and a free flow of capital and investments?