An Analysis of Proxy Voting and

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					   An Analysis of Proxy Voting and Engagement
                            Policies and Practices of the

                                   Sovereign Wealth Funds

                            By Afshin Mehrpouya, Chaoni Huang, Timothy Barnett


                                                      IRRCi SWF Report October 2009



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Abbreviations and Acronyms


     ADIA           Abu Dhabi Investment Authority

     AGFF           Australian Government Future Fund

     CIC            China Investment Corporation

     ESG            Environmental, Social and Governance

     GAPP           Generally Accepted Principles and Practices

     GIC            Government of Singapore Investment Corporation

     GPFG           Government Pension Fund Global (Norway)

     IMF            International Monetary Fund

     IWG            International Working Group

     KIA            Kuwait Investment Authority

     LIA            Libyan Investment Authority

     NBIM           Norges Bank Investment Management

     OECD           Organization for Economic Cooperation and Development

     QIA            Qatar Investment Authority

     RSF            Russian Stabilization Fund

     SWF            Sovereign Wealth Fund




IRRCi SWF Report www.irrcinstitute.org                                                    -2-
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Table of Contents
1.     EXECUTIVE SUMMARY ........................................................................................................ 7
Section I - Overview and Comparative Analysis ............................................................................... 9
2.     INTRODUCTION ............................................................................................................... 9
        2.1. SWFs: Background and Developments ............................................................................. 9
        2.2. How Large Is The Actual Impact of the SWFs?.................................................................. 12
        2.3. Regulatory Environment ........................................................................................... 13
        2.4. Objectives of the Study ........................................................................................... 14
        2.5. Methodology ........................................................................................................ 15
3.     COMPARATIVE ANALYSIS .................................................................................................. 20
        3.1. Engagement and Proxy Voting .................................................................................... 21
        3.2. Investment Strategies and Practices ............................................................................ 26
        3.3. Governance ......................................................................................................... 32
        3.4. Environmental, Social and Governance (ESG) Investments and Engagement .............................. 38
        3.5. Capabilities ......................................................................................................... 41
4.     COMPLIANCE WITH SANTIAGO PRINCIPLES.............................................................................. 43
        4.1. Compliance Analysis ............................................................................................... 44
        4.2. Compliance Rating ................................................................................................. 58
5.     CONCLUDING REMARKS .................................................................................................... 61
Section II – SWF Case Studies ................................................................................................... 63
6.     SWF CASE STUDIES ......................................................................................................... 63
        6.1. Abu Dhabi Investment Authority (ADIA) ......................................................................... 63
        6.2. Government Pension Fund - Global (GPFG) .................................................................... 67
        6.3. Government of Singapore Investment Corporation (GIC) ..................................................... 77
        6.4. Kuwait Investment Authority (KIA) .............................................................................. 83
        6.5. Russian Reserve Fund and National Wealth Fund .............................................................. 89
        6.6. China Investment Corporation (CIC) ............................................................................. 93
        6.7. Temasek Holdings (Temasek) .................................................................................... 101
        6.8. Qatar Investment Authority (QIA) ............................................................................... 108
        6.9. Libyan Investment Authority (LIA) .............................................................................. 113
        6.10. Australian Government Future Fund (AGFF)................................................................... 117
7.     REFERENCES ............................................................................................................... 122
8.     APPENDICES ................................................................................................................ 123

Appendix A.      Overview of Important SWFs Worldwide .................................................................... 123

Appendix B.      Assumptions for International Equity Size Estimation in Figure 5 ....................................... 124




IRRCi SWF Report www.irrcinstitute.org                                                                                          -3-
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Appendix C.      Analysis Criteria ................................................................................................ 125


Appendix D.      SWF Survey Questionnaire .................................................................................... 128


Appendix E.      The Santiago Principles ....................................................................................... 134


Appendix F.      RiskMetrics Rating Methodologies: IVA and GC+ ........................................................... 137


Appendix G.      Compliance Rating Guidelines ................................................................................ 138


Appendix H.      Compliance Rating Overview ................................................................................. 142


9.     End Notes .................................................................................................................. 152




IRRCi SWF Report www.irrcinstitute.org                                                                                           -4-
RiskMetrics Group                                                                                                  www.riskmetrics.com




Table of Figures
Figure   1   Five Types of SWFs ........................................................................................................ 9
Figure   2   SWFs by Funding Source ................................................................................................ 11
Figure   3   SWFs by Region .......................................................................................................... 11
Figure   4   Global Financial Assets by Investor Class (Trillion USD) ........................................................... 12
Figure   5   Estimates of SWFs' Investments in the International Equity Markets ............................................. 13
Figure   6 The 10 Largest SWFs Worldwide*......................................................................................         15
Figure   7 Contact Attempts with Portfolio Companies (including holdings of fully owned subsidiaries of the SWFs)                       19
Figure   8 Survey and Feedback Response from the SWFs .....................................................................             19
Figure   9 Comparative Analysis: Engagement and Proxy Voting ..............................................................             21
Figure   10 Response from Portfolio Companies of SWFs* ......................................................................           24
Figure   11 Comparative Analysis: Investment Strategies and Practices .....................................................             29
Figure   12 Comparative Analysis: Governance ..................................................................................         34
Figure   13 Comparative Analysis: ESG Investments ............................................................................          39
Figure   14 Comparative Analysis: Capabilities ..................................................................................       42
Figure   15 Compliance Analysis: Legal Framework, Objectives, and Coordination with Macroeconomic Policies ....                         44
Figure   16 Compliance Analysis: Institutional Framework and Governance Structure ....................................                  48
Figure   17 Compliance Analysis: Investment and Risk Management Framework ...........................................                   55
Figure   18   Percentage of Compliance for each SWF ...........................................................................         59
Figure   19   Overall Compliance Rating ...........................................................................................     59
Figure   20   Compliance Levels per Principle .....................................................................................     60
Figure   21   ADIA Analysis Overview ...............................................................................................    63
Figure   22   GPFG Analysis Overview ..............................................................................................     67
Figure   23   GPFG Asset Class Breakdowns over Time ...........................................................................         70
Figure   24   Regional Breakdown of GPFG‟s Equity Portfolio ...................................................................         71
Figure   25   The Ten Largest Equity Holdings in Investment Value ............................................................          73
Figure   26   Four Largest Equity Holdings in Percentage Ownership ..........................................................           74
Figure   27   Companies with which GPFG Engaged in 2008 .....................................................................           75
Figure   28   GIC Analysis Overview .................................................................................................   77
Figure   29   GIC Portfolio Breakdown Based on Asset Class ....................................................................         80
Figure   30   GIC Portfolio Breakdown in Geography ............................................................................. 81
Figure   31   KIA Analysis Overview ................................................................................................. 83
Figure   32   Response from KIA‟s Portfolio Companies .......................................................................... 88
Figure   33   Russian Reserve Fund and National Wealth Fund Analysis Overview ........................................... 89
Figure   34   Current Breakdown of the Reserve Fund‟s Investments .......................................................... 90
Figure   35   Current Breakdown of the National Wealth Fund's Investments ................................................. 91
Figure   36   CIC Analysis Overview ................................................................................................. 93
Figure   37   CIC‟s Initial Capital Deployment ..................................................................................... 96
Figure   38   CIC Global Investment Portfolio Distribution ...................................................................... 97
Figure   39   CIC‟s Major Transactions since Inception ........................................................................... 98
Figure   40   Temasek Analysis Overview ......................................................................................... 101
Figure   41   Temasek Asset Breakdown by Geographical Region .............................................................. 104
Figure 42 Temasek's Asset Breakdown by Sector ............................................................................. 105




IRRCi SWF Report www.irrcinstitute.org                                                                                              -5-
RiskMetrics Group                                                                                                www.riskmetrics.com




Figure 43 Temasek Portfolio Highlights ........................................................................................ 105
Figure   44   QIA Analysis Overview ................................................................................................ 108
Figure   45   LIA Analysis Overview ................................................................................................ 113
Figure   46   AGFF Analysis Overview .............................................................................................. 117
Figure   47   AGFF Portfolio Breakdown Based on Asset Class ................................................................. 119




IRRCi SWF Report www.irrcinstitute.org                                                                                            -6-
RiskMetrics Group                                                                               www.riskmetrics.com




1. EXECUTIVE SUMMARY
This report presents a study of the engagement and proxy voting practices of the ten largest Sovereign Wealth
Funds, as well as general analysis of the level of transparency with which they operate. During the past two years,
there has been an ongoing debate about the risks and opportunities related to the influence of the Sovereign
Wealth Funds on the global capital markets. However, no systematic attempts have yet been made to evaluate the
actual impact of the Sovereign Wealth Funds through analyzing their behavior and practices.


In the scope of our study, the SWFs were analyzed based on six criteria: investment strategy, governance,
engagement practices, capabilities, environmental, social and governance (ESG) practices, and disclosure. To
capture the data on the six pillars of analysis over 37 data points were collected for each SWF. To expedite access
to the local sources of information analysts speaking Chinese, Russian, French and English assisted in the data
collection process.


Disclosure by most SWFs is limited with regard to engagement policy and performance. Consequently to find
information in this area, in addition to interviews and questionnaires used to collect information directly from the
SWFs, many alternative sources of information outside of the SWFs were explored (See section 1.5).


Some of the key conclusions of this study are:


        The current total size of the SWFs and the percentage invested in international equity is much less than
         the figures reported in the media; consequently estimates of their potential impact on the international
         capital markets are mostly exaggerated. As further explained in section 1.2, our estimate of the total
         international equity investments of the ten largest SWFs is about half of the figures generally reported in
         the media

        In our study, evidence was found supporting active investment management by most of the SWFs.
         However, few such funds disclose engagement policy or performance data for investments in which they
         take large stakes and engage with the investee companies. While engagement by long-term investors such
         as SWFs can be a source of governance and operational improvements for the companies, more disclosure
         in this area can help allay investment community concerns (See section 2.1).

        The label „SWF‟ does not capture the wide variety of missions, organizational structures and investment
         styles of such funds. While some funds were originally launched as the privatization management arms of
         their respective governments, others were founded by the central banks to invest part of their foreign
         reserve surpluses. Some aim to maintain the country‟s wealth for the next generations, while others serve
         as economic stabilization funds and still others aim at achieving social causes such as expanding the
         middle class population. This makes many generalizations about the funds‟ practices inaccurate and
         misleading.

        One year after the introduction and adoption of the Santiago Principles, while a few funds have achieved a
         comparatively high level of disclosure, the public disclosure levels of a number of SWFs have not yet met
         the Principles‟ standards. A few SWFs under study do not seem to have adopted any initiatives to improve
         their compliance with the Santiago Principles following its introduction. Given the short time period since
         the introduction of the code, some other funds which have shown some improvements since the




IRRCi SWF Report www.irrcinstitute.org                                                                         -7-
RiskMetrics Group                                                                              www.riskmetrics.com




         introduction of the code might not have yet had enough time to achieve their targeted compliance levels
         with the GAPP.

        Few SWFs have shown strategic focus on environmental and social risk management and investments.
         Given SWFs are mostly long term investors; focus in this area can help them yield the associated long term
         financial benefits. In addition for the SWFs sourced from oil revenues, clean energy funds seem to be very
         relevant investments for diversification of their national economies


We believe this study is unique both in its approach and its data collection methods. Consequently, it can be an
important source of information to help the investment community, regulators and other concerned parties
achieve a clearer and more realistic understanding of the SWFs and their potential impacts on the global capital
markets.


One exceptional feature of this report is that it has been able to reach out and obtain rich input from funds such
as the Libyan Investment Authority which were formerly considered as relatively opaque Sovereign Wealth Funds.
We believe that, for the first time, this report can provide an insight into the governance and the mode of
operation of such funds.


This report is structured in two major sections. Section I includes Chapter 1 “Introduction”, Chapter 2
“Comparative Analysis” and Chapter 3 “Concluding Remarks”. The first chapter provides an overview of the SWFs,
the regulatory environment, objectives of the study and methodology. Chapter 2 draws a comparative analysis of
SWFs‟ engagement and proxy voting practices, investment strategies and practices, governance, ESG investments,
capabilities, and compliance with the Santiago Principles and Chapter 3 concludes the findings and key takeaways
and implications. Section II, Chapter 4 presents individual analysis of the ten largest SWFs.




IRRCi SWF Report www.irrcinstitute.org                                                                       -8-
RiskMetrics Group                                                                                 www.riskmetrics.com




Section I - Overview and Comparative Analysis

2. INTRODUCTION
Sovereign Wealth Funds are regarded by some as secretive government investment vehicles and by others as
sources of stability in the capital markets. Their growing size and investment appetite have ignited controversy
regarding their motives and influence over portfolio holdings. At the same time, they have been lauded as a source
of long-term thinking and stability and as saviors for the troubled Western banks. Despite ongoing debate, there
has been little analysis of the actual influence of the SWFs on the companies in their portfolio and the related risks
and opportunities for the investment community.

In order to fill this gap, the following report provides an analysis of the engagement and proxy voting policies and
practices of SWFs.


2.1. SWFs: Background and Developments

A Sovereign Wealth Fund is a particularly large pool of capital owned by a government and invested in the home
and overseas capital markets, against which the government has no liabilities; therefore, this report does not
consider public pension funds to be SWFs. Capital sources of SWFs tend to be wealth accumulated through
commodity exports like oil in the cases of Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority
(KIA), the Norwegian Government Pension Fund and Qatar Investment Authority (QIA), or foreign exchange
reserves of export-based economies such as China (CIC) and Singapore (GIC). Broadly speaking, SWFs can be
categorized based on their missions as illustrated in Figure 1. The category to which a SWF belongs is a defining
factor in its investment and engagement behavior.


Figure 1 Five Types of SWFs


 Type of SWF          Objective                                    Attributes               Examples
                      Aim to insulate the budget and the           Short- to mid-term
 Stabilization
                      economy against commodity (usually oil)      investment    time       Russian Reserve Fund
 Funds
                      price swings and crises                      horizon
 Intergenerational
                      Aim to convert nonrenewable assets into                               KIA; GPFG (Government
 Wealth Transfer                                                   Long term
                      a more diversified portfolio of assets                                Pension Fund Global)
 Funds
                                                                                            China        Investment
 Reserve              Assets are often still counted as reserve    Long term – more         Corporation       (CIC);
 Investment           assets, and are established to increase      aggressive   return      Government            of
 Corporations         the return on reserves                       requirements             Singapore Investment
                                                                                            Corporation (GIC)
                      Help fund socioeconomic projects or                                   Nordic    Development
 Development                                                       Socially focused –
                      promote industrial policies that might                                Fund;          European
 Funds                                                             less focus on returns
                      raise a country's potential output growth                             Development Fund




IRRCi SWF Report www.irrcinstitute.org                                                                           -9-
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                                                                   Mostly long term;
                                                                   risk appetite and
                      Provide (from sources other than
 Contingent                                                        investment         time
                      individual pension contributions) for                                   Australian Government
 Pension Reserve                                                   horizon    dependent
                      contingent unspecified pension liabilities                              Future Fund (AGFF)
 Funds                                                             on the trends and
                      on the government's balance sheet
                                                                   timeline     of      the
                                                                   pension liabilities
                      Primarily manage formerly government-        Long-term strategic
 Government                                                                                   Temasek       Holdings
                      owned companies on behalf of the             investor    –     large
 Asset Manager                                                                                (Temasek)
                      government                                   stakes

So far, the term Sovereign Wealth Fund (SWF) has been applied loosely to a diverse set of entities, with a diverse
set of sources of capital and missions. One example is Temasek Holdings (Temasek), which is not purely a fund
management entity; rather it also manages the corporate assets that formerly belonged to the government.
Another example is the Australian Government Future Fund (AGFF), which partially sourced its capital from the
privatization of government assets and transfer of budgetary surpluses aims to help with Australia‟s potential
long-term commonwealth pension deficits due to the aging population in that country. Consequently the AGFF
cannot be considered „without liabilities‟, albeit ones which only come into play in the longer term, which
contrasts with the common SWF definition.


SWFs have been investing government surpluses for decades. The first SWF, the Kuwait Investment Authority (KIA),
dates back to 1953, while the Abu Dhabi Investment Authority (ADIA) and the Singaporean fund Temasek Holdings
(Temasek) were both set up in the 1970s. Since 2005, at least 16 SWFs have been created. However, it is only
recently that such funds have emerged as managers of large “excess reserves” and other foreign assets. As
countries grow their foreign reserves compared to the size of their economies, they adopt higher risk appetites
and investment capabilities and seek greater returns. During the past few years, growth has been boosted by rising
commodity prices, especially oil and gas (particularly between 2003 and 2008). In the case of Asian SWFs, rapid
growth occurred as a result of the increase in exports due to the global economic boom prior to the current
economic crisis.


As of the end of 2007, institutions such as the International Monetary Fund (IMF) and Morgan Stanley estimated
global SWF capital to be around USD 3 trillion, with a forecasted size of between USD 12 trillion and USD 15 trillion
by 2015. To provide a measure of the forecasted scale of the SWFs, this would mean that by 2015, they would be
equivalent to between 15 and 25% of the global equity markets, or more than six times the current size of the
global private equity markets. However, the global financial crisis has not spared the SWFs. Since the onset of the
crisis, both the current aggregate size and the future estimates have shrunk significantly.


Some of the factors which have resulted in significant decrease of SWF capital during 2008 and 2009 are:


              Decrease in portfolio value due to the global downturn in equity markets

              Decrease in oil prices since late 2008 resulting in decreased capital flows into the oil-based SWFs

              Significant drop in Western demand for the exports of Asian economies such as Singapore and China

              Inward focus of SWF host governments to stimulate the local economies and to recapitalize troubled
              banks such as the case of the Russian SWF and ADIA




IRRCi SWF Report www.irrcinstitute.org                                                                          - 10 -
RiskMetrics Group                                                                                        www.riskmetrics.com




A list of the largest SWFs worldwide and their sources of capital is represented in Appendix A. The funding source
and regional breakdown of SWFs, as of year-end 2008, are presented in Figure 2 and Figure 3 respectively.


Figure 2 SWFs by Funding Source                                     Figure 3 SWFs by Region

                                    Total Other,                                          Other, 4%
                                                                            Europe, 13%               As ia, 35%
                                        36%




                                                                                                          Americ as ,
                                                                       Middle Eas t,                        2%
   Total Oil and
                                                                          46%
   Gas Related,
       64%


Source: SWF Institute (last updated Dec 2008)

As illustrated in Figure 2, globally 64% of the SWFs‟ funds are sourced from oil and gas-related commodity
revenues, and the rest of the 36% of the SWFs‟ capital is generated from non-commodity sources in export-based
economies. In such cases, the SWF receives a transfer of payment from excess foreign reserves (e.g. CIC and GIC).
Almost half of all sovereign assets are held by Middle East SWFs, representing the highest geographical
concentration of SWF assets worldwide. Roughly 35% of the SWFs‟ assets originate in Asia, making it the second
largest region with SWF assets, followed by Europe (13%).


In recent years, SWFs have become increasingly visible and active in the global financial markets, and their asset
size and influence in the investment community have grown dramatically. Among the more prominent investments
made by SWFs recently were those that inserted capital into the US banks following the onset of the credit crisis in
2008. For example, China Investment Corporation (CIC) acquired a USD 5 billion stake in Morgan Stanley, while Abu
Dhabi Investment Authority (ADIA) purchased a USD 7.5 billion stake in Citigroup. A number of these transactions
appear to have resulted in large losses for the SWFs. This issue, combined with the aforementioned decrease in
SWF capital has resulted in a dramatic decrease in the scale and scope of SWFs‟ international investment
activities.


Nonetheless, SWFs are becoming critically important players in the global economy in general and especially in the
financial sector. Although SWFs control only a relatively small percentage of total global financial assets, in
absolute terms they are already a significant investor class. Despite the current drops in oil prices, considering the
forecasted long-term trends in oil demand and supply, and barring heretofore unseen conservation or alternative
energy use growth, petroleum-based SWFs will grow at a greater pace than other categories of investors. They will
therefore have increasing influence on the global economy in the long run.


In contrast, most of the export-based economies such as China and Singapore are facing difficulties resulting from
the dependence of their economies on Western demand for their goods and services. Such economies have
recently announced renewed focus on local investments such as building national infrastructure and expanding the
size of their middle class. Strategies of this type can change the trade patterns of such countries, and
consequently we believe that the growth of their reserves and subsequently the growth of their SWFs will decrease
in the medium to long run.




IRRCi SWF Report www.irrcinstitute.org                                                                                  - 11 -
RiskMetrics Group                                                                                       www.riskmetrics.com




As Figure 4 demonstrates, as of September 2009, SWFs control more capital than either the hedge fund or private
equity asset classes.


Figure 4 Global Financial Assets by Investor Class (Trillion USD)




Source: Estimations as of September 2009 - (SWF size estimation includes all the SWFs - not only the top 10 largest as is the
case elsewhere in the report)


2.2. How Large Is The Actual Impact of the SWFs?

As mentioned above, there are several factors contributing to the recent shrinkage of the size of the SWFs. In
addition, the credit crisis has resulted in a shift to inward investment in several SWF countries such as the UAE and
China with the goal of replacing jobs and economic production lost to decreased exports. This trend has been
coupled with the capital injection into banks to resolve solvency issues and also to persuade lending.

With regard to the impact of SWFs, another factor that should be noted is that, while the total assets held by the
SWFs are usually cited as a proxy of their influence, the portion of funds reserved for international equity
investments is often a fraction of the total asset base. For example, out of the USD 200 billion initial capital of
China Investment Corporation (CIC), reportedly around 50% is reserved for international investments.


The table below shows the assets breakdown of the funds with the total estimated current assets under
management, the proportion of these assets designated for international investment, and the proportion of these
international assets invested in equities (for details of the assumptions and methodology please refer to Appendix
B).




IRRCi SWF Report www.irrcinstitute.org                                                                                - 12 -
RiskMetrics Group                                                                                 www.riskmetrics.com




Figure 5 Estimates of SWFs' Investments in the International Equity Markets

                    Size of Fund                     Assets    for   Int.   % of Int. Fund
                    Prior to Credit   Current Size   Investment in USD      Held          in   Estimated Value of
                    Crisis in USD     of Fund in     Billion          (or   Equities     (or   Int. Equities in USD
 SWF                Billion           USD billion    estimations)           estimations)       Billion
 ADIA                   600-800*         500-700        500-700 (100%)            60%                  300-420

 AGFF                     61              46.8           37.5 (80%)               20%                  7.4
 CIC                     195              195           98 (over 50%)           3.20%                   3.2
 GIC                   200-330          150-250        150-250 (100%)             44%                 66-110
 KIA                   220-250          190-220        190-220 (100%)             60%                  132
 LIA                      50              64.2           64.2 (100%)              10%                  6.42
 GPFG                    450              322            322 (100%)             49.60%                 159
 QIA                      60               60             60 (100%)               60%                   36
 RRF &NWF                220              220            220 (100%)                0%                    0
 Temasek                 134              120             82.8 (69%)             100%                  82.8

 Approximate          <>USD 2.5        <>USD 2.2
                                                       <>USD 2 trillion                           <USD 1 trillion
 Totals                Trillion         trillion

    Maximum estimates
    Disclosed as of Dec. 31 2008 or later

The findings show that, while the current size of the ten largest SWFs is estimated at USD 2.2 trillion, the actual
impact of their investments on international equity markets is smaller, at less than USD 1 trillion in total
international equity holdings. So, while SWFs will remain an important investor class, their impact on the global
equity markets should not be exaggerated. Strategic transactions are certainly reason for scrutiny, but in our view
their overall impact on the global capital markets will not be as significant as often claimed by the mainstream
media.


2.3. Regulatory Environment

As mentioned, regulators, the investment community and the press remain concerned about the possibility of
strategic and political motives for SWF investments jeopardizing the economic success of the companies in SWFs‟
portfolios. This issue, coupled with political concerns, has led to the development of new transnational regulations
for the SWFs to demand more disclosure of their relationships with their national governments and also to clarify
their investment processes and governance.


In May 2008, the International Monetary Fund (IMF) took a leading role in the establishment of the International
Working Group (IWG) of SWFs, which was set up to develop a voluntary code of conduct. The IWG is comprised of
representatives from 25 SWFs and is co-chaired by Hamad al Suwaidi, the Under Secretary of Finance of Abu Dhabi
and a director of ADIA, and Jaime Caruana, director of the IMF's Monetary and Capital Markets Department. In
October 2008, the Santiago Principles, a set of 24 voluntary principles and practices for SWFs, was launched by the
IWG. Under the guidelines set up by the IWG, SWFs are required to disclose the funds' source and purpose to the




IRRCi SWF Report www.irrcinstitute.org                                                                          - 13 -
RiskMetrics Group                                                                                  www.riskmetrics.com




public. Other public disclosure requirements include: the SWF's investment strategy, portfolio and legal structure,
as well as the legal relationship between the SWF and the government.


In parallel, the Organization for Economic Co-operation and Development (OECD) was asked by the G7 Finance
Ministers and the other OECD members to develop guidance for recipient countries‟ policies towards investments
from SWFs. In October 2008, the OECD Guidance on Sovereign Wealth Funds investments was adopted by OECD
members. The guidance contains three parts: OECD Ministerial Declaration on SWFs and recipient country policies,
reaffirmation of long standing OECD investment principles, and guidance for investment policies relating to
national security. As a next step, OECD members will be using the OECD‟s peer review process to promote
adherence to these standards.1


In addition to multilateral regulatory bodies, SWFs‟ overseas investment activities are obliged to comply with
national laws and regulations in the recipient countries. Many countries have laws on cross-border inward
investment, some of which have the effect of monitoring and limiting SWF transactions. Some of those national
uncoordinated laws and regulations are:


              The Committee on Foreign Investment in the United States (CFIUS)

              A committee for monitoring and ratifying foreign direct investments in Germany

              A cap of 5% for SWF holding of companies‟ equity in Italy (its enforcement status is unknown)

Such national initiatives risk conflicting with the OECD principle emphasizing that while national security remains a
central point of concern for the recipient countries, it should not be used as a basis for protectionism and
unjustified control of movement of capital from SWFs.

In our analysis we have attempted to capture the performance of the SWFs on most of the Santiago Principles‟
code requirements (please refer to Section I, Part 2 – The Comparative Analysis). Most of the requirements of the
code are relevant to this project because their ultimate goal is to provide more visibility on the nature of
influence of the SWFs on the recipient companies and also their investment objectives.


2.4. Objectives of the Study

As discussed, the global investment activities of SWFs could create new risks and opportunities for the recipient
companies and countries. When such funds are responsible, active, long-term investors, they can be a source of
economic stability and responsibility in the capital markets. However, any type of influence on the target
companies with non-economic objectives can lead to risks for other investors and the companies. Ultimately, such
issues can spur hostility to cross-border capital flows. Hence, the aim of this study is to uncover SWFs‟ real
influence, through analyzing the proxy voting and engagement practices of the SWFs. Throughout this study, we
seek to answer the following questions:


              Do the SWFs seek to influence the companies they invest in?

              o     If yes, does the influence aim to achieve pure economic goals, strategic goals, political goals or a
                    combination of these?

              Do the SWFs seek and exercise any proxy voting rights?




IRRCi SWF Report www.irrcinstitute.org                                                                           - 14 -
RiskMetrics Group                                                                                         www.riskmetrics.com




               o    If yes, what are the underlying principles of their proxy voting practices?

               Do they seek other types of engagement with the companies in their portfolio?

               o    If yes, what are the underlying principles of their engagement?

               Do the SWFs engage in social, environmental and governance issues?


We believe that the results of this study will help determine the role that SWFs are playing in the international
capital markets and in the responsible investing arena. This report can also serve as an instrument for
benchmarking engagement among the SWFs and suggests emerging best practice among the SWFs in areas such as
disclosure and responsible investment policies.


2.5. Methodology

Scope of Study

This study covered the ten largest SWFs in terms of assets under management (AUM) with assets ranging from
roughly USD 40 billion to USD 700 billion and with a geographical span from Australia to countries in the Middle
East, South East Asia, and Europe.


Figure 6 The 10 Largest SWFs Worldwide*

                                                                              Estimated or
                                                                              Reported Size       Year          Source of
 SWF                                                              Country     (USD Billion)       Established   Funding
                                                                              500-700
 Abu Dhabi Investment Authority (ADIA)                            Abu Dhabi   approx              1976          Oil
                                                                                                                Non
 Australian Government Future Fund (AGFF)                         Australia   46.8                2006          commodity
                                                                                                                Non
 China Investment Corporation (CIC)                               China       195                 2007          commodity
 Government of Singapore Investment Corporation                                                                 Non
 (GIC)                                                            Singapore   150-250             1981          commodity
 Kuwait Investment Authority (KIA)                                Kuwait      190-220             1953          Oil
 Libyan Investment Authority (LIA)                                Libya       64.2                2007          Oil
 Government Pension Fund Global (GPFG)                            Norway      322                 1990          Oil
 Qatar Investment Authority (QIA)                                 Qatar       60                  2000          Oil
 Russian Reserve Fund (RRF) and National Wealth Fund
 (NWF)                                                            Russia      220                 2003          Oil
                                                                                                                Non
 Temasek Holdings                                                 Singapore   120                 1974          commodity
* All estimates as of May 2009 or based on the latest financial disclosure




IRRCi SWF Report www.irrcinstitute.org                                                                                 - 15 -
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Analysis Criteria

The first step in this study was the establishment of criteria and data points needed to capture the scale and scope
of SWFs‟ influence on the target companies. To achieve this, a thorough analysis of the existing literature on SWFs
and similar institutions such as pension funds was carried out. In addition, codes such as the Santiago Principles
were reviewed as a basis for establishing some of the criteria. Following the preliminary research, the following
pillars of study were established:


              Governance structure

              o     Independence and diversity of the board and executive management team signifies less influence
                    of short-term government policies/politics on the investment practices. This issue is also
                    highlighted in the Santiago Principles. In addition, the governance design and the type of legal
                    entity under which the SWF operates is a defining factor in the role of government in the SWF‟s
                    operations.

              Capabilities

              o     While a SWF might have the best intentions and policies, in the absence of sufficient
                    management and investment capabilities, its behavior might be inconsistent with its principles.
                    In our study we attempt to evaluate the size of the SWF‟s team, the diversity of its workforce,
                    and also the level of capability building through tapping of external advisory resources and
                    outsourcing.

              Investment strategy and practices

              o     SWFs which purchase larger stakes in the target companies (such as Singapore‟s Temasek) have
                    more power to influence company practices than „portfolio investors‟ such as the Norwegian
                    Sovereign Wealth Fund, which holds small minority stakes in thousands of companies. For SWFs
                    holding large stakes in the companies, the engagement approach, active or passive, is of critical
                    importance. While passive investors create a governance gap in the target companies and
                    decrease the strength of shareholders, active investors raise concerns with regard to possible
                    political or strategic motives for engagements with the companies. In such cases, when the funds
                    explicitly state that they are active investors, it is important that they clarify the principles
                    underlying their engagement practices and, ideally, provide engagement records. Another key
                    aspect of the SWFs‟ investment approach, which defines how they influence the capital markets,
                    is their time horizon. Most of the SWFs claim that they are long-term investors. However,
                    depending on their mission and size; some funds are better positioned to adopt a long-term
                    investment mandate than others.

              Engagement, proxy voting policies and practices

              o     The engagement practices and proxy voting records are an important area to gain insights into
                    the actual influence of SWFs in their portfolio companies. Many SWFs provide sparse information
                    in this area. However, what little information is available can give a good indication of the SWF‟s
                    active engagement management approach.

              Integration of social, environmental and governance (ESG) issues in the active engagement practices




IRRCi SWF Report www.irrcinstitute.org                                                                           - 16 -
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              o     Attention to ESG issues and engagements in these areas may signify a higher level of maturity in
                    the funds‟ engagement platform. Attention to these areas by the SWFs may qualify them as a
                    force of increased responsibility within the companies in the global capital markets, which
                    should allay some of the concerns about the funds‟ influence in the recipient companies. In
                    addition, such a focus can help the fund achieve superior long-term financial performance
                    through better management of ESG risks of their investment portfolio.

              Disclosure

              o     Ultimately, the funds‟ continuous and comprehensive disclosure of their governance,
                    engagement and proxy voting practices could help other investors, companies and regulators
                    better analyze the risks and opportunities associated with the SWFs‟ investments in the future.

To capture the performance of the SWFs in each of these pillars, detailed qualitative and quantitative data points
were used. The criteria used for the selection of these data points are representativeness, accessibility (at least in
some of the cases) and comparability. For a detailed list and description of the data points, please refer to
Appendix B.


Data Collection

The methods used for data collection consist of:


              Analysis of publicly available information from the SWFs‟ websites

              Analysis of portfolio information using proprietary tools such as Thompson One Banker

              Analysis of news using Factiva and other news databases

              Analysis of the proxy voting records of the external asset managers used by the SWFs where available
              through the SWF itself or stock market regulatory bodies of recipient countries

              A survey sent to SWFs by email (Questionnaire provided in Appendix C)

              Calls to investee companies and analysis of the SWFs‟ engagement approach when disclosed

              A consultation process through-which detailed feedback was requested on the final report from all
              the SWFs


The preliminary data collection began with comprehensive research on each SWF‟s background, governance and
management structure, investment portfolio, and more importantly the SWF‟s proxy voting and engagement
policies and practices. Apart from obtaining information through the SWF‟s own channels, we looked into
disclosure by the investee companies and also the regulatory bodies of the recipient countries. As most SWFs
outsource the management of a significant portion of their assets to external investment management firms, we
attempted to access the proxy voting records of SWFs through the external investment management firms they
use. For the companies in which an SWF has major holdings, our research team tried to access the company‟s
proxy voting reports to find traces of the SWF‟s voting practices. The only Western country with sufficient
regulatory requirements to disclose how each shareholder casts its proxy votes is Italy. As part of our analysis,
proxy voting disclosure of Italian companies in SWF portfolios was studied.




IRRCi SWF Report www.irrcinstitute.org                                                                         - 17 -
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In the process of the data collection, a large number of third-party reports from the media, regulatory and other
sources were used.


A number of telephone interviews were conducted. In addition, in order to obtain additional information on proxy
voting and engagement issues, the research team carried out interviews with foreign companies where SWFs have
significant holdings. In total, the project team spoke to 19 companies including some high-profile investments such
as Blackstone, Credit Suisse and J Sainsbury. Figure 7 provides a list of portfolio companies with whom the
research team spoke; the company responses can be found in Figure 10 in the Comparative Analysis section.




IRRCi SWF Report www.irrcinstitute.org                                                                       - 18 -
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Figure 7 Contact Attempts with SWF Portfolio Companies (including holdings of fully owned
subsidiaries of the SWFs)

 SWF                Portfolio Company                                                % Shareholding
                    Citigroup                                                        4.9%
 ADIA
                    EFG-Hermes                                                       8.65%
                    Blackstone                                                       12.5%
 CIC
                    Morgan Stanley                                                   9.9%
                    Beijing Capital International Airport                            >10%
                    Citigroup                                                        11.1%
 GIC
                    Great Portland Estate                                            4.81%
                    Liberty International                                            4.97%
                    BP                                                               1.75%
                    Daimler                                                          6.9%
 KIA                EIIB                                                             3.68%
                    GEA Group                                                        8.2%
                    Victoria Jungfrau Collection                                     23.8%
                    Barclays                                                         5.82%
                    Credit Suisse                                                    8.9%
 QIA
                    London Stock Exchange                                            15.1%
                    J Sainsbury                                                      27.3%
                    Global Crossing                                                  62.3%
 Temasek            SP AusNet                                                        51.75%
                    Standard Chartered                                               14.14%


In addition, a survey (attached in Appendix C) was conducted to gather information on the proxy voting and
engagement practices of SWFs. The survey consisted of a set of 23 uniform questions plus some additional specific
questions tailored to each SWF, distributed via email over a three-week period in March 2009. The survey targeted
solely the ten largest SWFs globally, which are included in this study. Survey results were followed up by phone
calls where necessary. Apart from the questionnaire, the research team also requested the ten SWFs to provide
any reports or documents that could shed light on the approach of its investment management and engagements
practices. Only Government Pension Fund Global (GPFG) responded to this request. Instead of filling out the
questionnaire, a telephone interview was conducted with the head of Governance at Norges Bank Investment
Management (NBIM), which is responsible for the operational management of the Norwegian Sovereign Wealth
Fund. Figure 8 below summarizes the responses from the funds.


In addition to the survey, we contacted all the ten SWFs to participate in the reviewing of the final report.
Australia Government Future Fund (AGFF), Libyan Investment Authority (LIA), Norwegian Government Pension Fund
Global (GPFG), Temasek Holdings (Temasek) and the Government Investment Corporation (GIC) provided insightful
comments.


Figure 8 Survey and Feedback Response from the SWFs




IRRCi SWF Report www.irrcinstitute.org                                                                     - 19 -
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                                                                                                              Review
                                      Survey                                                                  Process
 SWF*          Contact Method         Participation     States Reason
               Email and phone                                                                                No
 ADIA          call                   No                -
               Email and phone                          AGFF was unable to participate due to time            Yes
 AGFF          call                   No                constraint
                                                                                                              No (Made a
                                                                                                              few general
                                                                                                              comments)
               Email   and phone                        CIC does not participate in such third party
 CIC           call                   No                studies and does not endorse them
               Email   and phone                                                                              Yes
 GIC           call                   No                  -
               Post    and   phone                      KIA said that it is a government body and             No
 KIA           call                   No                therefore does not participate in any surveys
               Email   and phone                                                                              Yes
 LIA           call                   No                LIA is under restructuring
               Email   and phone                                                                              Yes
 GPFG          call                   Yes               Telephone Interview was conducted
               Email   and phone                                                                              No
 QIA           call                   No                   -
               Email   and phone                                                                              Yes
 Temasek       call                   No                   -
* The Russian Reserve Fund and National Wealth Fund were not contacted as the funds currently have no investments in equities,
thus no engagement and proxy voting activities.


Case Studies and Comparative Analysis

Analysis was carried out based on the data points and the aforementioned data collection process. The first level
of analysis was at the individual SWF level. The analysis of the individual SWFs was followed by a comparative
analysis of their policies and practices along the six pillars of analysis.


The following section presents the comparative analysis of the SWF practices. For more details about individual
SWFs, please refer to „Section II‟ of the report named „Case Studies‟, where highlights of the SWF practices are
provided which may be potential sources of risk and opportunity for the investors and recipient companies. In
addition, detailed analysis of the SWF practices in each of the six analysis pillars is provided in that section.


3. COMPARATIVE ANALYSIS
The comparative analysis covers the following areas: engagement and proxy voting policies and practices,
investment strategy and practices, governance, ESG investments, capabilities, and finally compliance with the
Santiago Principles (degree of „Disclosure‟ in one of the six pillars). The aim is to provide an evaluation of the
SWFs through a systematic, comparable and objective approach combined with the related evidential data.
Average SWF practices are listed at the end of each comparative analysis section.




IRRCi SWF Report www.irrcinstitute.org                                                                                  - 20 -
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3.1. Engagement and Proxy Voting

In the ten case studies, we examined each of the SWFs‟ engagement and proxy voting policies and practices.
Despite the fact that most of the SWFs emphasize their economic and financial objectives, there is public,
regulatory and investment community concern about the potential political and strategic motives behind some
SWF investments. By examining their engagement and proxy voting activities, we have attempted to gain an
insight into the actual influence of SWFs in their portfolio companies. Information in this area is generally sparse
with only one of the funds publishing extensive data on how they interact and engage with their investments.
However, by using a number of different sources of proprietary and public information, a picture (or at least a
partial picture) of the influence the SWFs are exercising over their portfolio companies is provided. For the
purpose of the analysis, a number of different factors were considered (see Figure 9).


Figure 9 Comparative Analysis: Engagement and Proxy Voting

                                                                                Proxy
                                                         Other Engagement       Voting       Proxy Voting Records
 SWF          Seeks Board Seat      Vote                 Methods                Guidelines   Disclosure
 ADIA         Not found             Not found            Unknown                No           No
 AGFF         Not found             Yes                  No                     Yes          No
 CIC          Not found             Not found            Unknown                No           No
                                    Yes (at least in
 GIC          Evidence found        some cases)          Unknown                No           No
 KIA          Evidence found        Yes                  Unknown                Limited      No
 LIA          Not found             Yes                  Unknown                No           No
 GPFG         No                    Yes                  Yes                    Yes          Yes
                                                         Yes (at least     in
 QIA          Not found             Yes                  some cases)            No           No
 RSF          Not found             No                   No                     No           No
 Temasek      Evidence found        Yes                  Yes                    Limited      No


Seeking of Board Seats

When analyzing the potential influence of the SWFs on their portfolio companies, one key factor is whether the
funds seek board seats at the companies in which they invest. Seeking board seats suggests a significant level of
active investment behavior, and in such cases the fund is likely to have more influence on how the company is
managed. This influence can be both a source of opportunities and risks for the portfolio companies. On the
opportunities side, it can provide a director who is aligned with a material shareowner, and who could have
material financial and/or commercial expertise. On the negative side (for the co-investors) the board seat might
be used to influence the company with national aims in mind, which could be of an economic or a political nature.


We found few cases in which SWFs held seats at their portfolio companies. Especially following the current focus
on the SWFs‟ practices, the funds appear to stick to their claims that they are relatively passive investors, simply
relying on the standard voting procedures in order to manage their stakes.




IRRCi SWF Report www.irrcinstitute.org                                                                          - 21 -
RiskMetrics Group                                                                               www.riskmetrics.com




The cases where we found funds to be holding board seats fall into two distinct categories. The first is where the
fund holds a very large proportion of the shares in the company, or has a historical controlling stake. The best
example of this is Temasek, where a number of members of the board of directors also hold seats at Singapore-
based portfolio companies. This case is most likely due to the nature of Temasek as a vehicle to take over
management of government assets. At Temasek‟s overseas investments, its wholly-owned subsidiaries tend to seek
board seat in their respective holdings. For instance, Singapore Technologies Telemedia (STT), a wholly-owned
subsidiary of Temasek, owns over 60% of Global Crossing, a US telecommunication solution provider. Eight out of
the 12 board directors were appointed by STT. Temasek states that in such cases it does not have any possibility
for influencing the behavior of the holdings of its subsidiaries, given their management is completely independent
of Temasek.


Of more interest to regulators and fellow investors may be cases in which funds hold seats at companies in which
they have smaller, non-controlling stakes or where they are exerting pressure in the process of new investments to
appoint board members. Research showed that the Kuwait Investment Authority (KIA) has held a seat on the board
of one of its investments, GEA Group, since 2002. Its investment amounts to approximately 8% of the total shares
in the company. Research also highlighted that in 2009, the Government Investment Corporation of Singapore (GIC)
has put forward a motion to acquire a board seat in one of its portfolio companies, the Beijing Capital
International Airport, in which GIC is reported to own just over 10% of the total equity. GIC states that in general
it does not seek board seats in its portfolio companies and that its primary interest is that of „portfolio
management‟.


It should be noted that this activity appears to be the exception rather than the rule and that it is confined to
cases where the SWF owns a large, if minority, part of the equity. However, due to the lack of disclosure on their
board seat-seeking strategy, it is very difficult to assess to what extent SWFs either hold board seats or engage to
appoint or approve board members.


While on the positive side SWFs‟ long-term-oriented active investment management can be a source of discipline
and better governance in the portfolio companies, funds that are active owners would benefit from disclosing
more information on the principles underlying their active investment management.


Status of Proxy Voting

Understanding the funds‟ proxy voting procedures helps to explain their actions on the world stage and ascertain
whether these are any different from other, more traditional investment bodies such as pension funds.


The majority of the funds publish only limited information regarding their proxy voting activities; only GPFG has
total disclosure regarding its proxy voting records. GPFG, through NBIM, operates strict proxy voting guidelines
based on the OECD‟s Principles for Corporate Governance and OECD‟s Guidelines for Multinational Enterprises as
well as the UN Global Compact. NBIM claims that it uses its voting rights to protect and achieve growth in the
financial assets of its funds under management. This open approach to proxy voting procedure is not reflected
across the remaining funds. A number of the funds, including KIA and Temasek indicate that they exercise their
shareholder rights, including voting on resolutions, in order to protect their financial interests.


A lack of information on proxy voting procedures does not necessarily mean that the fund in question does not
vote, as research has shown (see below). However, the majority of the funds do not have coherent strategies or




IRRCi SWF Report www.irrcinstitute.org                                                                        - 22 -
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policies in place, or, if such policies exist, they are not disclosed. This is of particular concern to fellow investors
and recipients of investment, since it means there is no certainty as to how a fund will impact the companies in its
portfolio when it takes over large stakes.


Proxy Voting Records

Proxy voting records can act as an excellent indicator as to how SWFs are actually engaging with their investments.
In addition, analysis of proxy voting records can be used to highlight any discrepancies between the funds‟
statements regarding their policies and strategies and their actions.


With the exception of GPFG, none of the funds publish any proxy voting records. As such, it is difficult to assess
how the funds actually vote at the annual general meetings (AGMs) of their portfolio companies. In addition, in
most countries proxy voting records need not be published, or there is no requirement to publish specific
information regarding which investors have voted on which motions, and how they have voted (so as to protect
confidential voting). However, we have confirmed through contact with investee companies that in most cases the
respective fund attends AGMs and actively votes on resolutions. The table below shows the companies which were
contacted in the course of the research. The result is that, in the majority of cases where the company in question
was willing to comment, the funds held voting shares and fully utilized their rights as shareholders to vote at
company meetings. In addition, in a smaller number of cases, it is clear that the companies have a stronger
relationship with the funds which goes beyond a simple shareholder relationship. For example, in the case of the
Qatar Investment Authority (QIA) with investments in both Barclays and J. Sainsbury, both these companies are
reported to have active engagement with QIA and in the case of Barclays the bank sees this relationship as a
strategic opportunity to further its business in the Middle East region.


In some countries, there are strict requirements for companies to disclose their proxy voting results. In Italy, for
example, companies have to provide information on which investors have voted at meetings and whether they
have voted for or against the motions. Hence, in Italy, research into specific companies can be used to indicate
how funds have voted in Italian-listed companies in which they hold investments. However, portfolio data gathered
for this project has indicated very few investments by SWFs in Italian companies. Nonetheless, there are a number
of interesting examples. For example, records were found showing that two Libyan entities had voted for
management in recent meetings at UniCredit. These two entities are named as the Central Bank of Libya and the
Libyan Foreign Bank. Given the institutional similarities of such organizations and the Libyan Investment Authority,
such findings can be considered indicative but not definitive with regard to the voting behavior of LIA.


During the course of this research, a number of other government-owned funds were found, which, although not
SWFs, could be used as an indicator to speculate on the SWFs‟ investment behavior. Research in Enel and Telecom
Italia proxy voting records highlighted a Kuwaiti fund, named the Kuwait Fund for Economic Development, which,
although separate from KIA, acts in a similar manner, albeit with overall goals to provide financial assistance to
developing countries. It also acts as a government agency thus being an indicator as to how other Kuwaiti
government-run funds operate, particularly given KIA‟s close links to the Kuwaiti state. It should be noted that this
fund appears to vote exclusively in favor of motions proposed by the management of the companies, at least on
the votes for which records were attainable.


The table below shows the result of the calls made to the portfolio companies of the SWFs.




IRRCi SWF Report www.irrcinstitute.org                                                                           - 23 -
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Figure 10 Response from Portfolio Companies of SWFs*

                                       %
 SWF           Portfolio Company                      Company Response
                                       Shareholding
               Citigroup               4.9%           No information at press time
 ADIA
               EFG-Hermes              8.65%          Declined to comment
               Blackstone              12.5%          Reluctant to discuss further beyond public filings
 CIC
               Morgan Stanley          9.9%           No information at press time
                                                      Confirmed GIC is the largest shareholder of BCI‟s H shares
                                                      (21.07%) and one of the largest shareholders of BCI‟s total
               Beijing       Capital                  shares (over 10%) since Nov 2008
               International           >10%
               Airport                                GIC attends AGMs and exercises its voting rights

 GIC
                                                      GIC has requested a board seat in 2009
               Citigroup               11.1%          No information at press time
               Great       Portland
                                       4.81%          Declined to comment
               Estate
               Liberty
                                       4.97%          Declined to comment
               International
                                                      Confirmed shares carry voting rights but declined to
               BP                      1.75%
                                                      comment further
               Daimler                 6.9%           KIA attends AGMs and exercises voting rights
               EIIB                    3.68%          Declined to comment
 KIA
                                                      Confirmed KIA has been on the supervisory board since
               GEA Group               8.2%
                                                      2002
               Victoria   Jungfrau
                                       23.8%          Confirmed shareholding for over ten years
               Collection
                                                      Confirmed shareholding since July 2007


                                                      All shares carry voting rights


                                                      QIA exercises its voting rights


                                                      QIA does not seek a board seat

 QIA           Barclays                5.8%
                                                      Barclays engages with QIA regularly as part of its investor
                                                      relations activities


                                                      Barclays sees QIA as a strategic and long-term investor and
                                                      a supporter


                                                      The partnership helps strengthen Barclays‟ business in
                                                      Qatar




IRRCi SWF Report www.irrcinstitute.org                                                                      - 24 -
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                                          %
 SWF            Portfolio Company                             Company Response
                                          Shareholding
                                                              Confirmed QIA attends AGMs and exercises voting rights;
                                                              QIA has no board seat and is not seeking one; does not
                                                              request items for the agenda


                                                              CS engages with QIA at the corporate level to update QIA
                Credit Suisse             8.9%                on the company‟s performance


                                                              QIA has access to management


                                                              CS also confirmed that QIA is a client to its banking
                                                              business
                                                              Confirmed shareholding since Sep 2007; all shares carry
                                                              voting rights


                                                              QIA has no board seat and is not seeking one; no active
                London           Stock
                                          15.1%               engagement with QIA, and QIA is not seeking special
                Exchange
                                                              treatment


                                                              QIA generally behaves like any other large institutional
                                                              investor
                                                              Confirmed shareholding since April 2007


                                                              QIA exercises voting rights; QIA supports management
                J Sainsbury               27.3%

                                                              QIA does not have or seek special treatment from J
                                                              Sainsbury
                                                              Confirmed shareholding by STT for over five years
                Global     Crossing
                (through Singapore
                                          62.3%               STT exercises voting rights and appointed eight out of 12
                Technologies
                                                              directors – Temasek states that it has no role/influence on
                Telemedia)
                                                              how STT manages its holdings
                SP AusNet (through
 Temasek
                Singapore                                     Temasek states that it has no role/influence on how STT
                                          51.75%
                Technologies                                  manages its holdings
                Telemedia)
                                                              Temasek states that it does not have board seats but
                Standard Chartered        14.14%              maintains the right to „engage the board and
                                                              management‟
* This table includes both the SWFs’ direct holdings and the holdings of the fully owned subsidiaries of the SWFs




IRRCi SWF Report www.irrcinstitute.org                                                                                   - 25 -
RiskMetrics Group                                                                               www.riskmetrics.com




Other Engagement Methods

How SWFs engage with their portfolio companies is an important indicator as to how much influence they seek to
have in the day-to-day management of the companies in which they are invested. Similar to the question of
whether or not SWFs seek board seats, such engagement could be regarded positively or negatively.


There is little information available on how the funds engage with their investments. A number of portfolio
companies, when contacted, confirmed that they maintain a close relationship with their SWF shareholders (please
see Figure 10).


One example of positive and multifaceted engagement effort is the Norwegian Government Pension Fund Global.
Norges Bank Investment Management (NBIM), responsible for the operational management of GPFG, conducts
engagements through different means including meeting with individual companies. In 2008, NBIM engaged with 16
companies on corporate governance and shareholder rights; with 19 companies on child labor, risk management in
the supply chain, and board competence; and with ten companies about their stance on greenhouse gas emissions.
For more details of the engagement practices of each SWF, please refer to Section II, Case Studies.


Average Practices

              In general, the funds do not appear to have any specific strategies to seek board seats. Only three of
              the funds were found to be holding board seats at investee companies. In the majority of these cases
              this can be explained by the funds in question having large holdings in the companies. For example,
              Temasek was found to have board seats at a number of its investments, but this is most likely due to
              the nature of Temasek as a vehicle designed to take over management of large, state-owned
              enterprises.

              The majority of the funds were found to vote at company meetings and exercise full shareholder
              rights.

              In spite of a high level of voting activity, the majority of the funds have poor disclosure regarding
              their proxy voting guidelines and policies with only the Norwegian fund having extensive information
              in this area.

              Very few of the funds publish any proxy voting records with only the Norwegian fund having any
              disclosure in this area. Very little information is available about other engagement practices.
              However, a number of examples of funds engaging directly with investee companies were found.


3.2. Investment Strategies and Practices

Given their size, SWFs‟ investment strategies and practices affect portfolio companies and markets. In this section,
we compare the factors such as funding sources, financial obligations, investment horizons, and return targets
among the ten SWFs. This analysis is summarized in Figure 10.




IRRCi SWF Report www.irrcinstitute.org                                                                        - 26 -
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Sources of Funding and Financial Obligations

As discussed in a previous chapter, SWFs are usually set up to invest the excess revenues from commodity and non-
commodity revenues. More precisely, SWFs are funded either by fiscal transfer from government accounts, or by
issuance of special bonds. In cases where the capital is provided to the SWF in the form of debt, the fund faces
interest payment obligations. Among the ten largest SWFs, only the initial USD 200 billion capital for China
Investment Corporation (CIC) was funded by issuance of special bonds, in this case, by the Chinese Ministry of
Finance. The nine other SWFs are funded by fiscal transfer. Hence, CIC needs to make regular interest payments to
its bond holders. We believe financial considerations such as interest payments and return requirements may
influence an SWF towards a market orientation.


Investment Objectives

From an investment mission perspective, a SWF can belong to one of the three categories below:


              Purely return driven


Such funds mention that their investments are made with the sole objective of achieving financial returns. An
example of such funds is the Abu Dhabi Investment Authority (ADIA).


              Returns plus national economic objectives


None of the funds has disclosed a set of national economic objectives as part of its mandate. It should be pointed
out that in the case of Singapore‟s Temasek, the fund targets long-term risk-adjusted return objectives based on
four investment screens two of which are macroeconomic. The fund states that macroeconomic screens such as
„growing the middle class‟ and „transforming economies‟ are applied to the companies/countries, because the
fund believes investing in such economies yields higher long-term risk-adjusted returns. After acquisition of stakes
the macroeconomic objectives have no role in the way the fund manages its portfolio. Consequently, Temasek
qualifies as a purely economically driven investor.


              Returns plus national political objectives


None of the funds under analysis mentions explicit political or national economic objectives or has demonstrated
behavior amounting to material politically motivated investments.


Investment Horizon

As long-term investors, SWFs can be a stable capital source for investee companies and markets. If, however, they
invest with a short-term time horizon they can be a source of instability. In smaller capital markets, such investors
can even endanger the overall market performance. The ten SWFs all state that they are long-term investors.
Kuwait Investment Authority (KIA) has existed since 1953. Six of the funds have been operational for at least 15
years, whereas CIC, the Russian Reserve Fund (RRF), the Russian Social Welfare Fund (RSWF), and the Australian
Government Future Fund (AGFF) are more recent SWFs established after 2000.




IRRCi SWF Report www.irrcinstitute.org                                                                         - 27 -
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Funds such as RSF have more potential for shorter investment time horizons given their small size relative to the
economy and their mission, which is economic stabilization. This case manifested itself in the recent decision by
the Russian government to divert the resources of its SWF to internal investments to address the liquidity issues
the local market was facing.


Funds with more barriers to government withdrawal and larger size relative to the GDP have more potential for
being stable long-term investors.




IRRCi SWF Report www.irrcinstitute.org                                                                     - 28 -
       RiskMetrics Group                                                                                                  www.riskmetrics.com




       Figure 11 Comparative Analysis: Investment Strategies and Practices




                                                                                                                                                                                                          (%
                                                                                                                                                   Sector Focus




                                                                                                                                                                                    Withdrawal
                           Obligations




                                                          Investment
                                             Objectives




                                                                                                                          Geography




                                                                                                                                                                                                          Outsource
                           Financial




                                                                                      Holdings




                                                                                                                                                                                                          of AUM)
                                                                       Horizon




                                                                                                                                                                  Return
             Source




                                                                                                                                                                           Target
                                                                                                                                      Focus




                                                                                                                                                                                                 Rules
                                                                                                      Asset


                                                                                                              Class
SWF




                                                                                 Portfolio
          Fiscal                         Purely           Long                                     Equity, FI, RE,
ADIA




                      No                                                         Investments &                            No                  No                  Unknown           Unknown              Yes
          transfer                       economic         term                                     PE*
                                                                                 large holdings
          Fiscal
                      No (pension
          transfer                                                                                 Equity, FI, RE,                                                                  No
                      outflows           Purely           Long                   Portfolio                                                                                                               Yes
          / asset                                                                                  PE, Alternatives       No                  No                  CPI+ 4.5%         withdrawal
                      will    start      economic         term                   investments                                                                                                             (100%)
          transfers                                                                                & Cash                                                                           until 2020
AGFF




                      after 2020)
          (Telstra)
                                                                                                                                              No,       but
          Special                                                                Portfolio                                                    excludes
                                         Purely           Long                                     Equity, FI,        &
          bonds       Interest                                                   Investments &                            No                  Airlines,           >5%               Unknown              Yes
                                         economic         term                                     Alternatives
          issued                                                                 large holdings                                               Telecom, &
CIC




                                                                                                                                              Defense
                                                                                 Portfolio         Equity,       FI,
          Fiscal                         Purely           Long                                                                                                                                           Yes
                      No                                                         Investments &     Alternatives,          No                  No                  Unknown           Unknown
          Transfer                       economic         term                                                                                                                                           (33%)
GIC




                                                                                 large holdings    Cash & others
                                                                                 Portfolio         Any marketable                                                 Exceeds
          Fiscal                         Purely           Long
                      No                                                         Investments       securities,    &       No                  No                  stated            Unknown              Yes
          transfer                       economic         term
KIA




                                                                                 &large holdings   Alternatives                                                   index
                                                                                                   Equity,
          Fiscal                         Purely           Long                   4 wholly owned
                      No                                                                           Alternatives, &        No                  No                  Unknown           Unknown              Yes
          transfer                       economic         term                   subsidiaries
LIA




                                                                                                   FI




       IRRCi SWF Report www.irrcinstitute.org                                                                                                 - 29 -
           RiskMetrics Group                                                                                               www.riskmetrics.com




                                                                                                                                                                                                           (%
                                                                                                                                                    Sector Focus




                                                                                                                                                                                     Withdrawal
                               Obligations




                                                               Investment
                                                  Objectives




                                                                                                                           Geography




                                                                                                                                                                                                           Outsource
                               Financial




                                                                                             Holdings




                                                                                                                                                                                                           of AUM)
                                                                            Horizon




                                                                                                                                                                   Return
                 Source




                                                                                                                                                                            Target
                                                                                                                                       Focus




                                                                                                                                                                                                  Rules
                                                                                                           Asset


                                                                                                                   Class
SWF




                                                                                                                                                                                     To cover
                                                                                                                                                                   Exceeds
              Fiscal                         Purely            Long                   Portfolio                                                                                      non-oil              Yes
                          No                                                                            Equity & FI        No                  No                  stated
GPFG




              transfer                       economic          term                   Investments                                                                                    budget               (13%)
                                                                                                                                                                   index
                                                                                                                                                                                     deficit
                                                                                      Portfolio         Equity, FI, PE
              Fiscal                         Purely            Long
                          No                                                          Investments &     and      direct    No                  No                  Unknown           Unknown              Yes
              transfer                       economic          term
QIA




                                                                                      large holdings    investment
RRF & WF




              Fiscal                                           Long                                     Bonds & Foreign                        Not
                          No                 Purely return                            None                                 No                                      Unknown           Unknown              No
              transfer                                         term                                     exchange                               Applicable


                                                                                                                           No,     but
                                                                                                                           large               No,      but
                          Dividend
              Fiscal                         Risk adjusted                                                                 holdings in         heavy
                          (depending                           Long                                     Equity, PE &
              Transfer                       long     term                            Large holdings                       Singapore           investment          Unknown           Unknown              Unknown
                          on     board                         term                                     Venture capital
Temasek




              / debt                         returns                                                                       and other           in Telecom
                          decision)
                                                                                                                           Asian               & Financials
                                                                                                                           assets
           *FI: Fix Income; RE: Real Estate; PE: Private Equity




           IRRCi SWF Report www.irrcinstitute.org                                                                                              - 30 -
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Holdings

Percentage of outstanding shares held in the target companies is a key determinant of the level of influence an
investor has on a company. SWFs that define themselves as strategic investors and/or purchase large stakes in the
target companies are more likely to have greater power to influence company practices than „portfolio investors‟,
which hold minority stakes. As can be seen in Figure 10, QIA and Temasek tend to hold large stakes, whereas AGFF
and GPFG tend to take minority stakes in target companies. Some SWFs such as CIC appear to have a mix of large
and minority holdings in their portfolios. Other funds such as GPFG have set a maximum threshold of ownership in
the target companies. The threshold for GPFG was originally 5%; it was increased to 10% in 2008.


Return Targets

Explicit return targets can indicate a fund‟s economic focus, but unrealistic return targets might result in risky
investment behavior, including rapid trading. In our research, only AGFF and CIC have explicitly stated their
annual return requirement, both at around 5%, which is considered to be moderate and stabilizing. KIA„s return
target is implicit, aiming to exceed its composite benchmarks on a three-year rolling average; others such as ADIA
and GPFG do not disclose explicit financial targets.


Limits of Government Withdrawal

As the assets of all SWFs are ultimately owned by the governments, those governments can withdraw them in
times of need. As we have seen repeatedly, sudden withdrawals of liquidity from a market can cause turmoil.
Given the size of the SWFs‟ assets, unconstrained withdrawal of a fund‟s capital by government for short-term
capital needs could be an issue for the portfolio companies and the affected markets. Therefore, for stability
reasons, we consider SWFs that have clear rules and/or parliamentary ratification requirements for government
withdrawals to be more stable players in the marketplace. Only three funds, AGFF, GPFG and LIA have made
statements on this matter. AGFF states there will be no withdrawal until 2020, and as far as GPFG is concerned,
government withdrawal requires a parliamentary vote. No such constraints are observed in other SWFs. It should
be pointed out that funds that are incorporated and have independent boards are institutionally protected against
direct government involvement in their investment and divestiture decisions; however, in such cases, being the
sole investor, the government can still decide to withdraw its capital by divesting from the sovereign wealth fund
as a whole.


Portfolio

We studied the individual portfolio of each SWF where available to explore the risk appetite and frequency of
investment strategy overhauls. Overall, with some exceptions, low portfolio visibility was a barrier to effective
analysis and comparison of the SWFs‟ portfolios. That said, many mature SWFs (such as GIC, KIA, Temasek and
ADIA) invest in a diversified range of securities including publicly listed equity, fixed income, private equity, real
estate and other alternatives. Some funds, such as GPFG, maintain highly diversified public equity portfolios.


Aside from asset class, sector and geographic focus was taken into account. For example, CIC states that it will not
invest in sensitive industries such as airlines, telecom, and defense. In addition, for ethical reasons, some funds
like CIC exclude controversial sectors e.g. tobacco and weapons. In the case of Temasek, a significant part of the




IRRCi SWF Report www.irrcinstitute.org                                                                         - 31 -
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portfolio is invested in the Asia-Pacific region, and it has a strong emphasis on telecommunications and financial
stocks. Temasek owns formerly state-owned Singtel, which comprises a large part of its equity portfolio.


Outsourcing

In our opinion, outsourcing of some or all of a SWF‟s investment management can ease concerns about a fund‟s
motives and type of engagement influence in portfolio companies, particularly where disclosure is lacking.
However, the absence of an effective outsourcing management platform can result in ad hoc investment
management behavior. All ten SWFs outsource all or part of their asset management to external fund managers
across asset classes. With the exception of funds such as ADIA and QIA, in most cases, the SWFs disclose the
selection criteria. Only AGFF and GPFG disclose the full lists of external money managers on their public domains.


The percentage of outsourcing varies, though only three SWFs disclose the proportion of the assets managed
internally or outsourced. AGFF relies solely on external managers; approximately 13% of GPFG‟s assets under
management are outsourced to money managers; GIC has contracted external fund managers for around one third
of its assets. Interestingly, GPFG, which could be considered the SWF with the most developed engagement
policies, particularly on ESG issues, stated that it reserves all its engagement and governance activities for in-
house staff, despite outsourcing some asset management activities.


Average Practices

              All ten SWFs state clear investment objectives. Even though the wordings are different, it is fair to
              say that they all aim to maximize risk-adjusted returns of the excess revenues generated by
              commodity or non-commodity sources. However, there are some slight variations that distinguish
              their risk appetite. AGFF and GPFG put more emphasis on benefiting future generations, and thus
              appear to have a more long-term focus. The Russian fund is a stabilization fund meaning that it needs
              to stay liquid and thus has a potentially shorter time horizon.

              Holding styles are mixed depending on fund mission, structure and maturity

              Depending on mission and the level of maturity, we found that it is common for SWFs to invest in a
              diverse range of asset classes. As the funds mature, many of the larger funds are moving from public
              equity and fixed income holdings to alternative asset classes

              A minority of SWFs disclose their return targets

              Procedural controls on government withdrawal are unspecified in most cases

              Most of the SWFs use external fund managers to manage part of their assets. Most of them disclose
              outsourcing criteria, but it is uncommon for SWFs to identify their fund managers.


3.3. Governance

The governance practices of SWFs, particularly the closeness of the fund to government on a day-to-day basis, are
of great importance to fellow investors, recipients of investment, governments and regulatory bodies. The
presence of very close ties with government, either structurally or through influence of board members and




IRRCi SWF Report www.irrcinstitute.org                                                                       - 32 -
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especially the senior management, could lead to the investment strategy being skewed from financially focused
investments towards more strategic or political goals. In addition, international board members and senior
managers can provide the fund with a more global perspective and can also help improve the fund‟s
communications with the international community.


The reporting procedure and the target of the reporting is also an important factor in assessing the overall quality
of management of the fund and shows to what extent the fund is accountable to its shareholders. In addition,
audit procedures were assessed (please refer to Figure 12 for a summary).


Type of Legal Entity

The type of legal structure under which a SWF operates may affect its disclosure, control and governance.
Independent, incorporated legal entities likely retain more autonomy from government sources, maintain
independence in their investment strategies, and are more likely to invest primarily for financial returns. In
contrast, a fund which is either part of a government ministry or has close legal ties to government may be more
likely to take other factors into account beyond pure financial returns. For example, a fund with very close ties to
the government may be more likely to face pressure to invest in sectors which hold a strategic or political interest
for the country. In addition, being an incorporated, independent legal entity means that the SWF will be subject to
the same governance and disclosure requirements as any local private company. CIC, GIC, and Temasek are
incorporated legal entities.




IRRCi SWF Report www.irrcinstitute.org                                                                        - 33 -
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      Figure 12 Comparative Analysis: Governance


                                         Role           of
                  Type of        Legal                         Role of Government in
SWF                                      Government in the                                 Reporting Procedure                        Audit Procedure
                  Entity                                       Senior Management
                                         SWF Board
                                                               Limited  information  -
ADIA              Government             Strong government                                 No information beyond subject to           Internal  Audit      and   Audit
                                                               strong       government
                  agency                 presence                                          supervision by the Abu Dhabi government    Committee
                                                               presence
                  Comprised of two
                  bodies;        an                                                                                                   Internal Audit committee and
AGFF                                     Totally                                           Annual report and quarterly portfolio
                  incorporated body                            Independent                                                            external    Australian National
                                         independent board                                 updates available online
                  and a prescribed                                                                                                    Audit Office
                  agency
                                                               Members of the executive
                                         Five     government   committee do not have
CIC                                                                                        Accountable to the State Council and       Internal Audit Department and
                  Incorporated           officials on the      current        government
                                                                                           publishes annual report                    National Audit Office
                                         board                 positions, but come from
                                                               governmental background
                                         Mix of government                                 Publishes publicly available annual
GIC               Incorporated           and    independent    Independent                 reports as well as quarterly update        Auditor-General of Singapore
                                         members                                           reports to the Ministry of Finance
                                                                                           KIA reports directly to the Kuwaiti
                                         Mix of government     Mixed     of   government
KIA               Government                                                               Council of Ministers on an annual basis.
                                         and    independent    officials and independent                                              State Audit Bureau
                  agency                                                                   This report is not available to any
                                         members               members
                                                                                           outside party
                                         Four         senior
                                         government
                                         officials on the                                                                             The      People‟s     Supervision
LIA               Government                                                               LIA reports to the People‟s Congress on
                                         Board of Trustees;    Independent                                                            Authority and external audited
                  agency                                                                   an annual basis
                                         2/7 Directors hold                                                                           by an international audit firm
                                         current government
                                         positions
                                                                                                                                      Deloitte AS as well as internal
                                                                                                                                      audits conducted by the central
                  Integrated  into                             Independent – Norges Bank   Quarterly and annual reports to the
GPFG                                     Government-                                                                                  bank. Both parties submit audit
                  the Ministry of                              operates    as   Norway‟s   Ministry of Finance which are made
                                         appointed members                                                                            reports to the supervisory board,
                  Finance                                      central bank                public through the fund's website
                                                                                                                                      then final audit by the Office of
                                                                                                                                      the Auditor General




      IRRCi SWF Report www.irrcinstitute.org                                                                      - 34 -
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                                                        Limited information - mix
QIA           Government         Strong government                                  No information    regarding    reporting
                                                        of government officials                                                The State Audit Bureau
              agency             presence                                           procedure
                                                        and ruling family
RRF&          Integrated  into                                                      Reports to the government on a
                                 All are Ministry of                                                                           Accounts Chamber of the Russian
              the Ministry of                           Ministry of Finance         quarterly basis and publishes monthly
NWF                              Finance officials                                                                             Federation
              Finance                                                               fund updates to the public
                                                                                    Publishes annual report including a        Financial     statements      are
Temasek                          Independent      and
              Incorporated                              Independent                 financial summary as well as highlights    externally    audited    by    an
                                 highly diversified
                                                                                    from the year‟s activity                   international audit firm




  IRRCi SWF Report www.irrcinstitute.org                                                                  - 35 -
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As might be expected from funds owned by the government, the majority of the SWFs have very close
legal ties to governments. Four of the ten funds included in our analysis are government agencies,
meaning they are wholly embedded in the government. Three of the funds are operated as separate
incorporated bodies. These include CIC, GIC, and Temasek. In these cases they operate as independent
bodies with a higher level of autonomy from government management. AGFF comprises two bodies one of
which is incorporated, the other is a prescribed government agency.


The way in which funds are returned to the government varies slightly from fund to fund with Temasek
paying a dividend to its sole shareholder, the government of Singapore. In contrast, CIC operates with a
debt provided from the government and as such has to pay interest payments, which in turn governs its
return requirements.


The only funds that could be considered to be an arm of a national government are the two Russian funds,
which are both integrated into the Ministry of Finance of the Russian Federation. While the GPFG is also
part of the Ministry of Finance, the statutory independence of Norges Bank as the central bank
differentiates the Norwegian situation from that of the Russian SWFs.


Role of the Government in the SWF Board

The role of government within the board structure of the funds is another important indicator as to the
independence level of the funds. As the owner, the government will usually have board presentation. If a
large number of board members simultaneously hold government positions, it is possible that short-term
political priorities will play a part in the overall investment strategy. The presence of independent
directors could also allow the funds to take advantage of the wider range of experience held by the
members, which could lead to improvements in its investment strategies as well as bringing the fund
closer to the practices of other, non-SWF investors.


The majority of the funds have boards of directors in which some members also hold government
positions, which is to be expected given the funds are owned by the government. The only funds with
entirely independent boards are AGFF and Temasek, although in the latter case one of the directors has
previously held government positions. It should also be pointed out that Temasek has one of the most
diversified and international boards and senior management teams among the SWFs. The remaining funds
vary, from funds such as ADIA, where the board is made up almost exclusively of members of the
government, to funds such as the KIA and Singapore‟s GIC, where a proportion of the board members are
independent, with no current links to government. In the case of the Russian funds, there are no boards
of directors, as the management structure is simply that of the Ministry of Finance and therefore entirely
made up of government officials.


Role of Government in Operational Management

The role of government within the senior management at a fund has as many implications for overall
governance and management as the role of government on a board of directors. While presence of
government officials on the board of SWFs is to be expected (considering that the funds are owned by the
government), maintaining an independent senior management can help the fund maintain independence
in its day-to-day operations.




IRRCi SWF Report www.irrcinstitute.org                                                                       - 36 -
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The level of disclosure in this area is generally poor, with only a handful of the funds reporting their
senior management structures. However, those do appear to have a reasonably independent structure
with the majority of senior management positions being held by individuals with private sector
backgrounds. There are two key exceptions to this rule. The first of these is the Russian funds, where
operational management is carried out by the Ministry of Finance. Secondly, if the fund has close ties to
the central bank (such as the Norwegian GPFG, which is managed by Norges Bank Investment
Management, the investment arm of the central bank of Norway), independence of the operational
management of the central bank is key to the operational independence of the SWF. In the case of GPFG,
this independence is maintained at the Norges Bank.


Reporting

The majority of the funds have some level of public reporting on their strategies. Conversely, reporting on
operations and performance is limited to a few SWFs such as the Norwegian and Australian SWFs. The
funds with the lowest level of periodic public reporting tend to be the funds based in the Middle East.
However, these funds do tend to have websites with relatively extensive information on a number of key
issues such as their mission, strategies, and governance structures. None of these funds publishes
extensive information on the total assets under management or on the portfolio as a whole. The fund with
the most open disclosure, GPFG, publishes information on its portfolio as well as extensive information on
its interactions and engagements with its investments (see the Engagement and Proxy Voting Comparative
Analysis section).


Internal reporting tends to be fairly similar for all of the funds, with reports being submitted to some
governmental body on an annual, or in some case a quarterly basis. Based on the available information,
three of the SWFs including AGFF, GIC, and GPFG, report to their owners at least on a quarterly basis. LIA
reports to its owner annually. The Russian Reserve Fund and National Wealth Fund have monthly updates
on their accounts by the Ministry of Finance.


Audit Procedure

Auditing procedures are of great importance in any form of organization and verifies the reliability of any
published information. It also indicates a measure of transparency and adherence to accepted auditing
standards.

In general, all the funds have some form of audit procedure in place. However, the amount of information
published on this front is limited, with some not providing any information. In general, the funds with
close legal ties to government, such as those that run as government agencies, tend to rely on internal
audit procedures through national audit offices or similar bodies. Although this approach is satisfactory, it
does take away the element of independence from the verification of the fund‟s activities. A smaller
number of the funds, such as Temasek and GPFG, have stronger audit procedures in place and provide
information by external auditors who generally supplement the auditing carried out by government
bodies.


Average Practices




IRRCi SWF Report www.irrcinstitute.org                                                                          - 37 -
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              Structurally, the funds are set up as follows: incorporated as a separate legal entity,
              established as a government agency, internalized in the ministry of finance, or managed by
              the central bank.

              It is common to have government-appointed board members on SWF boards.

              In the majority of the SWFs, government officials hold some positions on the SWFs‟
              executive management team.

              Reporting procedures vary among SWFs depending on the legal and governance framework.
              Most of the SWFs do not carry out periodic public reporting, though the majority does report
              periodically to their governments. However, most SWFs publicize their general policies, at
              the very least.


3.4. Environmental, Social and Governance (ESG) Investments
and Engagement

One of the defining factors in the influence of SWFs in the capital markets is their stance on ESG issues
and whether they engage with companies to improve their behavior in these areas. Advocates assert that
SWFs should consider ESG factors in their investments, as they tend to be large, long-term and diversified
investors. Academic theoreticians have suggested they should follow the universal ownership theory,
which suggests that large, diversified owners have a special interest in decreasing the portfolio
companies‟ externalities because such externalities could be transferred as costs to the other companies
in their portfolio. This rationale for ESG engagement has been articulated by funds such as GPFG. Finally,
there is a case to be made that SWFs whose funding source is tied to natural resources have an
opportunity to diversify their portfolios away from those funding sources through investments in
alternative energy companies, thereby reducing their sponsor countries‟ risk due to a revenue stream
linked to oil or gas production.


In Figure 13, below, an overview of the SWFs‟ performance on the difference aspects of ESG portfolio risk
management is provided. ESG is analyzed along the following vectors:


              Approach to exclusions and negative screening

              Approach to ESG engagement

              Approach to environmental investments

              Commitment to international ESG investment codes




IRRCi SWF Report www.irrcinstitute.org                                                                       - 38 -
      RiskMetrics Group                                                                                      www.riskmetrics.com




      Figure 13 Comparative Analysis: ESG Investments

                                                                                      Environment
               Negative Screening /       Sustainability          ESG                                          External
SWF                                                                                   Related
               Divestment (3)             Funds                   Engagement                                   Codes
                                                                                      Investments (5)
ADIA           No                         No                      No                  No                       No
AGFF           No                         No                      No                  No                       No


               Yes   (Tobacco   and                                                   Not found (only
CIC            Gaming; Annual Report      No                      No                  strategic                No
               2008)                                                                  commitment)


GIC            No                         No                      No                  Not found                No
               Yes (gambling, alcohol
KIA            and              adult     No                      No                  Not found                No
               entertainment)
LIA            No                         No                      No                  No                       No
                                          Recently
                                          announced plans to
               Yes (cluster bombs,
                                          invest USD 3 billion
               child labor, significant
                                          in the area of
               ESG breaches, other                                Yes (child labor,
                                          Responsible
               divestments                                        global warming
                                          Investments – Had
GPFG           considered on a case-                              stance       and    No                       UNPRI
                                          a USD 305 m
               by-case basis) and                                 governance
                                          positively screened
               excludes 26 companies                              improvements)
                                          environmental fund
               from its investment
                                          which was merged
               universe
                                          with its portfolio in
                                          2004
                                                                                      USD       150     m
                                                                                      investment in a
                                                                                      carbon reductions
QIA            No                         No                      No                                           No
                                                                                      fund,     but     no
                                                                                      strategic     intent
                                                                                      disclosed
               Yes (defense sector -
RRF&
               vaguely    defined    -    No                      No                  No                       No
NWF
               gambling)
               Yes (The fund states
                                                                                      Invests    in     a
               that screens for issues
                                                                                      European      clean
Temasek        such as child labor are    No                      No                                           No
                                                                                      tech           fund
               a natural part of its
                                                                                      (unknown size)
               investment process)

      Approach to Exclusions and Negative Screening

      Given that SWFs are owned by their respective governments it is not surprising that the portfolios of the
      funds of some SWFs are screened, based on the normative positions of the governments of those
      countries. In such SWFs, investments in certain sectors and companies are forbidden. While the basis for
      exclusions for certain SWFs such as GPFG are human rights or environmental norms and standards, in
      other countries such as Kuwait, the exclusions are mostly based on religious values and include sectors
      such as alcoholic beverages and gambling.




      IRRCi SWF Report www.irrcinstitute.org                                                                              - 39 -
RiskMetrics Group                                                                                www.riskmetrics.com




Approach to ESG Engagement

The only SWF with explicit environmental and social engagement policies is GPFG. The NBIM (on behalf of
GPFG) specifically engages in prevention of child labor and issues related to the global warming stance of
the companies in its portfolio. This covers less areas than codes such as the UN Global Compact and other
corporate responsibility codes, though it is more robust than the vast majority of institutional investors.
During 2008, the fund engaged with a total of 45 companies on ESG issues. GPFG generally supports
shareholder proposals on ESG issues if such issues are believed to influence “the long-term value and
sustainability of the fund.” It should be pointed out that in the GPFG‟s proxy voting records for 2008 there
were 52 cases where the fund had voted against seemingly positive environmental and social initiatives
and/or more disclosure in this area. In our interview with the fund, it was stated that, in such cases, the
initiatives had been deemed insufficiently detailed, unfeasible or too costly.


With regard to engagement on governance issues, KIA and Temasek have both committed to improving the
governance of the companies in their portfolio. Temasek has detailed governance guidelines as the basis
for engagement with its portfolio companies; however, no engagement records were found in our study.
The most committed SWF in this area appears to be GPFG, which states that it engages with the
companies in its portfolio on transparency and governance improvements. For example, in 2009, the fund
systematically voted against all cases of appointments of the same person for the CEO and chairman
positions at its portfolio companies.


Approach to Environmental and Social Investments

With the exception of the GPFG, none of the SWFs so far has committed to a strategic set of social and
environmental investments, though there are a few isolated “green shoots.” The Norwegian finance
minister has expressed strategic interest in environmental investments 2 , and in April 2009, the fund
announced plans to commit USD 3 billion to responsible investments. In other cases such as QIA, the fund
has invested sporadically in environmental initiatives e.g. its USD 150 million contributions to the joint
carbon reduction fund3, but it has not expressed a strategic interest in this area. Overall, especially for
the petroleum-based SWFs, a diversification of their capital away from oil and into renewable energy
seems to be a route worth considering. However, none of the SWFs have shown a combination of strategic
intent and systematic action in this area.


Commitment to international ESG investment codes

Among the ten largest SWFs, GPFG is the only one that has signed on to codes such as the United Nations
Principles of Responsible Investments (UN PRI). Given the SWFs‟ stated long-term investment outlook,
joining such institutional investment communities focused on long-term investing issues would seem
logical. It might also improve the global image of SWFs.


Average Practices

              The majority of the SWFs do not have an ESG strategy

              With few exceptions, the majority of the SWFs do not engage with the companies in their
              portfolios to improve their ESG performance



IRRCi SWF Report www.irrcinstitute.org                                                                         - 40 -
RiskMetrics Group                                                                              www.riskmetrics.com




              The majority of the SWFs have no strategic approach to environmental investments

              The majority of the SWFs do not benefit from the communication, knowledge transfer and
              image improvements that could result from signing on to international, responsible
              investment codes


3.5. Capabilities

Even if a SWF sets appropriate investment objectives and policies, its behavior might be inconsistent with
its principles in the absence of sufficient management and investment capabilities. In our study we
attempt to evaluate the size of the SWF‟s team, the diversity of its workforce, and also the level of
capability building from tapping external advisory and outsourcing resources.




IRRCi SWF Report www.irrcinstitute.org                                                                       - 41 -
      RiskMetrics Group                                                                                   www.riskmetrics.com




      Figure 14 Comparative Analysis: Capabilities


                   International     Size      of    Asset      Workforce/Asset       Workforce            External
SWF
                   Offices           Workforce       Size       Size                  Diversity            Advisory
                                                                                      Forty
ADIA               None              1000            875        1.14                                       Yes
                                                                                      nationalities
                                                                                      Employs foreign
AGFF               None              39              45.8       0.85                                       Yes
                                                                                      nationals
                                                                                      Employs        18
CIC                None              194             213.6      0.91                  foreign              Yes
                                                                                      nationals
                                                                                      Roughly 55% of
                                                                                      investment
GIC                7                 1000            330        3.03                  professionals        Yes
                                                                                      are         non-
                                                                                      Singaporeans
KIA                1                 100             264        0.38                  Unknown              Yes
                                                                                      Around 4% are
LIA                None              74              64.2       1.15                                       Yes
                                                                                      non-Libyans
                                                                                      Roughly       13%
GPFG               3                 217             322        0.67                  are         non-     Yes
                                                                                      Norwegians
QIA                None              110             60         1.83                  Unknown              Unknown
RRF& NWF           None              Unknown         127        Unknown               Unknown              Unknown
                                                                                      Approx. 34% are
Temasek            8                 350             134        2.61                  non-                 Unknown
                                                                                      Singaporeans


      International Presence

      We believe that a physical international presence can be an indication of integration into the
      international financial community. In addition, an international presence can improve communications
      with regulators, the media, and the financial community. Among the ten largest SWFs, four have offices
      in locations other than their country of origin. GIC and Temasek both have some focus on the Asian
      markets and therefore operate in many of its neighboring cities such as Shanghai, Beijing, and Ho Chi
      Minh City. KIA is the only Middle East SWF that operates abroad.


      Workforce Diversity

      Workforce diversity with regards to nationality can affect a fund‟s‟ investment mindset and can help it
      better perform as an international investor. In addition, if a SWF only employs its own nationals, it signals
      local embeddedness, and in some cases it might reinforce the perceived secretiveness of the fund‟s
      investment operations. In addition, lack of diversity restricts a SWF‟s access to the international talent
      pool, which can have a significant impact on its investment management behavior.




      IRRCi SWF Report www.irrcinstitute.org                                                                           - 42 -
RiskMetrics Group                                                                                 www.riskmetrics.com




Of the funds ADIA, AGFF, CIC GIC, GPFG, LIA and Temasek disclose the employment of an international
workforce. More than half of GIC‟s workforce comprises non-local employees, compared to 34% in
Temasek. Around 13% of GPFG‟s staff are non-Norwegians.


Average Practices

              Four of the ten SWFs have international offices

              The size of the workforce varies according to the SWF‟s asset size and outsourcing practices.
              Generally, the smaller the workforce/asset size ratio is, the more likely it is that the SWF
              outsources (part of) its asset management

              Most SWFs tend not to disclose the nationalities of their workforce. Four of ten SWFs boast
              international expertise on staff, though in all cases but GIC the majority of the employees
              are local


4. COMPLIANCE WITH SANTIAGO PRINCIPLES
In May 2008, the International Monetary Fund (IMF) took a central role in the establishment of the
International Working Group (IWG) of SWFs. The goal of the IWG was to develop a voluntary code of
conduct guiding SWFs. Facilitated by IMF, the IWG is comprised of representatives from 25 SWFs. In
October 2008, the IWG launched the Santiago Principles, a set of 24 voluntary principles and practices for
SWFs.


Under the guidelines, SWFs are required to disclose their source of funds and purpose to the public. Other
required public disclosures include the SWFs‟ legal structure, governance framework, description of
investment policy and general approach to risk management and ownership rights. Independent and
objective assessment was conducted to check each SWF‟s compliance with the principles. The guidelines
seem to be attempting to address at least the following two issues:


              The concerns of the international regulatory and investment community about the motives
              behind the SWF investments

              The macroeconomic risks of the SWFs‟ operations for their home base country, especially
              lack of co-ordination with fiscal and monetary policies


It should be pointed out that the principles as well as their respective sub principles have been used as
the basis for this analysis. It should also be pointed out that this rating is based on an interpretation of
the code which is further delineated in Appendix G; of course different interpretations can result in
alterations in the result of the analysis. Different funds are at different levels of maturity; consequently,
funds that have been launched recently do not have the same level of disclosure compared to more
established funds. It should also be pointed out that given the Santiago Principles were published in
October 2008 the funds might not have had enough time to achieve their targeted level of compliance at
the time of this analysis which is about one year after the launch of the principles. Follow-up compliance
studies will be needed in the future to assure that the findings of this report are consistent with the long-
term compliance targets of the SWFs.



IRRCi SWF Report www.irrcinstitute.org                                                                          - 43 -
RiskMetrics Group                                                                                     www.riskmetrics.com




In the following section, an analysis of the level of compliance of the SWFs with the Santiago Principles is
provided. Ratings of „No Compliance‟, „Partial Compliance‟, and „Full Compliance‟ are used for each of
the funds against each principle the details of which can be found in Appendix H. As mentioned,
description of the rating rationale is provided in Appendix G.


4.1. Compliance Analysis

Figure 15 Compliance Analysis: Legal Framework, Objectives, and Coordination with
Macroeconomic Policies

                                       GAPP2-          Policy    GAPP4-    Funding  and        GAPP5- Reporting to
 SWF          GAPP1- Legal Entity      Purpose                   Withdrawal                    whom
                                                                 Withdrawal process not        Government     of    the
 ADIA         Government Agency        Intergeneration           disclosed                     Emirate of Abu Dhabi
              Mix of Incorporated      Contingent
              and      prescribed      Commonwealth
 AGFF         agency                   Pension Reserve           Disclosed                     Australian Government
                                       Reserve Investment        Withdrawal process not
 CIC          Incorporated             Corporations              clearly disclosed             State Council
                                       Reserve Investment
 GIC          Incorporated             Corporations              Not clearly disclosed         Ministry of Finance
                                                                 Withdrawal process not
 KIA          Government Agency        Intergeneration           clearly disclosed             State of Kuwait
                                                                 Disclosed – withdrawal
                                                                 rules      not     publicly
 LIA          Government Agency        Intergeneration           disclosed                     The People‟s Congress
              Integrated       into                                                            Storting (The Norwegian
 GPFG         Ministry of Finance      Intergeneration           Disclosed                     Parliament)
                                       Reserve Investment                                      Government of the State
 QIA          Government Agency        Corporations              Not disclosed                 of Qatar
 RRF&         Integrated          in                             Withdrawal process not
 NWF          Ministry of Finance      Stabilization             clearly disclosed             Russian Federation
                                                                 Government divestiture
                                       Government        Asset   process     not   clearly
 Temasek      Incorporated             Manager                   disclosed                     Ministry of Finance


GAPP 1 Principle

 “The legal framework for the SWF should be sound and support its effective operation and the
achievement of its stated objective(s).”


GAPP 1.1. Subprinciple. The legal framework for the SWF should ensure legal
soundness of the SWF and its transactions.




IRRCi SWF Report www.irrcinstitute.org                                                                               - 44 -
RiskMetrics Group                                                                              www.riskmetrics.com




GAPP 1.2. Subprinciple. The key features of the SWF’s legal basis and
structure, as well as the legal relationship between the SWF and other state
bodies, should be publicly disclosed.

It is believed that a sound legal framework is fundamental to a robust institutional and governance
structure of the SWF and critical for the SWF in formulating and implementing its investment objectives
and policies. Without the appropriate legal framework, we believe it is difficult for the SWF to operate
effectively to achieve its goals and objectives, and uncertainty may arise between the respective role of
SWF and its local government.


Throughout our research, SWFs have been discovered to operate under three different legal structures.
Funds that act as a government agency, funds that are incorporated independent legal entities, and funds
that are integrated into a government body like the Ministry of Finance or the Central Bank. All the
Middle East SWFs including ADIA, KIA, and QIA were set up as independent government entities. CIC, GIC,
and Temasek were established as wholly-owned state companies under their respective local company
act. The Russian and Norwegian SWFs are embedded in the Ministry of Finance.


Even though all the funds have stated their legal framework, this does not necessarily satisfy the GAPP‟s
requirement of “soundness and effectiveness” towards achieving the funds‟ objective. Insufficient
information is at our disposal to rate the „soundness and effectiveness‟ of the funds‟ legal frameworks
and hence no rating is carried out for this principle.


GAPP 2. Principle


“The policy purpose of the SWF should be clearly defined and publicly
disclosed.”

In the Santiago Principles, the policy purpose refers to the ultimate goals of each SWF. Clearly, each SWF
has distinct policy purposes. Examples are stabilizing the economy from commodity swings, or providing
economic security for future generations. A clearly defined policy purpose is important in guiding the
funds‟ investment policy and strategies. For intergeneration saving funds such as KIA and GPFG their
investment horizon tends to be more long-term focused with the goal of maximizing long-term returns
without taking excessive risk. In contrast, funds such as CIC, which aim to maximize risk-adjusted returns
on excess reserves, appear to serve shorter term objectives with greater risk appetite. As can be seen in
the above table, all the SWFs define their policy purpose and disclose it to the public.


All the ten SWFs fully comply with this principle.


GAPP 3. Principle


“Where the SWF’s activities have significant direct domestic macroeconomic
implications, those activities should be closely coordinated with the domestic
fiscal and monetary authorities, so as to ensure consistency with the overall
macroeconomic policies.”

IRRCi SWF Report www.irrcinstitute.org                                                                       - 45 -
RiskMetrics Group                                                                                  www.riskmetrics.com




This principle signifies direct supervision and revision of broad investment policies by the government to
make sure the SWF‟s actions do not have unwanted consequences such as inflation; it also serves to
coordinate the SWF‟s actions with national economic realities (financial crises, unemployment, etc).


This principle is outside the scope of this report.


GAPP 4. Principle


“There should be clear and publicly disclosed policies, rules, procedures, or
arrangements in relation to the SWF’s general approach to funding,
withdrawal, and spending operations.”

GAPP 4.1. Subprinciple. The source of SWF funding should be publicly
disclosed.

GAPP 4.2. Subprinciple. The general approach to withdrawals from the SWF
and spending on behalf of the government should be publicly disclosed.

Inflow and outflow of capital is critical to the funds‟ existence, investment scope, and hence their
influence on the markets. If a SWF does not disclose its funding and withdrawal rules, it raises concern
regarding the time horizon and potential instability effect on the markets. Sudden large investments can
inflate the markets, and sudden divestments can create volatility, particularly if the capital flows are
disproportionate to the size of the markets involved.


Both AGFF and GPFG disclose their funding and withdrawal rules which appear consistent with their policy
purposes. CIC‟s USD 200 billion initial capital was injected by issuing special bonds, therefore it is obliged
to pay out interest payments; however, it does not explain whether it imposes any limit on government
withdrawal from the fund, nor does it anticipate the growth of annual inflow of capital. Similarly,
Temasek clearly states the sources of the funds including dividends from portfolio companies, commercial
borrowings, bond issues, divestments, and occasional capital injections by the government. Temasek pays
annual undisclosed amount of dividend, decided by its independent board, to the government. In funds
such as Temasek which are incorporated and have independent boards, the government can not make
divestiture decisions about the assets held by the fund; however, as its sole investor, the government can
still decide to divest from the sovereign wealth fund. Consequently, in such cases, there are more
institutional barriers against government withdrawals in comparison to SWFs that are government
agencies. However, to allay regulatory and investment community concerns, such funds are recommended
to disclose the decision making process and constraints for possible government divestiture from the
Sovereign Wealth Fund. Aside from that, it is fair to say that most of the SWFs do not disclose their
general approach to withdrawal and spending operations.


Only three of the funds (AGFF, GPFG and LIA) disclose the required information. However in the case of
LIA the information about withdrawals is not yet publicly disclosed. Two of the funds do not publish any
information regarding capital inflow and outflows. The remaining funds disclose partial information,
mainly concerning sources of capital.



IRRCi SWF Report www.irrcinstitute.org                                                                           - 46 -
RiskMetrics Group                                                                               www.riskmetrics.com




GAPP 5. Principle


“The relevant statistical data pertaining to the SWF should be reported on a
timely basis to the owner, or as otherwise required, for inclusion where
appropriate in macroeconomic data sets.”

Coordination between the SWFs and their respective governments to assure that the macroeconomic
implications of the SWF transactions are taken into consideration in the government decisions is of
paramount importance. However, this issue is outside the focus area of this report which primarily studies
the impact of the SWFs on the companies in their portfolio. Consequently, no rating for this GAPP has
been carried out.


GAPP 6. Principle


“The governance framework for the SWF should be sound and establish a clear
and effective division of roles and responsibilities in order to facilitate
accountability and operational independence in the management of the SWF to
pursue its objectives.”

This principle highlights the importance of the distinction of roles and responsibilities of the SWFs‟
owners, governing bodies, and operational managements. The aim of such clear division is to ensure that
the SWFs‟ investment decisions are based on economic and financial criteria, free from day to day
government influence.


However, this principle is too broad to make compliance assessment possible; hence, no rating was
carried out in this report.


GAPP 7. Principle


“The owner should set the objectives of the SWF, appoint the members of its
governing body(ies) in accordance with clearly defined procedures, and
exercise oversight over the SWF’s operations.”

While independence is required for an SWF to operate on an economic and a financial basis, owner
oversight is required to ensure the SWF conducts its business in line with set objectives. Depending on the
type of legal entity, the role of owner varies from fund to fund. For instance, CIC is incorporated as a
limited company, but under direct supervision of the State Council that sets broader investment
objectives and appoints and removes directors of the board. Other funds such as GPFG, whose investment
objectives and strategies are set by the Ministry of Finance, are being indirectly governed by the owner.
In general, SWFs‟ mission of safeguarding the sovereign assets means relatively strict oversight by their
governments. However, this supervision can be principle-based such as GPFG, or have operational
involvement such as ADIA, where the governing bodies and senior management are mostly comprised of
government officials. All of the SWFs under analysis meet the requirement of this principle.


IRRCi SWF Report www.irrcinstitute.org                                                                        - 47 -
       RiskMetrics Group                                                                                www.riskmetrics.com




       Figure 16 Compliance Analysis: Institutional Framework and Governance Structure




                                                                 GAPP10




                                                                               GAPP11




                                                                                               GAPP12




                                                                                                                       GAPP14




                                                                                                                                         GAPP15




                                                                                                                                                        GAPP16




                                                                                                                                                                     GAPP17
               GAPP7




                              GAPP8




                                              GAPP9
SWF




           Sets
                                       Managing Director
           objectives
                           Board of    holds      senior     Defined and   No           Internal Audit and                          Law No. (5)      Publicly    No
           &                                                                                                     No disclosure
                           Directors   government            disclosed     disclosure   Audit Committee                             of 1981          disclosed   disclosure
           operational
ADIA




                                       position
           oversight
           Oversight,                                                                   Audit Committee
                                                                                                                                    The Future
           appoints/       Board of                          Defined and   Publicly     and      Australian      Detailed                            Publicly    Public
                                       Wholly outsourced                                                                            Fund   Act
           removes         Guardians                         disclosed     disclosed    National     Audit       disclosure                          disclosed   disclosure
AGFF




                                                                                                                                    2006
           directors                                                                    Office
                                       The       Executive                                                                          The
           Sets
                                       Committee     does                                                                           Company
           objectives,                                                                  The Internal Audit       Brief disclosure
                                       not hold current                                                                             Law and its
           oversight &     Board of                          Defined and   Publicly     Department    and        of           key                    Publicly    Public
                                       government                                                                                   Articles    of
           appoints/       Directors                         disclosed     disclosed    National     Audit       selection                           disclosed   disclosure
                                       positions, but has                                                                           Association
           removes                                                                      Office                   criteria
                                       government                                                                                   state its core
           directors
CIC




                                       background                                                                                   values
           Sets
           objectives,
                                                                                                                                    The
           oversight &     Board of                          Defined and   Publicly     Auditor-General of                                           Publicly    Public
                                       Independent                                                               No disclosure      Companies
           appoints/       Directors                         disclosed     disclosed    Singapore                                                    disclosed   disclosure
                                                                                                                                    Act
           removes
GIC




           directors




       IRRCi SWF Report www.irrcinstitute.org                                                                        - 48 -
               RiskMetrics Group                                                                                    www.riskmetrics.com




                                                                            GAPP10




                                                                                          GAPP11




                                                                                                           GAPP12




                                                                                                                                   GAPP14




                                                                                                                                                     GAPP15




                                                                                                                                                                    GAPP16




                                                                                                                                                                                 GAPP17
                       GAPP7




                                      GAPP8




                                                         GAPP9
SWF




                                                                                      Annual
                                                 Mix of government                    reporting                              Brief disclosure
                                   Board of      officials      and     Defined and   to      the                            of           key   Law No. 47       Publicly    No
                   Oversight                                                                        State Audit Bureau
                                   Directors     members of the         disclosed     Kuwaiti                                selection          of 1982          disclosed   disclosure
                                                 private sector                       Council of                             criteria
KIA




                                                                                      Ministers
                                                                                                                             The Board of
                                                                                      Annual        Internally audited       Directors
                                                                                      reporting     by the People‟s          appoint fund                        Disclosed
                                   Board of                             Defined and                                                             Articles    of               No
                   Oversight                     Independent                          to      the   Supervision              managers but                        but not
                                   Trustees                             disclosed                                                               Association                  disclosure
                                                                                      People‟s      Authority       and      selection                           publicly
                                                                                      Congress      externally audited       criteria  not
LIA




                                                                                                                             disclosed
                                                                                                    Audit Committee
                                                                                                    and Central Bank
                                   Ministry of                          Defined and   Publicly                               Detailed           The Pension      Publicly    Public
                   Oversight                     Independent                                        Audit; The Office
                                   Finance                              disclosed     disclosed                              disclosure         Fund Act         disclosed   disclosure
                                                                                                    of the Auditor
GPFG




                                                                                                    General
                                                 Mix of government                                                                              The      Emiri
                                   Board of                             Defined and   No            The State        Audit                                       Publicly    No public
                   Oversight                     officials and ruling                                                        Unknown            Decision No
                                   Directors                            disclosed     disclosure    Bureau                                                       disclosed   disclosure
RRF& NWF QIA




                                                 family                                                                                         (22) of 2005
                                                                                      Monthly                                                                                Public
                                                 Vesting                                            Accounts Chamber
                                   Ministry of                          Defined and   and                                                       The Budget       Publicly    disclosure
                   Oversight                     responsibility    to                               of   the Russian         Unknown
                                   Finance                              disclosed     quarterly                                                 Code             disclosed   but only in
                                                 Ministry of Finance                                Federation
                                                                                      report                                                                                 Russian
                                                                                                                             Internal rules
                                                                                                                                                The
Temasek




                                   Board of                             Defined and   Publicly                               and embedded                        Publicly    Public
                   Oversight                     Independent                                        Externally audited                          Companies
                                   Directors                            disclosed     disclosed                              in its Code of                      disclosed   disclosure
                                                                                                                                                Act
                                                                                                                             Ethics




               IRRCi SWF Report www.irrcinstitute.org                                                                            - 49 -
RiskMetrics Group                                                                             www.riskmetrics.com




GAPP 8. Principle


“The governing body(ies) should act in the best interests of the SWF, and have a clear
mandate and adequate authority and competency to carry out its functions.”

A governing body is mandated and authorized to oversee the fund‟s operation and overall performance. Based on
objectives and broad policies set by the owner, the governing body sets investment strategy and operational
guidelines. The governing body of a SWF usually takes the form of a board of directors/trustees. Among the ten
SWFs, most of them have a board of directors, while GPFG‟s and the Russian sovereign wealth funds‟ governing
bodies are within the respective country‟s Ministry of Finance.


Four funds (AGFF, GIC, GPFG, and Temasek) are fully compliant; two funds (QIA and RRF & NWF) do not meet the
criteria at all and are therefore rated non-compliant.


GAPP 9. Principle


“The operational management of the SWF should implement the SWF’s strategies in
an independent manner and in accordance with clearly defined responsibilities.”

In addition to defining owner and governing body responsibilities, GAPP 9 aims to reinforce the SWF‟s
independence from the operational manager‟s angle. As stated in the Santiago Principles, operational management
should act in the best interest of the SWF. The compliance rating looks at whether any government officials are
involved in the running of the SWFs. Depending on the legal and governance framework, some funds (CIC, GIC, LIA
and Temasek) have an independent executive management structure, while others like AGFF outsources all its
asset management to fund managers; the operation of GPFG is managed independently by NBIM.


Six funds fully comply with this principle with regard to the independence of operational management; one is
rated in partial compliance, and three are non-compliant.


GAPP 10. Principle


“The accountability framework for the SWF’s operations should be clearly defined in
the relevant legislation, charter, other constitutive documents, or management
agreement.”

A clearly defined accountability framework ensures that the owner, governing body and the operational
management fulfill their responsibilities and at the same time facilitate effective evaluation and monitoring. Set
within the SWF‟s legal and governance framework, the accountability process varies between funds. For those that
are established as separate legal entities such as GIC and Temasek, the managements of the funds are accountable
to their governing bodies and their governing bodies are accountable to the owners. In the case of SWFs, such as
the Russian Reserve Fund and the National Wealth Fund, which is integrated into a government body, or ADIA,
which is established as a government agency, the funds are directly accountable to the owners. All the SWFs under
study have and disclose a clearly defined accountability framework (All ten SWFs are in full compliance).




IRRCi SWF Report www.irrcinstitute.org                                                                      - 50 -
RiskMetrics Group                                                                                www.riskmetrics.com




GAPP 11. Principle


“An annual report and accompanying financial statements on the SWF’s operations
and performance should be prepared in a timely fashion and in accordance with
recognized international or national accounting standards in a consistent manner.”

Research has shown that all ten SWFs submit regular periodic reports to their owners; however, only five of them
(AGFF, CIC, GIC, GPFG and Temasek) disclose the reports to the public. In particular, AGFF and GPFG have
extensive disclosure including financial performance, asset allocation, geography breakdowns, and external fund
managers. All the reports are audited internally and/or externally; hence it is reasonable to assume that their
annual reports are consistent with international or national accounting standards. ADIA and QIA are the only two
funds that fail to state the existence and content of their annual reports to their owners. The rest of the funds are
rated fully compliant. While annual reports are not required to be public and the content of such reports may be
confidential, we believe that the existence of such reporting and disclosure of the general content of the annual
reports to its stakeholders is a good indicator of the soundness of the accountability framework and transparency
of a SWF.


GAPP 12. Principle


“The SWF’s operations and financial statements should be audited annually in
accordance with recognized international or national auditing standards in a
consistent manner.”

The GAPP 12 Principle requires SWFs to conduct regular independent internal audits and annual external audits on
their activities, finances, accounting and operational systems and controls. All of the funds disclose the existence
of their external independent auditing procedures; thus all are fully compliant with the principle.


GAPP 13. Principle


“Professional and ethical standards should be clearly defined and made known to the
members of the SWF’s governing body(ies), management, and staff.”

Professional and ethical standards are internal codes of conduct for a fund. However, it is believed that this
principle is too broad and information about any such codes is not available to third parties; therefore no
compliance rating is made in this report.


GAPP 14. Principle


“Dealing with third parties for the purpose of the SWF’s operational management
should be based on economic and financial grounds, and follow clear rules and
procedures.”



IRRCi SWF Report www.irrcinstitute.org                                                                         - 51 -
RiskMetrics Group                                                                                  www.riskmetrics.com




This principle gives guidance to SWFs when dealing with third parties e.g. external fund managers and advisory
bodies. Most of the SWFs outsource part of their asset management to money managers. Only AGFF, CIC, GPFG and
KIA discuss the key selection criteria for these money managers on their official websites. In addition, AGFF and
GPFG disclose a list of the fund managers who have been awarded the mandates.


Assessment shows that only three funds have established clear rules and procedures of dealing with third parties
such as fund managers selection and monitoring. Four funds fail to do so, and the other three meet the
requirement partially.


GAPP 15. Principle


“SWF operations and activities in host countries should be conducted in compliance
with all applicable regulatory and disclosure requirements of the countries in which
they operate.”

All the SWFs are governed under the relevant laws and regulations depending on their legal framework. So far, we
believe that the SWFs conduct their operations and activities in their host countries in compliance with
regulations.


In terms of disclosure compliance, it is reasonable to assume that the SWFs are operated in the manner stipulated
by the applicable regulatory requirement. In the case of KIA, its Law No. 47 of 1992 prohibits disclosure of any
information related to KIA to the public and penalizes any unauthorized disclosure. Research has not found any
evidence that SWFs violate their constitutive documents. No third-party reports were found regarding SWFs‟
breach of regulations in recipient countries.


Overall, all funds report the constitutive laws and regulations that they are obliged to follow.


GAPP 16. Principle


“The governance framework and objectives, as well as the manner in which the SWF’s
management is operationally independent from the owner, should be publicly
disclosed.”

As explained in GAPP 6, 7, 8, 9 and 10, the governance framework ensures SWFs‟ independence, and disclosure
ensures transparency and public scrutiny. To rate the compliance level of the SWFs, we look at two factors:
disclosure of governance framework and independence of operational management from governments. Most of the
SWFs disclose their governance framework and objectives and state their autonomy. Our assessment found that
half of the SWFs (AGFF, CIC, GIC, GPFG, Temasek) fully comply with GAPP 16 requirements of disclosure and
independence, and the rest of the funds only satisfy the partial compliance ratings. While LIA did provide the
required information in our interview with the fund‟s directors, the information is not yet publicly available.


GAPP 17. Principle




IRRCi SWF Report www.irrcinstitute.org                                                                          - 52 -
RiskMetrics Group                                                                               www.riskmetrics.com




“Relevant financial information regarding the SWF should be publicly disclosed to
demonstrate its economic and financial orientation, so as to contribute to stability in
international financial markets and enhance trust in recipient countries.”

Disclosure of financial information clearly helps to reassure the commercial nature of an SWF to the portfolio
companies, recipient countries, and the broader financial community. Despite good disclosure of their governance
framework, more than half of the SWFs fail to meet this principle: five funds have no compliance and one has only
partial compliance. The reason might be the funds‟ reluctance to reveal sensitive information such as asset
allocation, required rate of return, and portfolio breakdowns; in some cases such disclosure could be considered
trade secrets by the SWFs, which only the owner has the right to access. AGFF and GPFG publish quarterly and
annual reports with inclusion of relevant financial information, whilst GIC and Temasek‟s annual disclosures are
less extensive, but do provide some good insights into their financial position. In August 2009, CIC published its
first public annual report which includes aggregate financial performance data.


GAPP 18. Principle


“The SWF’s investment policy should be clear and consistent with its defined
objectives, risk tolerance, and investment strategy, as set by the owner or the
governing body(ies), and be based on sound portfolio management principles.”

GAPP 18.1. Subprinciple. The investment policy should guide the SWF’s financial risk
exposures and the possible use of leverage.

GAPP 18.2. Subprinciple. The investment policy should address the extent to which
internal and/or external investment managers are used, the range of their activities
and authority, and the process by which they are selected and their performance
monitored.

GAPP 18.3. Subprinciple. A description of the investment policy of the SWF should be
publicly disclosed.

Having an investment policy is fundamental in guiding the SWFs‟ investment approach. As public disclosure of the
full investment policy is not required by GAPP 18.1 and GAPP 18.2, our compliance rating is based on GAPP 18.3.
Even though all the funds provide a description of their investment policy/approach, we define minimum
description of the investment policy to include the following: investment time horizon, sector and geographic
focus, passive or active investment style, and the usage of external fund managers. Full compliance rate is low,
with only five funds (AGFF, CIC, GPFG, GIC, KIA) having disclosed all the mentioned aspects investment policies.
Temasek discloses details about its investment strategies however the principles underlying its investment
management outsourcing practices are unclear. The remaining funds with the exception of LIA are rated in partial
compliance to this principle because they all disclose a broad description of their investment policies. In the case
of LIA while the required information was provided in an interview with the fund‟s directors, the fund yet does not




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disclose it publicly as demanded by this principle. It should be pointed out that the rating has been carried out
only based on our interpretation of the general requirements of the principle and also of 18.3, which demands
public disclosure of investment policy description.


GAPP 19. Principle


“The SWF’s investment decisions should aim to maximize risk-adjusted financial
returns in a manner consistent with its investment policy, and based on economic and
financial grounds.”

GAPP 19.1. Subprinciple. If investment decisions are subject to other than economic
and financial considerations, these should be clearly set out in the investment policy
and be publicly disclosed.

GAPP 19.2. Subprinciple. The management of an SWF’s assets should be consistent
with what is generally accepted as sound asset management principles.

As discussed in the Comparative Analysis - Investment section, SWFs‟ investment objectives can be categorized
into pure return driven, returns plus national economic objectives (strategic), and returns plus national political
objectives (political). So far, we did not find any traces of information pointing to any SWFs with explicit or hidden
political agendas.


In the rating, all of the funds fully comply with this principle, as no evidence was found regarding explicit or
hidden political motives of their investments.




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      Figure 17 Compliance Analysis: Investment and Risk Management Framework

                 GAPP18-               GAPP19-         GAPP20- "Unfair                                                          GAPP23-
                                                                             GAPP21-      Ownership    GAPP22-          Risk                          GAPP24-
SWF              Investment            Investment      Access       to                                                          Performance
                                                                             Rights                    Management                                     Implementation
                 Policy                Objectives      Information"                                                             Measurement
                 Publicly disclosed
                                       Purely return
ADIA             - no disclosure on                    No disclosure         No disclosure             No disclosure            No disclosure         No review process
                                       driven
                 outsourcing
                 Publicly disclosed    Purely return                         Exercised;    discloses   Risk   management        Used     benchmark
AGFF                                                   No disclosure                                                                                  No review process
                 – detailed            driven                                voting policy             system                   index
                 Publicly disclosed    Purely return                                                   Risk   Management
CIC                                                    No disclosure         No disclosure                                      No disclosure         No review process
                 - detailed            driven                                                          Committee
                                                                             Exercised     but   no                             Used return targets
                                       Purely return
GIC              Publicly disclosed                    No disclosure         disclosure   of voting    Risk Committee           and         market    No review process
                                       driven
                                                                             policy                                             benchmarks
                                                                             Exercised     but   no
                                       Purely return                                                   Risk             and     Used     benchmark
KIA              Publicly disclosed                    No disclosure         disclosure   of voting                                                   No review process
                                       driven                                                          Performance Unit         index
                                                                             policy
                                                                             Exercise     but    no
                 Disclosed   –   Not   Purely return                                                   Risk Committee (but      Used     benchmark
LIA                                                    No disclosure         disclosure   of voting                                                   No review process
                 Public                driven                                                          no public disclosure)    index
                                                                             policy
                                                                                                       Detailed         Risk
                 Publicly disclosed    Purely return                         Exercised    and   full                            Used     benchmark
GPFG                                                   No disclosure                                   Management         at                          No review process
                 - detailed            driven                                disclosure                                         index
                                                                                                       NBIM
                 Publicly
                                                                             Exercised     but   no
                 disclosed-      no    Purely return
QIA                                                    No disclosure         disclosure   of voting    No disclosure            No disclosure         No review process
                 disclosure      on    driven
                                                                             policy
                 outsourcing
                 Publicly
                                                                             No              equity
                 disclosed-      no    Purely return
RRF& NWF                                               No disclosure         investments, thus no      No disclosure            No disclosure         No review process
                 disclosure      on    driven
                                                                             ownership rights
                 outsourcing
                 Publicly disclosed    Returns plus    internal guideline                                                       Used "Wealth Added
                 – detailed – no       national        regarding access      Exercised;    discloses   Risk    Management       (WA) factors" and
Temasek                                                                                                                                               No review process
                 disclosure      on    economic        to       privileged   voting policy             Unit                     Total   Shareholder
                 outsourcing           objectives      information                                                              Returns




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GAPP 20. Principle


“The SWF should not seek or take advantage of privileged information or
inappropriate influence by the broader government in competing with private
entities.”

There is a general concern that SWFs owned by the state could have access to the state information pools and
resources, which might benefit their investment activities. This is considered as unfair towards other private
investors and hence anti-competitive. The GAPP 20 principle reinforces the importance of information equality
between SWFs and private players in the market. Research has not found evidence of any litigation or publicized
cases alleging SWFs are taking advantage of government information bases. Temasek is the only fund which states
that it has internal guidelines which outline the employees‟ approach to privileged information. However, none of
the funds have disclosed legal or institutional barriers that guarantee against such information or resource access.
All ten SWFs fail to address this issue and are consequently rated non-compliant.


GAPP 21. Principle


“SWFs view shareholder ownership rights as a fundamental element of their equity
investments’ value. If an SWF chooses to exercise its ownership rights, it should do so
in a manner that is consistent with its investment policy and protects the financial
value of its investments. The SWF should publicly disclose its general approach to
voting securities of listed entities, including the key factors guiding its exercise of
ownership rights.”

This principle indicates the power and influence SWFs can have over their portfolio companies through board
representation and voting. GAPP 21 requires SWFs to disclose “ex ante whether and how they exercise their voting
rights”, and recommends but does not require that the funds disclose “appropriate ex post disclosure.”


Throughout our dialogues with SWFs, we were given the impression that many SWFs do attend AGMs and exercise
their voting rights in portfolio companies where they have significant holdings.


In terms of disclosure, GPFG is ahead of its peers. NBIM, who is responsible for the operational management of the
fund, discloses its voting guidelines on the public domain, as well as a full list of all the companies and resolutions
that GPFG cast votes on. AGFF discusses its stance on ownership rights in its newly published Statement of
Investment Policies. The fund states that the Board of Guardians “will exercise its ownership rights as a prudent
investor seeking to maximize investment returns over the long term”4 and outsources voting to its external fund
managers. Temasek stated that it exercises its shareholder rights, including voting, to protect its commercial
interests. Temasek supports several governance principles such as the separation of chairman/CEO, and views that
compensation and long-term returns should be aligned; however, no voting record has been disclosed. According to
Temasek‟s updated Charter released in August 2009, Temasek re-affirms its role as an active investor by engaging
with the boards and management of its portfolio companies. Middle East fund KIA states on its website that KIA




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exercises its voting rights, but no guidelines are available to the public. According to our conversations with their
portfolio companies, QIA and GIC do vote, but none of these funds state their general voting approach.


Thus GPFG, AGFF and Temasek are the only funds that are fully compliant. Most of the funds (seven out of ten) do
not state their ownership approach, policy and voting records. Only GPFG complies with the additional
recommended but not required disclosure of proxy voting records.


GAPP 22. Principle


“The SWF should have a framework that identifies, assesses, and manages the risks of
its operations.”

GAPP 22.1. Subprinciple. The risk management framework should include reliable
information and timely reporting systems, which should enable the adequate
monitoring and management of relevant risks within acceptable parameters and
levels, control and incentive mechanisms, codes of conduct, business continuity
planning, and an independent audit function.

GAPP 22.2. Subprinciple. The general approach to the SWF’s risk management
framework should be publicly disclosed.

Risk management frameworks are important to ensure a SWF‟s competency in managing financial, credit, market,
operational, legal and reputational risks in protecting its assets. Most of the funds have a specialized risk
committee or unit that often reports directly to the board, therefore fully comply with the principle. ADIA, QIA,
RRF and NWF fail to disclose any information with regard to their risk management framework. In the case of LIA
while the required information was provided in an interview with the fund‟s directors, the fund yet does not
disclose it publicly as demanded by this principle.


GAPP 23. Principle


“The assets and investment performance (absolute and relative to benchmarks, if
any) of the SWF should be measured and reported to the owner according to clearly
defined principles or standards.”

Regular performance measurement and reporting to the owner is a source of increased accountability at the SWFs.
SWFs that disclose their reporting process and performance evaluation are considered fully compliant. Six funds
are rated in full compliance, but GPFG in particular discloses a large amount of detailed information regarding its
financial disclosure process and content. Four funds (ADIA, CIC, QIA, and RRF&NWF) fail to make sufficient
disclosure about the components and structure of their disclosure to their owners. While the content of this
disclosure is to be disclosed only to the owner, it is helpful to the funds to publicly disclose the structure and
components of their reports to the owner; to assure the existence of sufficient oversight.




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GAPP 24. Principle


“A process of regular review of the implementation of the GAPP should be engaged in
by or on behalf of the SWF.”

No fund has disclosed information regarding regular review or specific audits for GAPP compliance; therefore, all
of the funds are non-compliant. However, in April 2009, the International Working Group of Sovereign Wealth
Funds (IWG) announced the establishment of the International Forum of Sovereign Wealth Funds (Forum). The
Forum, a voluntary group of SWFs, aims to “exchange views on issues of common interest and facilitate an
understanding of the Santiago Principles and SWFs‟ activities”5. Mr. David Murray, Chairman of Australia‟s Future
Fund Board of Guardians, was elected by the IWG members to chair the Forum. One of the Forum‟s sub-
committees is to work on the SWFs‟ experiences in the application of the Santiago Principles to date.


Average Practices

              Almost all of the SWFs have clearly defined their legal, institutional and accountability framework

              SWFs‟ funding, limit on government withdrawal and spending are not considered public information in
              most cases

              All of the SWFs have defined their mission and investment objectives

              Information regarding detailed investment policy, required rate of return, asset allocation, and
              performance measurement is often not disclosed

              In most cases, our research fails to establish that SWFs have set clear approaches regarding
              ownership rights

              Even though some of the SWFs exercise their voting rights, disclosure of the voting policy or records
              is uncommon

              None of the SWFs have dedicated reports or review processes with regard to compliance with the
              Santiago Principles

              Public disclosure of annual reports is not common


4.2. Compliance Rating

In this section we attempt to demonstrate the overall level of compliance of the SWFs with the Santiago
Principles. Depending on the principle, different criteria are used in order to assess whether the funds have „full
compliance‟, „partial compliance‟ and „no compliance‟. The criteria can be found in Appendix G.


At a glance, Figure 18 shows the overall compliance level of each fund. AGFF and GPFG lead the SWFs under study
with about 90% full compliance level, followed by Temasek (78.5% full compliance), and GIC (73.7% full
compliance). QIA has the lowest level of compliance with around 58% „no compliance‟ ratings, followed by ADIA.




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Figure 18 Percentage of Compliance for each SWF

 SWF                   No Compliance                Partial Compliance                 Full Compliance
 ADIA                  52.6%                        15.8%                              31.6%
 AGFF                  10.5%                        0.0%                               89.5%
 CIC                   21.1%                        15.8%                              63.2%
 GIC                   15.8%                        10.5%                              73.7%
 KIA                   15.8%                        31.6%                              52.6%
 LIA                   31.6%                        21.1%                              47.4%
 GPFG                  10.5%                        0.0%                               89.5%
 QIA                   57.9%                        10.5%                              31.6%
 RRF& NWF              42.1%                        15.8%                              42.1%
 Temasek               10.5%                        10.5%                              78.9%


Among the 24 voluntary principles set by the International Working Group of Sovereign Wealth Funds, GAPP 1, 3, 5,
6 and 13 are excluded from this analysis. The reason is that these principles are too broad or too little information
is available to make ratings possible or that they are not relevant to the objective of this study. For the 19
remaining principles the ten SWFs under study have fully complied with a total of 60% of the principles. The
respective figures for partial compliance and non-compliance are 13.2% and 26.8% overall compliance, as
illustrated in the pie chart below.


Figure 19 Overall Compliance Rating




                                                                       No
                                                                    Compliance
                                                                      27%



                                        Full
                                     Compliance                         Partial
                                       60%                            Compliance
                                                                         13%




In Figure 20 (below), full compliance tends to be very high when it comes to disclosure of legal and governance
frameworks (GAPP 2, 7, 10, 12, 15 and 19). Most of the SWFs clearly state their type of legal entity and their
governance structure. However, disclosure is generally weaker for financial information, investment performance,
investment policy, ownership rights and engagement approach.




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Figure 20 Compliance Levels per Principle

                                                 No Compliance   Partial Compliance    Full Compliance
 GAPP 2 - Policy Purpose                         0               0                     10
 GAPP 4 - Funding and Withdrawal                 2               6                     2
 GAPP 7 – Owner                                  0               0                     10
 GAPP 8 - Governing Body                         2               4                     4
 GAPP 9 - Operational Management                 3               1                     6
 GAPP 10 - Accountability Framework              0               0                     10
 GAPP 11 - Annual Report                         2               0                     8
 GAPP 12 – Auditing                              0               0                     10
 GAPP 14 - Third Parties                         4               3                     3
 GAPP 15 - Compliance in Host Country            0               0                     10
 GAPP 16 - Disclosure of Governance Framework    1               4                     5
 GAPP 17 - Disclosure of Financial Information   4               0                     6
 GAPP 18 - Investment Policy                     1               4                     5
 GAPP 19- Investment Objectives                  0               0                     10
 GAPP 20 - "Access to Privileged Government      10
 Information"                                                    0                     0
 GAPP 21 - Ownership Rights                      4               3                     3
 GAPP 22 - Risk Management                       4               0                     6
 GAPP 23 - Performance Measurement               4               0                     6
 GAPP 24 – Implementation                        10              0                     0




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5. CONCLUDING REMARKS
As mentioned in the report, the first point that we would like to emphasize again is that the overall size of the
SWFs‟ investments in the international equity markets is significantly smaller than typically stated in the media.
Consequently, while the transactional risks and concerns remain valid in some cases, the systemic risks attributed
to the involvement of SWFs in the capital markets are somewhat exaggerated as they are based on inflated
numbers or projections of what could happen in the future.


No examples of controversial engagement and voting practices were discovered by our study. The proxy votes
discovered through our analysis were mostly cast „for management‟ stances. This signifies that proxy voting, in
most cases, is based on general guidelines rather than case-by-case decisions, or that the specific issues studied
were non-objectionable to the SWFs. No major case of shareholder resolutions introduced by the SWFs was
discovered in our study with the exception of ESG engagements of the Norwegian Government Pension Fund Global
(GPFG). In the case of this SWF, while the fund has a strong track record in engagements and has engaged
effectively with companies to resolve labor and governance issues in several cases, its proxy voting was
counterintuitive with regard to some ESG issues. When questioned by our research team, the fund stated that in
such cases the suggested ESG initiatives were deemed „not feasible‟, „not economically justified‟, or „not
sufficiently detailed‟.


Given that governments are the owners of the SWFs, their presence on the boards of the funds is to be expected.
However, one key differentiator among the SWFs under study was the level of involvement of the government in
the funds‟ operational management. Most major governance codes such as OECD Guidelines for Good Governance
and the IMF General Principles and Practices for the SWFs recommend independence of management from the
board. According to these guidelines, the government would be involved in setting the principles and strategies
based on which the fund will be managed, but would not be involved in day-to-day operations and investment
decisions. Funds such as GPFG and Temasek are good examples of this model. In the case of Temasek, while the
fund‟s executives are appointed under the supervision of the President of Singapore, the board is also fully
independent. This makes Temasek not only fully independent on an operational level but also on a strategic level.
In many of the Middle Eastern funds, government officials appear to be deeply involved in the managerial aspects
of the fund. More separation of functions in this area, or, if separation exists, more disclosure in this area could
improve the accountability of the funds to their owners and would also provide concerned third parties with more
visibility on the role of the government in the management of the funds.


With regard to investment behavior and time horizon, SWFs are highly varied depending on their mission,
management, size, and their operational relationship with the government. So far, no rash divestments or
opportunistic investment practices have been detected in our analysis of the SWFs. We believe that high return
targets, direct withdrawal rights of the government to the funds without parliamentary ratification, and low
management capability of the funds are all conducive to more short-term oriented investment behavior. In
addition, stabilization funds in general have more potential for being withdrawn by the government in comparison
to other types of SWFs such as inter-generational savings funds. In such cases, we believe the funds that choose a
consistent portfolio-based investment strategy and avoid maintaining large holdings in their portfolio companies
can avoid the negative consequences of the needed flexibility of their investment behavior.




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In the capabilities area, four out of ten funds seem to be focused on tapping the global talent pool rather than
maintaining only a local team. We believe such funds including Temasek, GIC, and GPFG (NBIM) will be more
capable investors in the long run and will be more integrated in the global financial community


Finally in our analysis of the compliance of the SWFs with the Santiago Principles, an interesting pattern emerged.
Different SWFs have adopted widely different approaches to compliance with the code. While some have been
actively seeking to achieve a higher level of disclosure and more compliance with the code, a few of the funds
under coverage which were active in the Santiago Code development process, have not demonstrated any
improvements towards a higher level of compliance with the code. One key hurdle with regards to verifying
compliance with the Santiago Principles is the highly subjective and general nature of some of the principles such
as the requirements related to „soundness of governance‟, etc. In such cases compliance with the code is subject
to the interpretation of each SWF.


The SWFs are based in countries with different cultural, political and social settings, and, as such, they have very
different information disclosure standards. While some SWFs, such as the Norwegian GPFG and the Australian
Future Fund and Temasek have a high level of disclosure, all the SWFs need to improve their disclosure levels to
the minimums required by a sophisticated investor to be able to evaluate them as market participants. Currently,
around half of the SWFs under study fall short of this measure.




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Section II – SWF Case Studies

6. SWF CASE STUDIES
This chapter presents ten case studies of the world‟s largest SWFs by AUM. In each case study, a comprehensive
analysis of the policies and practices of each SWF is provided. Throughout this analysis, only factors which may
affect the way the SWF influences the companies in its portfolio are covered.




6.1. Abu Dhabi Investment Authority                                 Country:         Abu Dhabi, UAE

(ADIA)                                                              Inception:       1976

                                                                    Assets   Under USD     500-700      billion
                                                                    Management:    (Estimated value as of April
                                                                                   2009)

                                                                    Analyst:         Tim Barnett




Figure 21 ADIA Analysis Overview


 Governance                High level of government influence at board and senior management levels
                           Large, well established investment team (No information provided about the fund‟s
 Capabilities              outsourcing practices)
                           Strong international communications and public relations team
                           Long-term investor
 Investment Behavior       Passive investor
                           Does not disclose any portfolio information
                           Very limited information available regarding its engagement strategy
 Engagement
                           Does not publish any proxy voting records/strategy

 ESG Investments           No evidence of any ESG policies or activities

 Disclosure                Very limited disclosure


General Outlook

The Abu Dhabi Investment Authority (ADIA) has limited disclosure of its activities through public channels. Its
website provides limited information regarding its investment and engagement strategies, and there are no details
provided as to how these strategies are put into place or any information on the portfolio held by the fund.




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The limited statements suggest that the fund operates a diverse portfolio for financial returns with no specific
sectoral or geographical focus behind its investments. In addition, the fund states that it operates as a passive
investor in its portfolio and does not seek to actively manage its investments.


No information regarding its proxy voting strategy is disclosed and no previous proxy voting results are published.


Overview

ADIA was set up in 1976 and initially focused on equities and bonds, real estate and local and regional investments.
In 1986, ADIA established its commodities business and started private equity investments in 1989. In 1998, it
started investing in inflation indexed bonds and in 2005 established an emerging markets department. In 2007,
responsibility for local and regional investments was transferred to the Abu Dhabi Investment Council (ADIC). At
that time, ADIA transferred a number of its local investments to ADIC including assets in a number of Abu Dhabi-
based banks as well as Etihad Airways, Abu Dhabi‟s national airline. However, it should be noted that ADIA owns
approximately 95% of ADIC6. ADIA is headquartered in Abu Dhabi and does not appear to operate any international
offices.


Although it is unclear exactly how many people ADIA currently employs it stated that it exceeded 1,000 employees
in the early 1990s. The fund does not publish any detailed breakdown of its staff but does report that there are
over 40 nationalities represented in its workforce.


ADIA does not publish any information regarding the size of its funds or the breakdown by asset classes. In
addition, there is very little information regarding the size of the fund available through public sources. Most
estimates put the size of the fund at between USD 600 billion and USD 800 billion 7. There are also recent reports
stating that the fund may have lost up to USD 125 billion 8 during the course of 2008. This significant loss along
with fund transfers to boost the local economy would put the total current fund estimate under USD 500 billion.
The breakdown of the fund‟s portfolio is unknown, although following the creation of ADIC it is clear that the focus
of ADIA is in the area of international investments.


Governance

ADIA operates as a wholly state-owned enterprise subject to supervision by the Abu Dhabi government. The board
of directors at ADIA is made up largely of members of the government and the ruling family of Abu Dhabi. The
chairman is Sheikh Khalifa bin Zayed Al Nehayan, who also holds the position of Emir of Abu Dhabi as well as
President of the United Arab Emirates (UAE). The position of managing director is held by Sheikh Ahmed bin Zayed
Al Nehayan, who also holds a role in the Ministry of Finance and Industry. In addition, other board members hold
positions in both the government of Abu Dhabi and the UAE. The direct links between the board and senior
government positions increases the risk of political and strategic influence in the investment decisions of ADIA.
The presence of more private sector or independent directors would help to reassure recipients of investments as
well as investment partners that financial return is indeed its primary driving force, as stated by ADIA.


The fund does not appear to publish any information regarding its executive management. However, other sources
9
  confirm that there is a mix of nationalities holding senior positions at the fund. This includes the new
appointment in January 2009 of Bill Schwab as head of real estate investments.




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There is no published information regarding the reporting frequency or to whom the fund reports. The lack of
information on reporting leads to uncertainty regarding who holds the ultimate responsibility for the performance
of the fund. In addition, knowledge of the reporting time frames would help to indicate the investment time
horizon of the fund and the likelihood of it being a stable long-term investor.


Investment Strategy

ADIA does not publish any extensive information regarding its investment strategy through its website or through
any other source. It makes limited statements claiming to be operating a globally diversified portfolio across a
wide range of geographies and asset classes including publicly listed equities, fixed income, real estate and private
equity. The fund also states that it has a long tradition of prudent investing in which decisions are based solely on
its economic objective of achieving long-term financial returns. In addition, it is emphasized that it does not seek
active management of the companies in which it invests. However, it is clear that it has made some very large
single investments in the past. For example, in November 2007, ADIA bought USD 7.5 billion worth of convertible
notes in Citigroup, convertible into not more than 4.9% of Citibank‟s shares at that time.


Investment Outsourcing

ADIA does not publish any information regarding outsourcing of its funds. Some sources state that a proportion of
its equity assets are externally managed 10. However, there is no information available to indicate which fund
managers are used and what proportion of the total assets are managed externally. In addition, there is no
information as to how external managers are chosen or what principles and guidelines are in place for portfolio
selection and active investment management. Transparent use of external asset managers can help reassure fellow
investors, recipients of investments as well as regulators about the fund‟s investment behavior.


Equity Portfolio Analysis

ADIA does not publish any information regarding its portfolio breakdown. In addition, no details are provided
regarding any sectoral focus of the fund or any recent major transactions. The formation of ADIC in 2007 would
suggest that ADIA focuses its investments towards international assets rather than local and regional investments,
which are now handled by ADIC.


In 2008, ADIA invested USD 7.5 billion in Citigroup through convertible bonds paying 11% interest, which must be
converted to 235.6 million shares by March 2010. ADIA is reportedly considering its options for managing this
investment due to the changing economic circumstances. Possible courses of action for ADIA would be to wait until
the conversion deadline in the hope that the share price recovers or to convert the shares early in the hope of
heading off the possibility of U.S. government nationalization of the bank. This decision will obviously have very
serious knock-on effects for how ADIA is seen by other investors and regulators. 11


Environmental, Social and Governance Factors in Investments

There is no evidence that ADIA has any ESG strategy in place or that it screens its investments. Unlike KIA, ADIA
does not seem to have any exclusion based on religious criteria. Consideration of environmental and social issues in
its investment structure could help the fund to both avoid risks relating to these issues as well as identify potential
new areas in which to invest, such as clean energy technologies, which would help diversify oil-based SWFs.




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Engagement Strategy

ADIA states that it is a passive investor and does not seek active management within companies in which it invests.
This suggests that it is not interested in seeking to appoint board members or have any influence on how the
companies are managed on a day-to-day basis. However, the lack of information regarding ADIA‟s investment
portfolio makes it difficult to confirm the ways in which it engages with its portfolio companies.


Proxy Voting Analysis

ADIA does not publish any information regarding its proxy voting strategy nor does it provide any information on its
voting records.


International Code Commitments

ADIA is a signatory of the Santiago Principles. In addition, the co-chairman of the International Working Group who
drew up the principles was Hamad al Suwaidi, Under Secretary of Finance of Abu Dhabi and a director of ADIA. This
direct link to the Santiago Principles suggests that ADIA takes its international responsibilities seriously and
recognizes the need for greater disclosure and accountability on the part of sovereign wealth funds. Based on our
assessment of ADIA‟s compliance with the principles, ADIA‟s disclosure on legal and governance is average, and
information regarding its investment operation and management is limited. ADIA is not a signatory of the UN
Principle for Responsible Investment.




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                                                                     Country:                 Norway
6.2. Government                 Pension           Fund           -
                                                                     Inception:               1990
Global (GPFG)
                                                                     Assets           Under NOK 2,076     billion
                                                                     Management             (USD 322 billion 12 )
                                                                                            (as of    31 March
                                                                                            2009)

                                                                     Analyst:                 Chaoni Huang




Figure 22 GPFG Analysis Overview

                             Incorporated into the Ministry of Finance but operationally managed by Norges
                             Bank Investment Management
 Governance
                             Utilizes external auditing for its financial reporting
                             NBIM has a diversified international workforce that manages GPFG
 Capabilities
                             Overseas offices in London, New York and Shanghai
                             Long-term oriented investment behavior
                             Current portfolio consists of fixed income and diversified small equity holdings
 Investment Behavior
                             Outsources the management of part of its assets
                             Does not disclose required/targeted rate of return
                             Actively exercises its voting rights with a well-defined engagement strategy
 Engagement                  Only engages with a small number of companies out of its portfolio
                             Engages with companies on ESG improvements
                             Discloses ethical guidelines and has an ethical committee
                             Does not use positive screening
 ESG Investments             Uses negative screening based on E&S issues
                             Does not systematically measure the ES outcome of its portfolio
                             Has announced plans to expand ESG investments
                             Quarterly and annual reports
                             Does not produce separate sustainability or equivalent reports
                             Full disclosure of holdings
 Disclosure
                             Full disclosure of voting records
                             Full disclosure of outsourcing practices and external asset managers
                             Discloses investment strategy and risk appetite




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General Outlook

The Government Pension Fund Global (GPFG) has a long investment time horizon and a highly diversified
international investment portfolio. The fund is invested globally in a large number of financial securities
comprising fixed income and public equity. GPFG is managed with a view to maximizing return, given a low to
moderate level of risk in order to enable future generations to benefit from the country‟s current oil revenues.
The management of the fund is subject to a high degree of disclosure requirements. The Storting (Norway‟s
Parliament) is informed of the investment framework and the Ministry's oversight through an annual white paper
published each spring, and the operational manager, Norges Bank Investment Management, reports publicly on a
quarterly and annual basis.


The fund holds minority stakes in over 7,900 companies across the globe, and acts as a „Universal Owner‟ that
takes into account sustainability and ethical issues. Therefore, based on its ethical guidelines, the fund utilizes its
engagement and a negative screening and exclusion approach to promote responsible conduct. The fund engages
with companies that underperform in terms of ESG issues, but names of the engaged companies are not routinely
unveiled. In 2008, GPFG engaged with 45 companies concerning ESG. In addition to engagement, GPFG has a well-
defined voting policy and publishes its voting records to the public. However, research has discovered that in
approximately 52 cases GPFG voted against a number of ESG-related issues in 2008. The fund explains those votes
by stating that in those cases the proposals were deemed unclear, ineffective or too costly.


Nonetheless, GPFG is seen as a leader in corporate governance, transparency, disclosure, ESG investments and
shareholder activism. The minority shareholding style might lead to limited influence on corporate behavior, but
at an aggregate level, holding 0.77% of the global equity markets is significant in driving changes in sustainability.
The fund has set an example of how to be commercial while retaining its shareholder rights, without being
criticized of abusing its power for political and strategic reasons.


Overview

The Government Pension Fund Global (GPFG) is a continuation of the former Petroleum Fund that was first
established in 1990. The ultimate goal of the fund is to support the long-term management of petroleum revenues
and facilitate the government‟s accumulation of financial assets in order to help cope with large future financial
commitments associated with an ageing population. The Ministry of Finance is responsible for the management of
the fund, and the operational management of the fund's international assets has been delegated to Norges Bank
Investment Management (NBIM). The market value of the GPFG has grown to NOK 2,076 billion (approximately USD
322 billion) as of 31 March 2009. GPFG states it aims to “foster the financial interests of the fund‟s owners through
active management and active ownership,” which classifies it as a commercially driven investor with an active
investment approach.


The inflow of GPFG consists of state petroleum revenues, net financial transactions related to petroleum
activities, as well as the return on GPFG's investments. The outflow from the fund is the sum needed to cover the
non-oil budget deficit, making net allocations to the Fund equal to the total budget surplus including oil revenues.
As of today, there have been no government withdrawals from the fund to the fiscal budget.




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Apart from its headquarters in Oslo, NBIM currently has regional offices in London, New York and Shanghai. As of
the end of 2008, the fund has a total of 217 permanent employees, of whom 28% are non-Norwegian nationals from
18 different countries. We believe that its international presence and international workforce are important
factors in making GPFG act as a well-integrated mainstream actor in the international investment community.


Governance

As GPFG is not established as a separated legal entity; its governance and management is entrusted to the Ministry
of Finance. The governance structure of GPFG is marked by a clear division of responsibilities between the
political authorities and the operational management. The framework for GPFG was laid down by the Storting in
the Government Pension Fund Act. As stated in a previous section, GPFG is administered by the Ministry of Finance
that sets the main rules for the fund‟s investments in its regulations and supplementary provisions. The
operational management of the fund has been delegated to NBIM.


Norway is a constitutional monarchy. The executive board has overriding responsibility for Norges Bank‟s
operations. The executive board consists of seven members, all appointed by the King. The governor and deputy
governor of Norges Bank are its chairman and vice-chairman respectively.


Since 2006, an advisory board has been set up to support the executive board‟s work on investment management.
In 2007, an audit committee was created consisting of three of the executive board‟s external members. The
committee serves as a preparatory body for the executive board on matters relating to the board‟s oversight
functions and responsibility for risk management and internal control. Since 2007, the financial auditing of the
GPFG has been contracted to Deloitte AS. Meanwhile, an internal audit is also conducted by the Central Bank Audit
Office. Both Deloitte and the Central Bank Audit Office submit a separate audit report to the supervisory board on
the financial reporting of the fund. The Office of the Auditor General is responsible for the final audit of GPFG in
the national accounts.


As the operational management of the fund sits within NBIM, it is important to look into NBIM‟s executive
management team, which consists of eight people none of whom has a current government position. Yngve
Slyngstad acts as the CEO and CIO at NBIM, and Stephen Hirsch is the Deputy CEO and COO. Slyngstad has extensive
experience working in the mainstream investment community prior to joining NBIM.


Norges Bank submits quarterly and annual reports to the Ministry of Finance concerning its management of the
fund. The reports are made available to the general public via the fund‟s website. Key aspects such as the fund‟s
financial performance, adherence to the stipulated guidelines, and engagement activities are included in the
reports.


The Ministry of Finance‟s responsibilities include setting broad principles, supervising the fund‟s performance and
also making decisions about exclusions based on the recommendations of the ethical committee. The Ministry of
Finance is not involved in the day-to-day management of the fund. Therefore the role of the government in the
daily operation of the Norwegian fund is minimal.


Investment Strategy




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GPFG is an active and long-term investor. The Ministry of Finance has formulated a long-term investment strategy
that has an objective of a high return for moderate risk, with the intention of safeguarding the basis for future
welfare, including pensions for the country‟s citizens. We believe that the institutional framework provides an
assurance of a long-term strategy. The capital of the fund is invested solely in non-Norwegian financial
instruments, and in 42 developed and emerging equity markets as well as 31 currencies for fixed income
investments. Approximately 87% of GPFG‟s assets are managed in-house by NBIM and the rest by external fund
mangers.


As of 31 March 2009, the market value of the GPFG was NOK 2,076 billion (USD 322 billion), up from NOK 2,019
billion (USD 305 billion) at the end of 2007. Inflows of new capital into the fund during 2008 were record-high at
NOK 384 billion (USD 58 billion) and were invested entirely in global equity markets. In addition, a further NOK 44
billion (USD 6.8 billion) has been transferred to the fund in the first quarter of 2009.


Compared with other SWFs, GPFG takes minority shareholdings in a large number of companies. The fund holds
equity investments in nearly 7,900 companies. On average, GPFG‟s investment in any single company amounts to
less than 1% of outstanding shares; the fund‟s ownership in global equity markets climbed to 0.77% (2007: 0.49%)
at the end of 2008, while its average ownership interest in European companies rose to 1.33%. This means that
GPFG can act as a universal owner and should be more likely to take economic externalities into account. (The
universal owner theory suggests that one company‟s economic externality, such as pollution, will be re-
internalized into the portfolio of a universal owner through increasing costs elsewhere. Thus, while a non-
diversified owner of a polluting entity could [in economic terms only] reap an advantage by polluting and having
others pay the cost of it, a universal owner will suffer the negative economic consequences of that pollution
elsewhere in its portfolio.) Therefore, it is widely believed that an institutional investor like GPFG, with a large
and diversified portfolio has better incentives to act to reduce negative impacts, and hence to engage with
portfolio companies on a wide range of externalities that could potentially harm GPFG‟s long-term value. This, in
fact, appears to be the case with GPFG (see Engagement section for more details).


Figure 23 GPFG Asset Class Breakdowns over Time




                    

Source: NBIM’s GPFG 2008 Annual Report




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Like most investors, GPFG has been negatively affected by the current market crisis. The overall return on the
fund in 2008 was -23.3% in international currency, resulting in the weakest annual return since inception. Return
on the equity portfolio was -40.7% and -0.5% for the fixed income portfolio. In absolute terms, GPFG reportedly
lost over USD 90 billion in the year 2008. The dramatic worsening results mean that portfolio return is only 2.94%
since Jan 1998.


The allocation to equities in the fund at the end of 2008 increased from around 40% to 49.6%. Figure 23 (above)
shows the changes of asset class breakdowns for the period of 2004 and 2008.


In the face of the market downturn, NBIM has made significant changes to its investment strategy. For instance,
the Ministry of Finance has decided to increase the allocation to equities in the fund from 40 to 60% over time. In
2008, the fund made record purchases in equity markets and NBIM made recommendations to the Ministry of
Finance to include more emerging market investments. In the summer of 2008, the Storting agreed on a target of
up to 5% of GPFG being invested in real estate, which may be opportunistic, based on asset values, but may also
be a sign of GPFG‟s increasing appetite for further diversification and higher return. Another important change is
that the Storting has approved an increase of the holding limit on individual companies from 5% to 10%, which
could increase the influence of the fund on the companies in its portfolio.


Equity Portfolio Analysis

GPFG has not stated any sectoral or regional focus except for responsible investing activities (please refer to the
Environmental and Social Factors in the Investments section). Below is a pie chart that shows the regional
breakdown of GPFG‟s equity portfolio. As can be seen, over 48% of its equity portfolio consists of companies in
Europe, followed by over 35% in the Americas and the remaining 16.2% in Asia and Oceania. Country assessments
are conducted by NBIM to measure the suitability of a market for its investments. According to NBIM, the market
must be open to foreigners, the country must have laws protecting investors‟ rights, and the settlement systems
must meet certain minimum standards.


Figure 24 Regional Breakdown of GPFG’s Equity Portfolio



                                                                        Asia and
                                                                     Oceania, 16.2%


                        Europe, 48.6%




                                                               Americas, 35.2%



Source: NBIM GPFG’s 2008 Annual Report




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As mentioned previously, GPFG tends to hold minority stakes in companies, but it also has some large positions in
companies that have a high market capitalization. The table summarizes GPFG‟s largest equity holdings as of year-
end 2008. Four of the ten largest positions at the end of 2008 were oil companies. The largest ownership interest
in a company was 8.7% in Mondi. Overall, the fund holds more than 5% of four companies and more than 2% of 195
companies. Taking into account that there are over 7,900 companies in the fund‟s equity portfolio, large holdings
only represent a small percentage. Therefore, in the majority of cases, we do not think that GPFG has significant
influence on a company‟s operation and management, which helps remove concerns of a hidden non-commercial
agenda; however, this investment approach can also limit the fund‟s ability to have influence and impact towards
improved long-term financial performance of its portfolio.


Investment Outsourcing

NBIM uses external asset management organizations to manage parts of the equity and fixed income portfolios for
GPFG. The combined value of externally managed portfolios for the fund is over NOK 300 billion (approximately
USD 45 billion), which represents around 13% of the fund‟s capital. These external portfolios are managed by more
than 40 different organizations. Leaving aside fixed income, GPFG outsourced equity investment mandates to 32
fund managers with a total value of approximately NOK 200 billion (USD 30 billion), or approximately 19% of the
fund‟s total equity portfolio. GPFG lists the names of all its external fund managers on its public domain. In 2008,
the external equity mandates made a negative contribution equivalent to 15% of the equity portfolio‟s overall
underperformance.


Among the 32 fund managers, the research team analyzed their ESG performances based on Innovest‟s rating
wherever available. (Innovest, a leading provider of sustainability research to the investment community, was
recently acquired by RiskMetrics Group.) Only eight of GPFG‟s equity fund managers are covered in the Innovest
universe. Except for Janus Capital, all of them achieve ratings above BBB. Janus Capital received an Innovest
rating of CCC for its poor performance on ESG risk, its disclosure on management of emerging markets investment
risks.


NBIM provides invitation to tender on its public website, which details information regarding GPFG‟s investment
requirement that is long-only and long-based products. GPFG focuses primarily on single country mandates and
sector mandates, and typical initial funding for each manager ranges from USD 50 million to USD 250 million. In
addition, the fund states explicitly that it does not consider investment mandates in non-listed equity, private
equity, non-listed real estate, Options, SRI (Socially Responsible Investments) funds and more. This is in line with
GPFG‟s overall investment strategy. Despite its ESG profile, GPFG does not consider investment in any external SRI
funds.


Environmental and Social Factors in Investments

GPFG‟s Council on Ethics was established by Royal Decree in November 2004, and the Ethical Guidelines for        the
fund were introduced at the same time; they were decided by the Ministry of Finance and approved by              the
Storting. The council provides an evaluation of whether investments in specified companies are consistent with   the
Ethical Guidelines. Decisions regarding exclusions would be made by the Ministry of Finance based on             the
recommendations of the council.




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According to the Ethical Guidelines, the ethical basis for the fund shall be promoted through the following three
measures: exercise of ownership rights, negative screening of companies that are involved in weapons, and
exclusion of companies that violate human rights, cause environmental damage, and are implicated in corruption
cases and other serious unethical norms.


At present, 26 companies have been excluded from the investment universe of GPFG; their names are disclosed on
the website of the Ministry of Finance.


In addition to the Ethical Guidelines, GPFG has an Environmental Fund that was transferred to the fund‟s ordinary
portfolio at the end of 2004. The Environmental Fund was established in 2001, with capital around NOK 2 billion
(USD 305 million). It was created to invest solely in companies that were assumed to have only a limited negative
influence on the environment and in companies that complied with specific environmental reporting and
certification requirements. The environmental requirements were based on analyses from an external consulting
company.


A more recent development in the area of responsible investment is that GPFG has planned to allocate NOK 20
billion (approximately USD 3 billion) to environmental investing and a potential program aimed at sustainable
growth assets in emerging markets over five years. In addition, a report by the Ministry of Finance to the Storting
in April 2009 recommended that the pension fund exclude tobacco manufacturers from its portfolios. Other major
recommendations include the introduction of a public „watch-list‟ for companies the fund considers could be in
breach of international human and labor rights issues13. From our dialogue with GPFG, the white paper highlighted
the need for better cooperation between the Ethical Council and NBIM, stronger engagement on environmental
issues, and more active engagement of the Ministry of Finance in setting the engagement principles of NBIM.


GPFG currently does not employ a positive screening mechanism or a best-in-class approach to select companies.
Its threshold for excluding a company from GPFG is also very high, which yields only a handful of excluded
companies. For example, four out of ten of the fund‟s largest shareholdings are oil and gas companies, which could
be considered unusual, considering that the function of the GPFG is to diversify from one asset, i.e. petroleum, to
a portfolio of international securities in order to reduce risk. Arguably GPFG should diversify away from the oil
sector, and invest in sectors that can act as a counter-balance to the oil sector, in particular the „green‟ area.


The research team looked into the ESG performance of GPFG‟s largest investments. Based on RiskMetrics‟ IVA and
GC+ methodologies (Appendix E), most of its largest investments by value and by percentage ownership receive
above-average ratings (above “A”). The summaries appear in Figures 25 and 26.


Figure 25 The Ten Largest Equity Holdings in Investment Value


                                                                            Voting     Ownership
 Company                  Country         Sector              Holdings                                IVA
                                                                            Rights     Interest
 Royal Dutch Shell plc    UK              Oil and Gas         15262997      1.37%      1.37%          AA
 Nestle SA                Switzerland     Food Products       14901137      1.42%      1.42%          AAA
 BP plc                   UK              Oil and Gas         13151267      1.31%      1.33%          AAA
 Exxon Mobil Corp         US              Oil and Gas         12216868      0.43%      0.43%          BBB
 Total SA                 France          Oil and Gas         11313968      1.26%      1.26%          AA




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 HSBC plc                   UK            Banks                   10561521    1.31%    1.31%          BBB
 Novartis AG                Switzerland   Pharmaceuticals         10350119    1.13%    1.13%          AA
 Roche Holding AG           Switzerland   Pharmaceuticals         9997166     0.28%    1.08%          AAA
 E. ON AG                   Germany       Electric Utilities      9089589     1.64%    1.64%          A


Figure 26 Four Largest Equity Holdings in Percentage Ownership


                                                                                       Ownership
 Company               Country        Sector           Holdings       Voting Rights                       ISVA
                                                                                       Interest
                                      Paper     and    165619         2.42%            7.35%              BBB
 M-real OYJ            Finland
                                      Forestry
                                      Paper     and    656750         8.71%            5.87%              Green
 Mondi plc             UK
                                      Forestry
                                      Paper     and    2629621        5.77%            5.77%              AA
 UPM-Kymmene Oyj       Finland
                                      Forestry
 China Water Affairs                  Water            51767          5%               5%                 _
                       HK
 Group Ltd                            Utilities


NBIM‟s approach to ESG issues is based on the belief that, even though better ESG performance might not result in
performance gains for a single company, it will result in portfolio performance gains for NBIM through secondary
effects given its global exposure.


Engagement Strategy

The exercise of ownership rights is Norges Bank‟s responsibility, governed by a set of principles adopted by the
bank‟s Executive Board. According to the fund, it actively exercises its ownership rights through voting, dialogue,
engagement with individual companies, collaboration with other investors, submission to relevant regulatory
authorities, and research and public communication.


GPFG does not provide any information regarding its policies to seek board seats in its portfolio companies, and
research has not found any evidence that it seeks board representation.

Based on its 2008 annual report, we summarized GPFG‟s engagement activities with portfolio companies. As
illustrated in Figure 23, NBIM engaged with a total of 45 companies on ESG issues during the year. NBIM told the
research team that its engagement attempts will remain confidential unless the case becomes publicized through
litigations.




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Figure 27 Companies with which GPFG Engaged in 2008

                            No.            of
 Issues                                         Sector
                            Companies
 Environmental              10                  Mining, Oil and Gas, Electricity, Energy and Water

                            19                  Chemical, Industrial Metals, Food and Drink, Electronics and
 Social
                                                Electrical Equipment, Oil and Gas, IT Hardware and Peripherals

 Governance                 16                  Unknown
Source: GPFG 2008 Annual Report


Engagement on environmental issues involved ten US companies with high sector intensity to the environment.
Topics discussed were the potential impact of proposals for reductions in greenhouse gas emissions on these
companies‟ business and investment strategies, and key issues that these companies would discuss with
lawmakers.


On the social side, NBIM started implementing the NBIM Investor Expectations on Children‟s Rights systematically
both as an analytical tool and in its dialogue with companies. Engagements were conducted with those companies
that did not report adequately or failed to provide information on their position on international conventions on
human rights, children‟s rights and child labor, and on their risk management in these areas both in their own
operations and in their supply chain.


In addition, the fund entered into dialogues with companies on various corporate governance issues. NBIM‟s
expectations of companies are based on international standards such as the UN Global Compact and OECD
Principles of Corporate Governance and Guidelines for Multinational Enterprises.


In April 2009, the Ministry of Finance called for an „observation list‟ of companies of concern before opting for
exclusions.


Proxy Voting Analysis

Voting is conducted in house by NBIM rather than exercised by its external fund managers. GPFG‟s proxy voting
activities are in line with NBIM‟s proxy voting guidelines, which are in accordance with NBIM‟s Principles for
Corporate Governance and the Protection of Financial Assets. It is stated that NBIM will actively exercise its voting
rights in order to protect and achieve growth in the financial assets of the funds under management.


GPFG‟s voting guidelines state that “non-financial considerations cannot take precedence over long-term financial
considerations related to the value of the portfolio,” and it will support shareholder proposals on ES issues only if
such issues are believed to influence “the long-term value and sustainability of the fund.”


NBIM has stated in its voting guidelines that it generally votes against shareholder proposals that demand
disclosure or reporting in excess of what is demanded by local law and regulation, provided it sees no value for
shareholders in the long term of these proposals. However, there are contradictory statements; for instance, NBIM
also states that it will consider supporting proposals regarding company reporting on carbon emissions, issuance of
environmental impact assessments, and adoption of international human rights and labor standards.




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GPFG states that it aims to vote at all general meetings of the companies in which the fund has shares. In 2008,
GPFG voted on 68,724 items at 7,871 general meetings. As such, NBIM exercised its voting rights in almost 90% of
the companies in its portfolio. NBIM generally supported management‟s proposals, voting against 11% of proposals
from the company. NBIM did not sponsor any shareholder proposals in 2008. Voting records are published annually
and are available to the public on Norges Bank‟s website.


On environmental issues, NBIM voted on 80 proposals at 42 companies, mainly concerning reduction targets of
greenhouse gas emissions. However, research discovered that 21 „against‟ votes were cast on items such as
production of sustainability reports, reporting on GHG emissions and environmental policies, recycling, renewable
energy and toxic substances.


On social issues, NBIM voted on 166 shareholder proposals at 110 companies. The majority of these proposals
called for the implementation of guidelines on human and labor rights, and improved disclosure and reporting by
the company on its social responsibility and human rights performance. Among the 166 proposals, there were 31
exceptions where NBIM voted against ESG proposals such as adopting the ILO standards or the MacBride Principles.


The research team contacted NBIM for an explanation as to why these 52 „against‟ votes were cast. NBIM
responded that the votes on ESG issues are not systematic and decisions are made on a case-by-case basis. NBIM
stated that voting is in accordance with the voting guidelines; however, it may be against the generally stated
position if NBIM thinks that the specific proposal will be too expensive to implement, too complicated, impractical
or in general not in the best interests of the company, even if NBIM may support the underlying intent of the
proposal.


NBIM said it systematically voted against all the cases of appointments of the same person for the CEO and
chairman positions in the 2009 proxy voting season.


International Code Commitments

Along with many large SWFs, GPFG is a member of the International Working Group (IWG) for Sovereign Wealth
Funds Santiago Principles. No official statements have been found regarding full compliance to the new guidelines.
According to our assessment on the fund‟s performance with the Santiago Principles, GPFG has extensive
disclosure and meets the requirements set up by IWG.


In April 2009, the Norwegian Ministry of Finance stated that, as an owner of GPFG‟s assets, it would become the
first government entity to become a signatory of the UN PRI, and would seek to drive its responsible investment
policy for the fund according to the PRI‟s six guiding principles.


GPFG assesses its portfolio companies‟ ESG performances based on international standards such as the UN Global
Compact and the OECD Principles of Corporate Governance and Guidelines for Multinational Enterprises.


During 2008, NBIM became a signatory to the Carbon Disclosure Project (CDP), and it also signed the Investor
Statement on a Global Agreement on Climate Change. In addition, GPFG often works with a number of
transnational organizations such as UNICEF and ILO.




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6.3. Government       of     Singapore
                                                                    Country:               Singapore
Investment Corporation (GIC)
                                                                    Date of Inception      1981

                                                                    Assets           Under USD 150 – USD 250
                                                                    Management             billion (estimated as of
                                                                                           2009)

                                                                    Analyst:               Tim Barnett



Figure 28 GIC Analysis Overview


                              Incorporated body wholly owned by Singapore‟s government
                              Board is made up of a mix of government officials and people with independent
 Governance                   backgrounds

                              Board predominantly comprises Singaporean nationals
                              Relatively large team from a wide range of nationalities
 Capabilities
                              Operates international offices
                              Long-term oriented investment behavior (stated and track record)
                              Mostly a passive investor (though cases of active investment were discovered in our
 Investment Behavior          study)
                              Holds a wide range of asset classes including public equity, fixed income, private
                              equity, LBO, hedge fund etc.

                              Limited disclosure regarding engagement strategy and proxy voting – traces of
 Engagement
                              active investment found
                              Limited environmental or social policies or strategies in place
 E&S Investment Policies
                              Does not appear to have any strategic E&S activities
                              Publishes an annual review document with limited financial and portfolio
                              information
 Disclosure                   No disclosure on portfolio details, proxy voting, etc.
                              Does not report the exact amount of its assets under management


General Outlook

GIC is one of the SWFs with an above-average level of overall disclosure on its governance structure and
investment strategy.


Overall, there is limited information available regarding the engagements strategy at GIC. In addition, GIC does
not publish any information on its proxy voting policies, and there are very limited proxy records available for the
fund. However, research has shown that the fund is active at least in some of its international investments.


Overview




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The Singapore Government Investment Corporation (GIC) was established in 1981 with the aim of managing
Singapore‟s foreign reserves. Headquartered in Singapore, GIC also operates international offices in San Francisco
and New York, U.S.A.; London, England; Shanghai and Beijing, China; Seoul, South Korea, and Tokyo, Japan. GIC is
split into three divisions, GIC Asset Management, GIC Real Estate, and GIC Special Investments.


GIC does not provide any official information regarding the total assets under management but does state that it
manages „in excess of USD 100 billion‟. However, the fund has been estimated to have assets well in excess of USD
200 billion14 with some older estimates putting the fund as high as USD 330 billion 15. GIC has recently confirmed
reports that its assets have fallen by approximately 25%16 due to the recent financial crisis. Based on this, along
with current reports, GIC‟s assets under management have been estimated at USD 150 - 250 billion.


In its 2007/2008 annual report, GIC reports that it employs just over 1,000 people. Of GIC‟s investment
professionals, 45% are Singaporean nationals, 32% from Asia, Australasia and Africa, 12% from the Americas, and
11% from Europe.


The diversity in its employee base and the existence of international offices all help to reassure investors that GIC
is integrated into the global investment community. In addition, the recruitment of staff from multiple
nationalities helps to ensure that GIC taps the best managers to work on its investments.


The track record of GIC as a long-term investor is a reassuring factor in comparison to several recently established
SWFs.


Governance

GIC is an incorporated body which is wholly owned by the Singaporean government, an arrangement which GIC
states allows it to operate autonomously as a global fund manager whilst at the same time retaining government
oversight.


The board of governors at GIC is made up of a mix of government officials as well as a number of representatives
with a private-sector background, or at least who do not appear to hold current government positions. (The fund
has not responded positively to our survey; consequently, additional information could not be obtained in this
area). The chairman, Mr. Lee Kuan Yew, has headed GIC since its inception and currently holds the position of
Minister Mentor. His political career started in 1959 when he was appointed as Singapore‟s first Prime Minister, a
term which lasted until 1990. The deputy chairman, Mr. Lee Hsien Loong, is the current Prime Minister of
Singapore, and the executive director, Dr. Tony Tan Keng Yam, is the former Deputy Prime Minister and
Coordinating Minister for Security and Defense, a position from which he retired in 2005. In addition, Dr. Tan has
experience in the banking sector as chairman and CEO of OCBC Bank from 1992 to 1995 as well as government
roles for trade, industry and finance. Other government members with board positions include the Minister for
Trade and Industry, the current and previous Ministers for Finance, and the Minister for Transportation and Second
Minister for Foreign Affairs. Board members from the private sector include the Chairman of Singapore
Technologies Engineering Ltd., the CEO of Singapore Airlines Ltd., and the CEO of Singapore Exchange Ltd. In
addition, the heads of GIC‟s separate investment divisions all have a seat on the board. GIC operates boards at
division levels, with the majority of members being from the private sector. The division level senior management
is also made up exclusively of managers with private-sector backgrounds. The majority of the overall board




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appears to be made up of Singaporean nationals, but a number of senior positions within the boards of the
separate divisions are held by non-Singaporeans.


The close ties of the board to current government officials and ministers could potentially lead to a greater risk
that political or strategic criteria will be used in GIC‟s investment decisions. However, the fact that GIC operates
as an incorporated body along with the presence of private sector board members and senior management, should
help to mitigate fears that the fund‟s behavior is excessively influenced by the government of Singapore. A large
number of the Singaporean board members have international experience or education, and the boards of the
specific investment divisions include foreign nationals as well as local members. This should help to improve the
international outlook of the fund.


GIC publishes some information regarding its reporting structure. In 2007/2008, the fund published its first annual
report. This report highlights the fund‟s overall performance over the financial year but provides limited
information on its portfolio, engagement and other aspects of the fund‟s management. GIC does not disclose the
size of the fund. It is also unknown when the next report will be published, but it is implied that this will be a
running annual reporting structure. GIC publishes extensive information regarding the structure, history,
governance and investment process through its website. On top of public reporting, GIC is required to provide a
quarterly report to the Ministry of Finance‟s Accountant General‟s department detailing executed investment
transactions, current holdings and balances. This report also includes detailed information on the performance of
the fund and the risk analytics. Once a year, the GIC management meets with the Minister of Finance to formally
report on the overall performance of the fund.


The release of an annual report is a good step towards improved disclosure by GIC. However, there could be more
extensive information regarding the size and distribution of the fund and its engagement practices, which would
allay regulatory and investor concerns and show better compliance with the Santiago Principles‟ requirements (for
more information, please refer to the section on Comparative Analysis of Santiago Principles Compliance).


Investment Strategy

GIC provides extensive details regarding its investment approach and process. Its core mission is stated as the
achievement of long-term returns on state assets placed under management with GIC through international
investments with due regard to risk and the nature of associated liabilities. The objective of the fund is to
preserve and enhance the international purchasing power of the reserves of Singapore by achieving a rate of return
higher than the rate of inflation over the long term. In addition, there are medium-term aims to outperform an
appropriate composite of market indices. GIC operates with a long-term view on its portfolio of investments


GIC does not provide any precise details of any rules regarding withdrawal of funds from GIC by the government.
However, it does state that the Constitution of Singapore mandates that a proportion of the fund‟s income can be
used to support the government‟s budget when needed. There is no information as to what proportion of the
income can be affected in this way or under what terms. Ease of access by the government to the assets of the
SWFs (without need for parliamentary ratification or other legal constraints) could result in concerns about the
possibility of liquidity-driven investment behavior in the face of unforeseen government capital needs.




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The annual report states that GIC conducts the majority of its investment management in-house, but it does
outsource approximately one third of its assets to external managers (see Investment Outsourcing for more
information).


Figure 29 GIC Portfolio Breakdown Based on Asset Class




                                                                         Fixed Income,
                                                                             26%

        Public Equities,
             44%



                                                                                    Alternatives,
                                                                                        23%

                                                 Cash and Others,
                                                       7%


Source: GIC 2008 Annual Report


Figure 29 above shows the breakdown of GIC‟s portfolio by asset class. It is clear that its investments are spread
across a wide range of asset classes. Although there is no historical data available with which to compare, GIC does
report that it has recently accelerated the pace of investment into the real estate and private equity markets and
diversified further into emerging markets and started to invest in hedge funds, natural resources and
infrastructure. At the same time, fixed income assets have been heavily reduced from over three quarters of the
portfolio 25 years ago to approximately one quarter at the current time.


GIC also publishes the geographical breakdown of its assets, shown in Figure 30. This demonstrates that a
significant portion of the fund is invested in the Americas, primarily the United States with European investments
making up the second largest group. The report states that GIC has recently expanded its investments in Asian
markets and the emerging economies.




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Figure 30 GIC Portfolio Breakdown in Geography




                                 Europe, 35%
                                                                                  Asia, 23%




                                                                             Australia, 2%
                                     Americas, 40%



Source: GIC 2008 Annual Report


Investment Outsourcing

GIC invests in a variety of externally managed funds including real estate funds, private equity funds, bonds, index
funds and hedge funds. In addition, GIC places mandates with external fund managers in asset classes such as
global equities and fixed income. In total about one third of its assets are outsourced to external managers with
the remainder managed in-house. External managers are selected for their ability to extend the skill set of GIC to
asset classes in which it does not have extensive experience as well as complementing the fund‟s internal asset
management capabilities.


However, there is no information provided regarding the identity of these managers or any strict criteria regarding
how they are chosen or assessed. GIC does not disclose whether it provides its external asset managers with
guidelines for engagement and proxy voting.


Equity Portfolio Analysis

With the exception of the information provided regarding the breakdown of the fund by asset class and geography,
GIC does not publish extensive information about its portfolio especially at the level of individual holdings. Lack of
information in this area could lead to increased suspicion of the fund‟s‟ activities and motives when making
investments. For example, without any information on the portfolio it is impossible to ensure that there is no
specific strategic sectoral focus in its investments.


GIC exclusively invests outside Singapore with a particular focus on established economies in America and Europe.
However, in recent years it has expanded its reach to Asia and Africa as well as developing economies.




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Through its Special Investment arm, GIC has taken part in a number of private equity buyouts. Together with
venture capital, they represent 8% of GIC‟s assets under management. On its website, GIC provides a list of some
of its private equity investments.


Environmental and Social Factors in Investments

GIC does not appear to conduct any analysis of environmental or social factors in its investment decision process.
Active management of these issues can lead to both improved assessment of the risks relating to companies and to
potentially new investment opportunities in industries such as alternative energy.


No record was found of any environmental and social investments or risk management carried out by GIC within
Singapore or internationally.


Engagement Strategy

GIC does not publish any information regarding its engagements with companies in which it has investments. The
research team contacted four companies in which GIC holds significant shares, including Beijing Capital
International Airport (China), Citigroup (US), Great Portland Estate (UK) and Liberty International (UK). Beijing
Capital International Airport confirmed that GIC is the largest shareholder with over 20% stake. According to the
Chinese company, GIC attends AGMs and exercises its voting rights. For the AGM in 2009, GIC has put forward a
motion which would allow it to appoint a board member at Beijing Capital International Airport. If this resolution
receives majority votes, GIC‟s will have a seat on the board as a non-executive director. In our contact with Great
Portland Estate (GPE), GPE declined to comment. Active investment behavior without disclosure of engagement
principles can be a source of concern to GIC‟s co-investors and regulators.


Proxy Voting Analysis

GIC states that ownership rights are exercised to protect the financial interest, but does not publish any proxy
voting records. However, a significant part of the public equity holdings of GIC are relatively small and as such it is
difficult to make any assessment of what influence the fund is having with regard to proxy voting. It should be
noted that based on the company‟s statement, the investment in Beijing Capital International Airport was recently
expanded. In the previous years, GIC is unlikely to have held significant influence in the company.


International Code Commitments

GIC is a signatory of the IMF‟s International Working Group on Sovereign Wealth Fund‟s Santiago Principles.
Contribution to the development of these principles is commendable and shows that GIC is keen to work towards
improving the international reputation of sovereign wealth funds and enhance the level of understanding and
disclosure regarding the funds‟ activities. In our assessment based on the Santiago Principles, we found that GIC‟s
disclosure level is above average, but further information regarding engagement policy and ownership strategy is
needed. GIC is not a signatory of the UN Principles for Responsible Investment.




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                                                                    Country:            Kuwait
6.4. Kuwait Investment Authority (KIA)
                                                                    Inception:          1953

                                                                    Assets     Under USD 190 - 220 billion
                                                                    Management:      (estimated as of July
                                                                                     2009)

                                                                    Analyst:            Tim Barnett




Figure 31 KIA Analysis Overview


                      KIA is a separate legal entity from the government
 Governance
                      Four out of nine board directors hold current government positions
                      Outsources the management of a proportion of its assets

                      Has international offices
                      Has a long history of successful long-term investment management
 Capabilities
                      Does not provide details of external fund managers, its outsourcing management
                      principles and practices

                      The board and senior executives are mostly from Kuwait


                      Stated long-term investment approach which is consistent with its practices
 Investment           Mostly portfolio-based investment approach
 Behavior
                      Has return targets and is return focused
                      Does take large stakes in some investments

 Engagement           Appears to be an active investor in a number of its investments without publishing any
                      engagement or proxy voting strategies
                      Negative screens for certain criteria, primarily alcohol, adult entertainment, and
                      gambling
                      No policies on ESG issues
 ESG Investments
                      Investment in companies with high environmental or social footprint without any
                      environmental engagement platform (e.g. Oil and gas companies)

                      Has historically disclosed its total assets under management but no portfolio details

 Disclosure           Does not disclose detailed portfolio information
                      Only reports on a regular basis to the Government of Kuwait – limited public reporting




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General Outlook

As the oldest sovereign wealth fund, KIA has extensive experience and a long track record of investment
management. Also, the large size of the fund in comparison to the size of the economy of Kuwait renders its
investment practices more resilient to economic downturns and short term government capital needs.


Overall, the Kuwait Investment Authority (KIA) is fairly opaque. There are significant deficiencies in its disclosure
on engagement and proxy voting. In addition, there is very limited information available regarding its investment
portfolio, which makes it difficult to study its investment style and to analyze to what extent the fund exerts
influence on the companies in its portfolio.


Overview

KIA was formed in 1953 with the aim of achieving long-term returns on oil revenue surpluses and to diversify the
country‟s sources of income. KIA operates two key funds, the General Reserves Fund (GRF) and the Future
Generations Fund (FGF). The GRF holds all government assets and receives all government revenues. Annually 10%
of government revenue is transferred to the FGF.


In 2007, KIA reported that its total assets amounted to USD 213 billion, of which USD 174 billion was held in the
FGF and USD 39 billion in the GRF17. KIA is reported to have lost approximately USD 31 billion due to the current
economic crisis18. In light of this information and the oil price trends, the total current assets under management
have been estimated at USD 190 – 220 billion.


KIA is based in Kuwait but operates a London office, the Kuwait Investment Office (KIO), which acts as an
investment subsidiary. KIA reports that this office employs approximately 100 people. However, no breakdown for
operations in Kuwait and abroad is provided. The presence of a London-based office suggests that KIA is outward
looking and is more integrated into the global financial community than some other SWFs.


Governance

KIA appears to act in conjunction with the central bank for the State of Kuwait with all government revenues being
directed through the GRF. Ten percent of this income is transferred to the FGF for investment outside Kuwait. The
KIA board consists of members from both government and the private sector. The position of chairman is occupied
by the Minister of Finance with three further board positions given to the Governor of the Central Bank of Kuwait,
the Minister of Oil and the Under-Secretary of the Ministry of Finance. The remaining five positions are occupied
by private sector members; one of these is a managing director appointed by the board. The structure of KIA‟s
board suggests a good mix of government involvement coupled with independent leadership. This approach should
help to ensure the fund is well regulated and controlled by the owner as well as operating in an independent
manner.


The executive management team consists of 11 mostly independent members including the Managing Director, the
President of KIO, Executive Directors in General Reserves, Alternative Investments, Marketable Securities,
Operations and Administration and the Office of the Managing Director. In addition, there are heads of Legal
Affairs, Internal Audit, and Debt Settlement.




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KIA reports directly to the Kuwaiti Council of Ministers on an annual basis. This report is not available to outside
parties. The lack of external communication and transparency on different aspects of the fund‟s operations is
common amongst sovereign wealth funds and can cause suspicion regarding the investment and engagement
intentions of the fund.


Investment Strategy

According to its own statements, KIA is a passive investor seeking to achieve long-term investment returns on the
funds entrusted by the State of Kuwait, which in turn provides an alternative to oil revenues. The passive
investment approach allays concerns about the possibility of political or strategic motives in its investment
management, but it could also leave a gap in the governance of the companies in its portfolio, as there is a
decrease in the importance of shareholders in the management of companies in which KIA is invested. However, in
the course of our analysis some cases were discovered where KIA has used its right to seek board seats and also the
fund has been observed to use its proxy voting rights in some cases. KIA aims to achieve a rate of return on its
investment that, on a three-year rolling average, exceeds its composite benchmarks by


              Designing and maintaining an asset allocation consistent with its mandated return and risk objectives

              Selecting investments and investment managers with the ability to outperform the respective index
              for each asset class

              Placing an emphasis on diversification across geographic locations and asset types


That policy supports the argument that KIA is primarily economically focused and that political or strategic
investments are less likely, as they may not achieve the returns necessary.


In addition, KIA seeks to ensure that funds are distributed across a wide range of external fund managers (EFMs)
(see Investment Outsourcing for more details on external fund managers).


KIA was the first SWF established, and since its inception it has not been involved in any controversial cases
related to the nature of its investments and engagement. This signifies that the fund is a stable, committed long-
term investor.


Investment Outsourcing

KIA states that a significant portion of its portfolio is managed by EFMs, none of whom are named by KIA. However,
the fund does provide details of how these EFMs are chosen and managed. These managers are selected following
a detailed process of evaluation and assessment, which looks at a number of key criteria:


              EFMs‟ resources and capabilities

              Assets under management

              Fundamental and technical expertise

              Investment philosophy and style




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              Track record of risk management and performance

              Number of institutional clients


These EFMs are expected to invest in prime quality marketable securities as well as follow a conservative
investment strategy, whilst preserving capital in real terms and achieving optimum long-term growth. The
selection of securities should be primarily driven by research and analysis-based approaches and supported by
quantitative analysis techniques. All EFMs are also required to comply with all legislation, laws and regulations, as
well as professional standards and administrative procedures developed by KIA.


All managers are monitored on an ongoing basis in order to ensure that investment goals are being achieved and no
investments are made in a number of areas including companies involved in the gambling, liquor, and adult
entertainment industries, private placement, and venture capitalization. Investments in a single issuer may not
exceed 5% of the portfolio at the time of the investment.

KIA operates strict guidelines on the amount of funds held with each EFM and employs a number of EFMs to
enhance diversification. In addition, the core competencies of each EFM are considered and identified.


By using external management for their funds and introducing leading outsourcing management practices, KIA
helps alleviate concerns regarding the underlying intention of its investments. The use of established managers
also supports KIA‟s claims that it is an economic investor mainly interested in the rate of return achieved from its
funds. However, the lack of clarity as to what proportion of the funds are under external management, as well as
the lack of any details regarding the identity of these managers does lead to ambiguity regarding the fund‟s
investment principles and approach. In a discussion with one of KIA‟s external asset managers, the research team
learned that KIA‟s management is primarily return oriented and KIA does not provide the company with any proxy
voting guidelines. This confirms the fund‟s established reputation as a passive economically focused investor, at
least for the outsourced portion of its portfolio.


Equity Portfolio Analysis

KIA does not make any clear-cut statements regarding the sectoral focus of its portfolio but rather states that its
overall strategy is to seek a wide diversity of investment types. Geographically, however, FGF does act as a
diversified international investor without any discovered geographical focus.


KIA does not publish any portfolio information, making it difficult to draw any conclusions regarding its actual
investment portfolio. From the limited information available 19 it appears that the fund invests relatively small
amounts in a wide variety of sectors, very rarely taking more than 1% of the total equity in its target investments.
This approach is consistent with a diversified portfolio approach.


In certain cases, KIA has been known to take much larger stakes in individual companies and thus move away from
a diversified portfolio approach to its investments. In July 2008, KIA made large-scale investments into Merrill
Lynch of just short of USD 2 billion 20 giving the fund a 4.6% share of Merrill‟s business and making it the third
largest investor. At around the same time, KIA made a similar-sized investment into Citigroup21. In addition, KIA
holds significant stakes in a wide range of companies including BP Plc (1.7% stake), Daimler AG (7.6% stake), Gea
Group (8.2% stake), as well as the Swiss luxury hotel chain Victoria-Jungfrau Collection AG (23.8% stake)22.




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Environmental and Social Factors in Investments

KIA does not appear to put much emphasis on environmental and social factors in its investments. However, it does
make limited statements regarding its desire to improve the quality of governance amongst other Kuwaiti
companies and organizations by setting an example in its own activities through careful management of the
economic and social impacts of its investment decisions.


In addition, KIA operates a negative screen banning investment in industries relating to gambling, alcohol, and
adult entertainment.


KIA appears to lack an explicit environmental and social risk management policy.


Engagement Strategy

KIA does not publish extensive information relating to its engagement with its portfolio companies. As the majority
of its investments represent very small proportions of the total company value, it must be assumed that KIA does
not have great influence over the strategic management of its investments. However, there are a number of cases
where KIA holds a greater proportion and does seek to exert influence. For example, research has revealed that
KIA has a seat on the GEA Group‟s supervisory board. KIA owns approximately an 8.2% stake at GEA Group, and KIO
was on the supervisory board in 2002. The seat was subsequently replaced by KIA in 200323. In our communication
with GEA, it transpired that “it is not foreseen under German law that the supervisory board participates in
meetings of the GEA executive board,” but members of GEA‟s executive board participate in meetings of the
supervisory board. This implies that the two-tier management and oversight structure enforces the separation of
management and supervision, which appears to partially remove the concern of non-economic and non-financial
influence by KIA in GEA‟s day-to-day operations. Other companies in which KIA has significant investments, such as
BP and Daimler, do not appear to have any representation from KIA on their boards. According to our dialogue with
Daimler, where KIA has a 6.9% stake, KIA attends AGMs and exercises voting rights. Other portfolio companies in
which KIA is a major investor were reluctant to comment.


Figure 32 illustrates the companies contacted and their response. How any investment fund interacts with its
investments is of huge interest to a wide variety of parties including the companies themselves and other
stakeholders in the business. In an effort to better understand KIA‟s investment and engagement activities, we
invited KIA and KIO to participate in a survey. KIO declined to take part due to „its governmental nature‟.




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Figure 32 Response from KIA’s Portfolio Companies


 Portfolio Company             % Shareholding                Response

                                                             Confirmed shares carry voting rights but decline to
 BP                            1.75%                         comment further

 Daimler                       6.90%                         KIA attends AGM and exercises voting rights
 EIIB                          3.68%                         Declined to comment
                                                             Confirmed KIA has been on the supervisory board
 GEA Group                     8.20%                         since 2002

 Victoria           Jungfrau                                 Confirmed shareholding for over 10 years – no
 Collection                    23.80%                        comments about engagement


Proxy Voting Analysis

With regard to proxy voting policy, KIA states that it exercises its voting rights, if at all, in a manner that it
believes will protect the financial interests of the fund; it also claims that to the extent KIA votes for the election
of any board members of a portfolio company, such board member will be subject to all the obligations of board
members under applicable laws.


KIA does not publish any proxy voting guidelines, results or analysis through any publicly available channel.


International Code Commitments

KIA is a member of the International Working Group24 for Sovereign Wealth Funds and as such has been involved in
the development and implementation of the Santiago Principles. It does not appear that KIA is in full compliance
with the principles. KIA‟s legal, governance, and investment frameworks were assessed against the 24 voluntary
principles set up by IWG. Based on our analysis provided in the „Santiago Principles Compliance‟ section, KIA‟s
compliance level is average relative to the other SWFs.




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                                                                     Country:                 Russian Federation
6.5. Russian    Reserve                       Fund          and
                                                                     Inception:               2004     (current    form
National Wealth Fund                                                                          established in 2008)

                                                                     Assets     Under USD 220 billion as of 1
                                                                     Management       March, 2009

                                                                     Analyst:                 Tim Barnett




Figure 33 Russian Reserve Fund and National Wealth Fund Analysis Overview

                                         Management team all from within Ministry of Finance
 Governance
                                         No details on senior management provided

                                         Indicates that external management is likely to be used if it were to
 Capabilities                            invest in equities


 Investment Behavior                     Does not currently hold any international equities

 Engagement                              No engagement strategies currently in place

 ESG Investments                         No information available

                                         Reports directly to the government

 Disclosure                              Provides breakdown of fund performance through its website




General Outlook

The Russian Stabilization Fund (RSF) has recently been split into two new funds, the Reserve Fund and the National
Wealth Fund. At the current time, neither fund is invested in international equities, although the National Wealth
Fund is permitted to do so. As such, at the current time, neither fund publishes any information regarding its
engagement strategies or proxy voting records.


Overview

RSF was established in January 2004 as a stabilization fund as part of the Russian federal budget with the aim of
balancing the federal budget at times when the oil price falls below a cut-off price, set at USD 27 per barrel at the
time. However, in February 2008, the RSF split into two separate funds, the Reserve Fund and the National Wealth
Fund. The Reserve Fund, currently valued at approximately USD 136.3 billion25, operates as a replacement for the
RSF; its aim is stated as contributing to the stability of the Russian economy, reducing inflationary pressures, and
insulating Russia from volatility of its natural resource export earnings. The Reserve Fund will be invested abroad
in low-yield securities. However, in contrast to RSF, the Reserve Fund accumulates federal budget revenues from
natural gas as well as the oil revenues that formed the income of RSF. The National Wealth Fund, currently valued




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at USD 83.9 billion26, will invest in higher-return vehicles with greater levels of risk. The aim of this fund is to
ensure the security of future pension payments.


Governance

There are no specific details as to the overall management of either the Reserve Fund or the National Wealth
Fund. However, since both funds are integrated within the Russian Ministry of Finance, it can be assumed that the
responsibility for management of the funds rests with the Ministry itself. The board and management structure of
the specific funds is not disclosed; there is no evidence of any representation by external or independent board
members.


Both funds have to report their financial position on a monthly basis. The reports are made public through
mainstream media sources, and up-to-date reports on the transactions of the funds are made available through the
Ministry of Finance‟s website. The Ministry of Finance reports to the government on a quarterly basis regarding the
accumulation of the fund, investment decisions, and spending. In turn, the government reports the same
information to both houses of the national parliament, also on a quarterly basis.


Both funds are audited on an annual basis by the Accounts Chamber of the Russian Federation, an independent
statutory auditor established by the Federal Assembly.


Investment Strategy

At the current time, both funds are allowed to invest through the purchase of foreign currency or through the
purchase of bonds issued by foreign governments and other international financial institutions. The National
Wealth Fund is permitted to invest in equities, but at the current time has not done so and has limited investments
in bonds and currency transactions.


Figure 34 Current Breakdown of the Reserve Fund’s Investments

                                                       Limits     Set         By   Approved     By   Ministry     of
                                                       Government                  Finance
 Foreign government bonds                              50-100%                     95%
 Bonds of foreign government agencies and central      0-30%                       0%
 banks
 Bonds of international financial organizations        0-15%                       5%
 Deposits in foreign banks and lending agencies        0-30%                       0%




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Figure 35 Current Breakdown of the National Wealth Fund's Investments


                                                                  Norms approved

                                                  Limits set by   by the Ministry of Finance
                                                  Government
                                                                  Foreign            Domestic currency        (max
                                                                  currency           40% of fund)

 Foreign government bonds                         0-100%          100%               0%
 Bonds of foreign government agencies and         0-30%           0%                 0%
 central banks
 Bonds      of      international     financial   0-15%           0%                 0%
 organizations
 Deposits to accounts of bank of development
 and foreign economic activity (Government        0-40%           0%                 100%
 owned)
 Bonds of legal entities                          0-30%           0%                 0%
 Stocks of legal entities and shares of           0-50%           0%                 0%
 investment funds


Both funds are permitted to invest in bonds from a selection of countries, namely Austria, Belgium, the U.K.,
Germany, Denmark, Ireland, Spain, Canada, Luxembourg, the Netherlands, the U.S.A., Finland, France and
Sweden. In addition, there is a limited list of international financial institutions in which the funds are permitted
to invest. These are the Asian Development Bank, the Council of Europe Development Bank, the European Bank for
Reconstruction and Development, the Inter-American Development Bank, the International Finance Corporation,
the International Bank for Reconstruction and Development, and the Nordic Investment Bank.


Investment Outsourcing

Currently, external fund managers are not used for the funds. An IWG survey does state that some functions of
asset management for the National Wealth Fund may be delegated to the Bank of Russia or to external asset
managers in the future.


Equity Portfolio Analysis

The Russian funds currently have no international equity investments.


Environmental and Social Factors in Investments

Neither of the funds has any policies or strategies in place to account for social or environmental issues in their
investments. Due to the lack of equity investments there is very little scope for the funds to be impacted by
environmental and social factors.


Engagement Strategy




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There appears to be no engagement strategies or guidelines in place for either of the funds at the current time.
Since there are no current equity investments, there is limited need for such strategies, but any future
investments in equities on the part of the National Wealth Fund would need to be governed by an engagement
strategy.


Proxy Voting Analysis

As there are no current equity investments, no proxy voting records are published. However, with the potential for
making equity investments in the future, the funds should set out its intentions as far as proxy voting is concerned
in order to reassure fellow investors and recipients of investment as to the motives of the funds.


International Code Commitments

Both Russian funds are signatories of the International Working Group for Sovereign Wealth Funds‟ Santiago
Principles suggesting that they are concerned about their public image and disclosure practices on an international
scale and are also interested in improving the image of sovereign wealth investments globally. Neither fund is a
signatory of the UN Principles for Responsible Investment.




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6.6. China Investment Corporation                              Country:          China

(CIC)                                                          Inception:        2007

                                                               Assets    Under USD 195 billion ( as of
                                                               Management      August 2009 - Estimated)


                                                               Analyst:          Chaoni Huang




Figure 36 CIC Analysis Overview

                         CIC is an independent legal entity
                         None of the Executive Committee members hold current government positions

                         Five of the non-executive board directors currently hold current governmental
 Governance              positions
                         Discloses the backgrounds of its governors and management executives

                         The State Council has the ultimate power in the appointment and removal of the
                         board directors
                         Outsources the management of a significant portion of its assets
                         Seventy-three staff members have overseas working experience
                         Most of its directors come from policy making background
 Capabilities
                         Hires external investment advisors
                         No current international offices, but may open an office in London
                         No evidence of political agenda
                         Long-term and passive investor (stated investment strategy)
                         Appears to invest in alternative investments including private equity
                         Five percent annual rate of return target
 Investment Behavior
                         Diversified portfolio
                         Divests (rather than engages) in cases of disagreement with the management of a
                         portfolio company
                         Passive investor resulting in dilution of shareholder governance power
 Engagement              No stated focus on improved governance in the portfolio
                         No proxy voting records found
                         No systematic ESG strategy
 ESG Investments         CDP signatory in 2008. Discontinued membership in 2009.
                         No money earmarked for environmental or social investments
                         No stated limits of government withdrawal
                         Insufficient portfolio details disclosure
 Disclosure              Published first annual report in August 2009 including financial performance
                         aggregates and portfolio structure and governance disclosure
                         Does not disclose proxy voting policies and records




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General Outlook

Overall, CIC‟s disclosure has shown improvement since its inception in 2007, as its corporate website details
information such as company overview, corporate governance, and investment strategy. In August 2009, CIC
published its first annual report to the public. Based on our research, it appears that CIC remains a passive and
long-term investor in the international markets. Given its recent publication of its first annual report, CIC‟s
reporting on governance and disclosure of investment management is above average compared to the other SWFs.


Limited information is publicly available about CIC‟s interaction with its portfolio companies in terms of strategic
influence, shareholder engagement, and proxy voting. Despite a voiced general commitment to environmental and
social risk management, no ESG risk management or investment strategies are disclosed by the fund. In August
2009, CIC published its first annual report which includes aggregate financial performance information and
accounting statements, portfolio highlights and governance related information. Disclosure on engagements and
proxy voting remain sparse.

Given China‟s large foreign exchange reserves, it would not be surprising to see CIC further grow its investments in
overseas markets in the near future.


Overview

CIC is an investment institution and a wholly state-owned company headquartered in Beijing. Established on 29
September, 2007 with the issuance of special sovereign bonds worth RMB 1.55 trillion (approximately USD 200
billion) by the Chinese Ministry of Finance (MoF), CIC is responsible for managing part of China's foreign exchange
reserves. CIC states that its mission is “to retain long-term investments which maximize risk-adjusted financial
returns 27 .” This statement implies that CIC is financially driven, rather than acting in the interests of the
government for political or strategic reasons. It has been reported that the fund has made positive returns in 2008
leading to USD 10 billion in profits for the fund.


Currently CIC‟s headquarters are in Beijing, but it is expected to set up branches overseas, the locations of which
are still to be determined. In December 2007, Lou Jiwei (chairman and CEO of CIC) stated that opening an office in
London was under consideration28. Having an international presence can be a sign of further integration into the
international financial community and should further the fund‟s effective communication with the international
financial community.


According to its annual report 2008, CIC has 194 employees in its workforce, 73 of whom have overseas working
experience and 18 are non-Chinese nationals. For instance, Mr. Gao Xiqing, Vice Chairman, President and CIO, who
graduated and obtained his Juris Doctor from Duke University, was a Wall Street lawyer for many years. Recently
in June 2009, CIC launched a new round of global hiring offered in over 33 categories by 13 departments. The
hiring advertisement states that the fund welcomes applications from all nationalities and backgrounds.


Governance

CIC is established as a limited company under the Company Law of the People‟s Republic of China. The fund states
that CIC has full operational independence and makes its investment decisions based on its assessment of
economic and financial objectives. While it emphasizes its independence, CIC remains accountable to the State




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Council of the People‟s Republic of China29, the highest executive authority headed by Premier Wen Jiabao. It is
unclear how often CIC reports to the State Council.


CIC‟s corporate governance structure is comprised of a board of directors, a board of supervisors, and an executive
committee. The board of directors consists of 11 governors, five of whom are non-executive directors, two are
independent directors, and one is an employee director. Lou Jiwei is chairman and CEO, while Gao Xiqing acts as
the vice chairman, president and CIO. Both Lou and Gao were appointed by the State Council. According to CIC‟s
Articles of Association, the non-executive directors are appointed by each of the National Development and
Reform Commissions (NDRC), MoF, the Ministry of Commerce (MoC), the People's Bank of China (PBoC - the Chinese
central bank) and the State Administration of Foreign Exchange (SAFE). The appointment and removal of a director
is subject to the approval of the State Council30. Five of the non-executive members of the board of directors are
current government officials. Two of the independent directors do not appear to have any current roles in any
governmental bodies, but have held responsibilities in the past. All of CIC‟s management executives had senior
government positions in the past. In July 2009, CIC announced the establishment of its international advisory
council composed of 14 internationally prominent experts and business executives. The OECD code for Good
Governance and the Santiago Principles 9 and 16 all recommend independence of ownership from the executive
management. The executive management of CIC does not hold current government positions, which demonstrates
a level of independence. However, given some of the executive managers of CIC held government positions before,
the level of independence at this fund is considered inferior to funds where the executive managers have pure
private-sector backgrounds such as Temasek and GIC. CIC did not respond to our feedback requests and surveys in
a detailed manner. Consequently it is unknown to us, whether the fund has sufficient processes in place to assure
the independence of operational management from the government.


Investment Strategy

CIC has used one third of its capital to purchase Central Huijin, which now controls China's major state-owned
commercial banks; another third to replenish the capital of the Agricultural Bank of China (ABC) and China
Development Bank (CDB); and the remaining third to invest in global capital markets31. However, in June 2008, CIC
announced that it increased its foreign investments to USD 90 billion at the expense of lower capital deployment in
the state-owned banks. Based on the 2008 annual report, as of December 31, 2008, over 50% of the USD 213 billion
capital of the fund, over 50% was reserved for international investments (which the fund calls Global Investments
Portfolio). The breakdown of its initial capital allocation is illustrated in Figure 37.




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Figure 37 CIC‟s Initial Capital Deployment


                                                                    Injecting capital
                                                                  into Chinese banks,
                                                                          USD
                                                                     43,000,000,000


                             Acquisition of
                            Central Huijin,
                                 USD
                            67,000,000,000


                                                                                      Overseas
                                                                                 Investments, USD
                                                                                   90,000,000,000




The way CIC splits its capital is important particularly in understanding its influence on international capital
markets. Despite its USD 200 billion capital, currently slightly above 50% of this amount is in the global investment
portfolio for investment in the international capital markets (based on the 2008 Annual Report). Out of this
amount by the end of 2008, only 3.2% was invested in international equities. Consequently the general concern
about CIC‟s USD 200 billion „financial horsepower‟ is inflated. This is significantly smaller than SWFs such as ADIA,
GIC, and KIA.


As CIC‟s USD 200 billion initial capital was raised by special bonds issued by the MoF, Lou Jiwei recently said that it
must earn RMB 300 million a day (approximately USD 40 million) 32 to pay its 4%-5% annual interest payments33.
CIC‟s overseas investments are concentrated in US dollars, while its debt is in Remnibi. Consequently, in the
absence of a hedging program, revaluation of the RMB against the USD and other western currencies would make
the return requirements more difficult. In a Bloomberg report, Lou was quoted as saying that “Our annual rate of
return target is 5 percent” and “Our long-term return target is a little bit higher than this''34. Despite heavy paper
losses for investments in Blackstone and Morgan Stanley, it is reported that CIC earned USD 10 billion in 2008,
representing a 5% return. CIC‟s target rate of return appears to be moderate, which is essential to its investment
style. An aggressively high rate of return is often associated with short-termism, which may lead to disturbance in
the receiving companies and in the capital markets, given the large size of SWFs.


The People‟s Bank of China (PBoC), which is ultimately responsible for China's foreign reserves, can recapitalize
CIC, according to the US-China Business Council35. CIC is a corporate entity which signifies that the government has
no direct say on CIC‟s individual investments and divestments, but in the absence of legal barriers the government
can still decide to divest from CIC as a whole. No evidence has been found regarding limits or parliamentary
controls on government withdrawals from the fund. , Lack of disclosure about withdrawal limits casts a degree of
uncertainty on the sustainability of the fund‟s long-term investment horizon.


CIC uses external fund managers to manage part of its foreign investments. Jesse Wang, Chief Risk Officer at CIC,
noted that CIC does not plan to manage the majority of its assets in-house, and will outsource the management of
“more of its cash-based assets over the long run”36.




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In addition to fund managers, CIC appears to hire external investment consultants and advisory teams to help
define its asset allocation and set a risk budget constraint for its portfolio. Reportedly, Boston-based firm
Cambridge Associates has been brought on by CIC for various strategic consulting services especially development
of the fund‟s capabilities in alternative asset classes (hedge funds, private equity and real estate)37.


Equity Portfolio Analysis

CIC states that its investments are not limited to any particular sector, geography, or asset class and include
equity, fixed income, and alternative assets such as private equity investments, hedge funds, and real estate
investments38.


According to CIC‟s Annual Report 2008, the global investment portfolio distribution (as of December 2008) was
reported to be as follows:

Figure 38 CIC Global Investment Portfolio Distribution


 Asset Class                                              Breakdown
 Cash Funds                                               87.4%
 Fixed Income Securities                                  9.0%
 Equities                                                 3.2%
 Others                                                   0.4%
Source: CIC Annual Report 2008


Based on the company‟s annual report, as of December 31 2008, the fund‟s international equity portfolio remains
limited to 3.2% of the total capital allotted to the Global Investments Portfolio of CIC. According to a report by
Xinhua, China‟s biggest national media outlet, in November 2007, China's Vice Minister of Finance Li Yong, also
non-executive director on the CIC board stated that “CIC would not buy into overseas airlines, telecommunications
or oil companies”39. According to a Bloomberg report, CIC acquired a 1.5% stake in Veolia Environment S.A., the
world's largest water company. CIC has become more active in acquiring assets in 2009. There was a speculation of
CIC‟s possible purchase of 3%- 5% of equity stake in Enel SpA‟s Green Power Renewable unit40. In March, Reuters
reported that Morgan Stanley‟s USD 6 billion Property Fund has secured a USD 800 million commitment from CIC 41.
In addition, reportedly Daimler AG, the world‟s second largest automaker, has been in talks with CIC for capital
injection. In July 2009, CIC agreed to purchase over 17% stake at Teck Resources Limited, a Canadian mining
company, for USD 1.5 billion42. According to Jesse Wang, CIC sees investment opportunities in the energy and
commodities sectors as prices have fallen steeply. CIC wants to diversify its portfolio into the “basic necessities,
resources and manufacturing” after incurring heavy paper losses on high-profile financial investments in
Blackstone and Morgan Stanley43. In the Boao Forum for Asia Annual Conference 2009, Lou expressed interest in
investing in Europe in 2009.




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As stated in the Investment Strategy section, CIC only plans to invest part of its USD 200 billion in the international
markets. Since its inception, CIC has completed a number of major deals. These have been summarized below.


Figure 39 CIC’s Major Transactions since Inception


 Portfolio Company                           Date           Investment (USD million)            % held by CIC

                                             May-07;
 Blackstone Group LP                                        >3000                               12.5%
                                             Oct- 08;
 China Railway H Share                       Nov-07         100                                 <2%
                                             Dec-07;
 Morgan Stanley                                             5600                                9.86%
                                             Jun- 09
 Visa                                        Mar-08         100                                 0.10%
 J.C. Flowers PE Fund                        Apr-08         3200                                80%
 Veolia Environment S.A                      Aug-08         275                                 1.5%
 Morgan Stanley Property Fund                Mar-09         800                                 -
 Blackstone Hedge Fund                       Jun- 09        500
 Teck Resources Limited                      July- 09       1,500                               17.2%

On 20th May 2007, CIC purchased USD 3 billion worth of shares of Blackstone prior to Blackstone‟s initial public
offering (IPO) at USD 29.605 per share. The shares were non-voting shares, and originally gave CIC 9.3% ownership.
Blackstone‟s press release reported that CIC had agreed to hold its investment in Blackstone for “at least four
years,” and that CIC‟s holding would be maintained below 10% 44 . However, according to a recent report in
People‟s Daily Online in October 2008, CIC “has raised its stake in Blackstone to more than 10% -- still short of the
12.5% limit recently agreed between the two parties”45. The extra shares were purchased in the open market,
which means that they are ordinary shares and give voting rights to CIC. A recent Reuters report in June 2009 said
that CIC was poised to invest around USD 500 million into a Blackstone Group hedge fund unit (not direct shares) 46.
No official comment from CIC on its additional share purchase was made, and Blackstone was reluctant to disclose
additional information requested for the purpose of this study.


In April 2008, CIC signed a deal with J.C. Flowers & Co to launch a USD 4 billion private equity fund to focus on
investments in US financial assets. CIC provided approximately 80% of the contributions, J.C. Flowers offered 10%,
and the remaining 10% came from various other sources. CIC acts as a limited partner of the new private equity
fund47. Given the lack of transparency in the private equity space combined with CIC‟s limited disclosure, it is
difficult to comment on CIC‟s investment activities through the private equity fund.


As of the time of this analysis, CIC appears to have adopted a passive investment approach in the target listed
companies. The passive orientation means that CIC is unlikely to be involved in engagement practices.


Investment Outsourcing

On its corporate website, CIC lists a number of asset management outsourcing selection criteria. “CIC selects
managers based on the application documents, the interview, the experience of the investment teams and track
record in the specific asset class, the management fee proposal, and other relevant considerations.”




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In December 2007, CIC first announced its plan to outsource some of its assets to external management. The
announcement has attracted over 200 fund managers to bid on four mandates, which include global equity, global
fixed income, emerging markets, and EAFE markets. In February 2008, CIC launched a second tender for two fixed-
income mandates – one global and the other emerging markets. The fund does not disclose whether and how the
external asset managers vote on its behalf.


Environmental and Social Factors in Investments

CIC has announced its intentions to consider responsible and sustainable investment policies. At a conference in
Beijing in June 2008, CIC President Gao declared that the fund would invest in clean energy and environmentally
friendly technologies and “everything cross-border except for casinos, tobacco companies or machine-gun
companies.”48 Despite this commitment, research has not found any systematic ESG investment strategies. Current
international holdings are mainly financial stocks, and no assets are earmarked for ESG investments.


Engagement Strategy

As emphasized by CIC, the fund sticks to its passive and long-term investment guidelines in pursuit of long-term
risk-adjusted returns. From its current stake purchases, no evidence has been found pointing towards board seat
seeking behaviors or engagement. Given CIC declined to participate in the survey for this report, details in these
areas are not available. Regarding its relationship with Blackstone, the research team attempted to contact
Blackstone, but the company was reluctant to disclose any further information beyond public filings. While allaying
concerns about political influence, passive investments create a governance gap in the companies and decrease
the shareholders‟ power to influence company behavior.


Proxy Voting Analysis

So far, research has not found any evidence of proxy voting exercised by CIC. The company‟s first 9.9% stake in
Blackstone carries no voting rights, but the additional purchase of about 3.5% in ordinary shares allows CIC to vote
on the company‟s resolutions. Nothing has been reported indicating that CIC exerts any influence on its invested
companies‟ governance and day-to-day operations which is consistent with the company‟s claim being a passive
investor,


International Code Commitments

Along with many large SWFs, CIC is a signatory to the Santiago Principles. No official statements have been found
regarding the timing for full compliance with the guidelines. According to our assessment of CIC‟s compliance with
the principles, CIC‟s disclosure on its legal framework, objectives, institutional framework and governance
structure is average. It is desirable to see future disclosure in areas such as fund performance, portfolio and its
investment management principles and practices. In April 2009, the International Working Group of Sovereign
Wealth Funds (IWG) established the International Forum of Sovereign Wealth Funds. Mr. Jin Liqun, Chairman of the
Board of Supervisors at CIC, was elected to be one of the deputy chairs of the Forum.


In addition, CIC became a signatory to the Carbon Disclosure Project (CDP) in 2008 as one of the first Chinese
companies. It does not appear that CIC has signed up to any other international codes or voluntary initiatives such




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as the United Nations Principles for Responsible Investment (PRI) and the Global Compact (GC); nor does it appear
that CIC continued its CDP signatory status in 2009.




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6.7. Temasek Holdings (Temasek)
                                                             Country:              Singapore

                                                             Inception             1974

                                                             Assets     Under USD 120 billion (as of July
                                                             Management       2009)

                                                             Analyst:               Tim Barnett



Figure 40 Temasek Analysis Overview

                                 Incorporated as a separate company with an independent board of directors

 Governance
                                 Independent senior management structure with private-sector backgrounds

                                 Large team from a wide range of nationalities
                                 A number of office locations around Asia as well as offices in Mexico and Brazil
 Capabilities
                                 Does not provide any information on the use of external asset managers
                                 Holds large (25% plus) stakes in a number of its investments
 Investment Behavior
                                 Long-term oriented investment behavior
                                 Discloses broad engagement policies mostly focused on governance


 Engagement                      Exercises rights as a shareholder - including proxy voting
                                 Evidence found regarding use of different engagement mechanisms including
                                 nominating board members, voting, etc.
                                 Does not have any substantive environmental or social policies or strategies in
                                 place
 E&S Investment Policies         Has invested in clean tech funds
                                 Works with several trusts and non-profit organizations in a number of areas

                                 Publishes annual review (since 2004)
                                 Extensive information available through website
 Disclosure
                                 Does not publicly report financial performance
                                 Financial reports are externally audited


General Outlook

Overall, Temasek operates in an open manner, particularly when compared to a number of other, more opaque
sovereign wealth funds, and takes an active approach to its investments. It publishes a wide range of information
through its Annual Review as well as its website and other sources. This includes its total assets under
management and highlights of its portfolio, as well as slightly more limited information on its investment and
engagement strategies. Unlike the majority of other sovereign wealth funds, Temasek frequently takes large
stakes in its investments.




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Temasek reports that it is actively using its shareholder rights, including voting, but allows its portfolio companies
to be independently managed by their respective boards. However, it does not publish any voting records, nor does
it appear to disclose any extensive engagement policies. Records show that it recommends board members, so it
clearly engages in the governance of the companies it invests in. Temasek stated that in companies where it is
entitled to board representation, the directors are not Temasek nominees and are instead independent directors
who have fiduciary responsibilities towards the company. The fund has a large concentration in the financial
sector, which represents around 33% of the total assets under management; investments are strongly concentrated
in the Asian region (43% of the portfolio as of 31 March 2009).


In spite of a lack of disclosed environmental and social risk management policies or guidelines, Temasek is active
in the environmental and social arena with a number of activities ranging from investments in clean tech funds to
charitable activities.


Overview

Temasek Holdings was established in 1974 with the aim of managing assets and investments previously held by the
Singaporean government through the Ministry for Finance (Incorporated). This move was designed to separate the
Ministry of Finance from its responsibilities in management of its assets and allow it to concentrate its activities on
policy making and other government administration roles as well as allowing it to manage state-owned assets
through a more independent „arms-length‟ approach. The fund reports that it operates as an autonomous
investment holding company incorporated under the Singapore Companies Act of which the sole shareholder is the
Ministry of Finance. Temasek reports that it manages approximately USD 120 billion as of July 2009. In the past
few months the fund has significantly recovered from its credit crisis related losses which decreased its assets to
around billion 90 billion as of March 2009. Temasek Holdings is headquartered in Singapore and operates offices in
Mumbai and Chennai, India; in Hong Kong, Shanghai and Beijing, China; in Hanoi and Ho Chi Minh City, Vietnam;
and in Mexico and Brazil.


Temasek reports that it employs approximately 350 people around the world. As of March 2008, 66% of the staff at
Temasek were Singapore nationals with the remainder being from other, mostly Asian countries. The presence of
international employees in the fund should help to reassure fellow investors that Temasek is integrated into the
international financial community. In addition, operating an employment system open to foreign nationals as well
as Singaporeans should ensure that the company has access to a wide talent pool.


Governance

Temasek operates as a separate incorporated body under the Singapore Companies Act. However, its sole
shareholder is the Singaporean Ministry of Finance. In spite of this ownership structure, the board is made up
almost exclusively of independent persons; only one director currently holds a government position. The chairman,
S. Dhanabalan, has held the role since 1996; he was previously chairman of a number of private companies
including DBS Group and Singapore Airlines. In addition, he has held positions in the civil service of Singapore and
entered politics in 1960; he served in cabinet positions from 1978 to 1994. Ho Ching has been the executive
director since 2002 and has held the CEO position since 2004. She has held government positions with the Ministry
of Defense as well as private sector appointments. It should also be noted that she is the wife of the current Prime
Minister of Singapore, Lee Hsien Loong. On 1 February, 2009 Charles W. Goodyear was appointed as a member of
the board. On 1 March he assumed the position of CEO designate, and he was due to take over as CEO in October




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2009. Mr. Goodyear has a private-sector background, most recently with BHP Billiton, where he served as chief
executive from 2003 to 2008. However, on July 23, 2009, it was announced that Temasek and Mr. Goodyear
mutually decided to terminate their relationship due to „differences in strategic vision‟. Appointment of an
international executive was regarded as a sign of openness and progressiveness of the governance of Temasek. It
remains to be seen how the fund resolves this leadership issue.


The only board member with a current civil servant position is Teo Ming Kian, who holds the title of director as
well as being the present Permanent Secretary of the Ministry of Finance as well as a number of other roles, both
within government and the private sector.


Temasek‟s management team has strong international representation with a highly diversified skill set and
backgrounds. The team consists largely of members with an exclusively private-sector background with the
exception of the Senior Managing Director for International and Strategic Relations who held a senior military
position up until 1998, after which he went into the private sector. The senior management team has worked in a
wide array of senior private sector positions, both within the financial sector as well as other industries. This wide
array of experience should help the fund manage its day-to-day activities in an efficient and effective manner and
reassure recipients of investment, fellow investors and regulators. Both the board and the senior management
team consist of Singaporean and non-Singaporean nationals. This international presence should aid the fund in
maintaining a global perspective in its investments.


Temasek is incorporated as an exempt private company, meaning that it is not required to publish financial
results. However, it does publish an extensive report on an annual basis including a financial summary as well as
highlights from the year‟s activities. Temasek has published a report of this type since 2004. In addition,
Temasek‟s financial statements are externally audited by an international audit firm. The fund pays an annual
dividend to its shareholder, the Ministry of Finance. The amount of the dividend is not disclosed. Temasek states
that the amount of dividend is decided by the board as any other corporate entity. The extent of reporting carried
out by the fund should help allay concerns about its investment motives.


Investment Strategy

Temasek reports that its primary mandate is to create and maximize long-term returns for its shareholder, the
Ministry of Finance. In order to achieve this, the fund reports that it operates as an active investor, taking a long-
term view on investments and that it has flexible investment horizons as well as the option of taking concentrated
positions or remaining in cash. It should be noted that Temasek is rated by Standard and Poor‟s and Moody‟s at
AAA/Aaa respectively. To be rated, the fund would have had to provide detailed financial information, as well as
some information about its own governance and operational policies, to the rating agencies. The fund reports that,
although it is state-owned, it is not state-governed and makes all investment decisions autonomously, an approach
which it extends to its portfolio companies by refraining from taking an active role in the day-to-day management
of its investments, preferring to leave this to the respective company boards. There is very little information
regarding any future investment strategies or fund withdrawal rules. However, the status of Temasek as an
independent company should protect the assets from withdrawal by government entities, except in the most
extreme circumstances.


Temasek reports that it primarily focuses on Asian markets, a fact that is supported by its primarily Asian office
locations and portfolio. However, the fund reports that it is open to investments elsewhere around the world. The




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regional breakdown of Temasek‟s assets is shown in Figure 41. The table shows the clear focus on the Asian region
with only around a quarter of the fund invested in the OECD economies in North America and Europe.


Figure 41 Temasek Asset Breakdown by Geographical Region


                                     2007                      2008                          2009
 Region
                                     (%)                       (%)                           (%)

 Singapore                           38                        33                            31
 North                        Asia
                                     24                        22                            27
 (China, Taiwan, Korea)

 ASEAN                      Region
                                     12                        12                            9
 (Excluding Singapore)

 South                        Asia
                                     4                         7                             7
 (India, Pakistan)

 OECD                    Economies
                                     20                        23                            22
 (Excluding Korea)
 Others                              2                         3                             4
Source: Temasek Annual Review 2008


Investment Outsourcing

Temasek does not state whether it uses external managers for any of its investments. In our interview with a
director at Temasek it was stated that, the fund outsources a very small portion of its capital to external fund
managers, however no further detail was provided.


Equity Portfolio Analysis

Temasek provides information on the sectoral focus of its fund, which is detailed in Figure 42 below. The table
shows that Temasek has a heavy concentration in financial services, which made up around 40% of the fund‟s
assets. However, given the recent credit crisis, this figure is likely to have changed.




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Figure 42 Temasek's Asset Breakdown by Sector

 Sector                                                    2007               2008                2009
 Financial Services                                        38%                40%                 33%
 Telecommunications and Media                              23%                24%                 26%
 Transportation and Logistics                              12%                10%                 13%
 Real Estate                                               9%                 7%                  9%

 Infrastructure, Industrial and Engineering                6%                 6%                  6%

 Energy and Resources                                      6%                 5%                  5%
 Technology                                                2%                 2%                  1%
 Life Sciences, Consumer and Lifestyle                     1%                 2%                  1%
 Others                                                    3%                 4%                  6%
Source: Temasek Annual Review 2008


In addition to its sectoral focus, Temasek published the identity of a number of companies in which it holds stakes
as well as a performance overview for each in its annual review of 2008. In comparison to the majority of
investments made by other sovereign wealth funds, Temasek appears to take very large stakes in the majority of
its transactions. This is partly explained by the original 100% ownership of government assets which are transferred
to Temasek by the government. However, there are a number of foreign-based companies in which the fund has
large shares of equity. Examples include a 42% share in Shin Corporation, the Thai telecommunications company.
These high percentage holdings in large companies from locations other than Singapore could cause concern
regarding the political implications of the fund‟s investments. Figure 43 below shows a highlight of Temasek‟s
investments as of March 2008, as listed in its Annual Review.


Figure 43 Temasek Portfolio Highlights


 Company                             % Ownership     Sector                              Country        Held Since

 NIB Bank                            63%             Financial Services                  Pakistan       2005
 PT Bank Danamon Indonesia           58%             Financial Services                  Indonesia      2003
 PT       Bank     Internasional
                                     48%             Financial Services                  Indonesia      2003
 Indonesia
 DBS Group Holdings                  28%             Financial Services                  Singapore      1975
 Standard Chartered                  19%             Financial Services                  UK             2006
 Hana Financial Group                10%             Financial Services                  S. Korea       2004
 Merrill Lynch                       9%              Financial Services                  USA            2007
 ICICI Bank                          8%              Financial Services                  India          2003
 China Construction Bank             6%              Financial Services                  China          2006
 Bank of China                       4%              Financial Services                  China          2006
 Barclays                            2%              Financial Services                  UK             2007
 MediaCorp                           100%            Telecommunications and Media        Singapore      1992
 Singapore         Technologies
                                     100%            Telecommunications and Media        Singapore      1995
 Telemedia
 Singapore Telecommunications        55%             Telecommunications and Media        Singapore      1993
 Shin Corporation                    42%             Telecommunications and Media        Thailand       2006
 Bharti Airtel                       5%              Telecommunications and Media        India          2007




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 Company                              % Ownership    Sector                               Country      Held Since

 PSA International                    100%           Transportation and Logistics         Singapore    1997
 Neptune Orient Lines                 66%            Transportation and Logistics         Singapore    1976
 Singapore Airlines                   54%            Transportation and Logistics         Singapore    1976
 Singapore          Technologies                     Infrastructure,   Industry   and
                                      50%                                                 Singapore    1997
 Engineering                                         Engineering
                                                     Infrastructure,   Industry   and
 Sembcorp Industries                  49%                                                 Singapore    1983
                                                     Engineering
                                                     Infrastructure,   Industry   and
 Keppel Corporation                   21%                                                 Singapore    1976
                                                     Engineering
 PowerSeraya                          100%           Energy and Resources                 Singapore    1996
 Senoko Power*                        100%           Energy and Resources                 Singapore    1995
 Singapore Power                      100%           Energy and Resources                 Singapore    1995
Source: Temasek Annual Review 2008)

* Earmarked for divestment in 2008


The table (Figure 43) shows that Temasek has a wide range of investments in the financial sector across a number
of international markets. In addition, it has a strong concentration in the telecommunications sector, with
investments in Singapore as well as significant stakes in large companies in other countries. The approach of taking
large stakes in foreign entities could be interpreted by some regulatory bodies as aggressive acquisition of national
assets.


Environmental and Social Factors in Investments

Temasek does not publish any specific environmental policies or strategies. However, it does make a number of
statements in its annual report which make reference to the importance of environmental and social impacts of its
activities. The report states that, as a long-term investor, Temasek has a stake in the lives and well-being of its
fellow men and that social, environmental and governance factors can have an impact on the wider community as
well as the long-term sustainability of companies and businesses. The fund‟s activities in the environmental and
social arena include conducting itself in a responsible manner as well as donating to charities and appeals. In
addition, it contributes to a number of trusts and foundations set up for a variety of activities. The Temasek Trust
oversees management of funds received from Temasek and other sources and disperses them to designated non-
profit organizations. The Temasek Foundation was established in 2007 with a mandate to improve human capital
levels, bridge gaps between diverse peoples, build a culture of good governance, and rebuild after natural
disasters. In addition, Temasek contributes to a number of other initiatives in the technology and health sectors.


Temasek also reports that it has made a number of moves towards environmental or socially targeted investment
including a European clean tech fund bringing new environmental technologies to Asia. The fund does not publish
any information regarding the size of investments in environmental or social funds, nor does it state whether it
uses its influence as a large shareholder to improve environmental and social performance in companies in which it
is invested.


With regard to integration of environmental and social risk management and exclusions, the fund‟s representative
stated in an interview that such processes are an integral part of its risk management process and consequently,
the fund does not find it necessary to have separate disclosure in these areas.




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Engagement Strategy

Temasek does not provide extensive information on its engagement strategy. However, it does state that it leaves
the day-to-day management of its portfolio companies to the respective boards of those companies. It is unclear
how Temasek manages companies in which it holds the majority, or even all, of the shares, as a more active
management approach would be expected. No information is provided about appointment of board members at
companies in which it has investment, but the company does state that it uses its network of contacts to suggest
qualified individuals for board positions. It should be noted that a number of Temasek‟s directors also hold
positions on the board of portfolio companies. For example, the chairman of Temasek has served as chairman of
DBS Group Holdings and Singapore Airlines and the CEO, Ho Ching, previously held the positions of president and
CEO of Singapore Technologies Group. Based on our research, some of Temasek‟s majority owned subsidiaries have
an active approach to investments. For example Singapore Technologies Telemedia (STT), a wholly-owned
subsidiary of Temasek, which owns over 62.3% of Global Crossing, a US telecommunication solution provider,
appoints eight of the 12 board directors. Another example is SP AusNet, one of Australia's largest publicly-listed
energy delivery businesses, in which Singapore Power International, a Temasek subsidiary, has a stake of over
51.75%. Four of SP AusNet‟s board members appear to have associations with Singapore Power. Temasek
emphasizes that in such cases it can exert no influence on how its subsidiaries manage their holdings and they are
run with full independence from Temasek. While Temasek does disclose some of the underlying principles for its
engagement activities, the fund could benefit from more disclosure in this area and also disclosure of performance
information regarding its engagement activities.


In August 2009 the fund released an updated version of the Temasek Charter, re-affirming the role of Temasek as
an active investor and value-adding shareholder to deliver sustainable long-term value. The Charter outlines how
Temasek will work with portfolio companies to ensure financial discipline and sound governance practices.


Proxy Voting Analysis

Temasek does not publish any proxy voting records through its reporting structure. However, it does report that it
actively engages with its investments and exercises its rights as a shareholder to vote at annual general meetings
in order to protect its commercial interests.


International Code Commitments

Temasek is a signatory of the IMF‟s International Working Group on Sovereign Wealth Funds‟ Santiago Principles.
Contribution to the development of these principles is commendable and shows that Temasek is keen to work
towards improving the international reputation of sovereign wealth funds and also improving the level of public
understanding and disclosure regarding its own activities. The research team assessed Temasek‟s compliance level
regarding the Santiago Principles; it found that Temasek has above-average disclosure and appears to be
transparent in its legal framework, institutional framework, governance structure, investment, and risk
management approach. However, more details regarding engagement with its investee companies would be
desirable.




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                                                                             Country:          Qatar
6.8. Qatar Investment Authority (QIA)
                                                                             Inception:        2005

                                                                             Assets  Under USD    60   billion
                                                                             Management    (approx.)  as    of
                                                                                           December 2008

                                                                             Analyst:          Tim Barnett




Figure 44 QIA Analysis Overview

                              The board of governors is largely made up of current government ministers and
 Governance                   members of the Qatari royal family

                              Large well-trained internal team of asset managers

 Capabilities                 Does not provide details of external asset managers and its outsourcing policy
                              Lack of international presence at board and senior management level

                              Long-term stated investment strategy
                              Has a wide-ranging portfolio in a wide range of asset classes – a combination of
 Investment Behavior          portfolio-based investing and direct large stakes in some investments - including
                              controlling stakes
                              Does not publish information on holdings

 Engagement                   Appears to be an active investor in a number of its investments without publishing
                              any engagement or proxy voting strategies or records

                              Has made investments in companies with a very strong environmental focus (e.g.
 E&S Investment Policies      alternative-fuel vehicles)
                              Limited statements on ESG issues
                              Does not provide any information regarding its reporting practice
 Disclosure                   Does not give any breakdown on its portfolio structure, proxy voting and
                              performance

General Outlook

The Qatar Investment Authority (QIA) has generally poor disclosure on its activities and strategies with no
published reports regarding its engagement strategy, proxy voting strategy or any information on its wider
portfolio. It is also unclear exactly how it reports its performance, and to what extent it operates independently of
the Qatari government. The fund does have very close ties with the Qatari government, with the majority of the
board of directors holding current government positions or being members of the Qatari royal family. As such, it is
very difficult to assess the level of expertise and experience held by the board and the executive management. In
addition, the fund appears to take an active investment approach, taking large stakes in several target companies,
but no information regarding its engagement strategies or approach to proxy voting is revealed.


Overview




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QIA was founded in 2005 with the aim of strengthening the economy of the State of Qatar through diverse
investments in a number of asset classes. QIA is headquartered in Doha and invests internationally in a wide range
of asset classes including listed securities, property, alternative investments and private equity. The fund is
estimated to have around USD 60 billion in assets under management.


QIA reports that it currently employs approximately 110 investment professionals. QIA does not provide any
information as to whether the employees are all Qatari nationals or whether other nationalities are represented.
However, it does state that it is constantly seeking candidates from the world's leading financial institutions
suggesting that a number of the staff may have international backgrounds.


Governance

QIA is chaired by H.H. Sheikh Tamim bin Hamad Al Thani. The Chief Executive is H.E. Sheikh Hamad bin Jassim bin
Jabr Al Thani. Other board members include H.E. Sheikh Abdullah bin Saud Al Thani, H.E. Yousef Hussain Kamal, Dr
Hussain Al Abdulla and Mr. Tariq Al Malki. The board of the QIA claims it has extensive financial experience and
exists to serve the government and people of Qatar by strengthening the Qatari economy.


There appear to be extensive links between the board of QIA and the government. Qatar operates as a monarchy
with the Emir of Qatar being the head of state as well as head of the government.


Although QIA does not publish any information regarding other commitments and positions held by the board
members, a number of them appear to be of the ruling Al Thani family and thus presumably have direct links to
the national government. In addition, the position of chairman of QIA is currently held by the Heir Apparent to the
Emir and the position of chief executive officer is occupied by the Prime Minister (who also holds the position of
Minister of Foreign Affairs). These close ties to government suggest that the fund is at risk of acting for political or
strategic reasons. In addition, the fund may be used for government-led initiatives, which could require exit from
some of its conventional investments. For example, the state of Qatar has recently requested that QIA buy local
banks‟ investment portfolios in order to boost liquidity and encourage lending 49. Although it is unclear where the
funds for this will be sourced it could lead to QIA divesting from a number of its other investments in order to
satisfy the needs of the state of Qatar.


QIA does not report on its executive management structure, and there is no evidence of an executive board as
such. Rather, the chief executive officer is responsible for internal control, management and policy
implementation at QIA. In carrying out these tasks, he is assisted by a management team including an investment
committee and a number of business departments representing the various investment types as well as support
functions such as internal audit, legal, administration and finance departments.


QIA does not report publicly on financial information through any official channels. The State Audit Bureau is
responsible for monitoring and auditing QIA‟s accounts. However, there is no information available on the
frequency of this audit process.


Investment Strategy

QIA states that it is a passive long-term investor in its target companies. The fund does not state any specific
sectoral focus. However, it does state that it is seeking to diversify the Qatari economy through investments in




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small to medium-sized enterprises and in promotional events such as the Asian Games, which Qatar hosted in 2006.
In addition, a QIA-owned property company, Qatari Diar Real Estate Investment Company has become a worldwide
investor in large-scale property developments across a number of international locations. Similarly, Qatar Holding,
a wholly-owned subsidiary of QIA, was incorporated in April 2006 within the jurisdiction of Qatar Financial Centre
as the prime vehicle for strategic and direct investments by the State of Qatar. Outside Qatar, QIA invests in a
wide variety of assets such as equities, fixed income, private equity and direct investment, but there is no
reported focus on any particular sectors or a specific strategic industrial focus.


QIA does not report on any return targets for its investments, nor does it provide a breakdown of its portfolio. The
fund fails to indicate whether it acts as a portfolio investor with a large number of small investments or as a
strategic investor holding larger stakes in the companies in which it invests, or both. However, there is significant
evidence that QIA holds large percentages of a number of major international companies around the world (see
Equity Portfolio Analysis for more details).


In addition, no information regarding fund withdrawal rules is provided. Hence the government could potentially
reallocate funds with very short notice, selling large numbers of shares in its large-scale investments to free up
cash for other government uses. This scenario presents increased risks for those companies in which QIA is
investing as well as for partners in investments. However, the size of the fund relative to the size of the economy
of Qatar would suggest that the likelihood of the fund being used to help the government solve short-term liquidity
issues is relatively small.


Investment Outsourcing

QIA does not publish any information to indicate whether its funds are managed internally or externally. Reports
are available that a large number of asset managers are employed, which suggests that at least part of the fund is
managed internally.


Equity Portfolio Analysis

QIA does not publish any details of its investment portfolio. It also makes no statements regarding any sectoral
focus beyond stating the desire to diversify the Qatari economy. There is also very limited information on QIA
investments available in the public domain. However, a number of high-profile investments have been identified
relating to QIA.


The fund currently holds approximately 27% of the shares in J Sainsbury supermarkets, 15% of the shares of the
London Stock Exchange, 5.82% of Barclays Bank (through Qatar Holding), 8.9% of Credit Suisse (through Qatar
Holding), as well as a number of large investments in Qatar-based banks.


The size of these investments suggests that QIA does not simply invest in a wide-ranging portfolio but also in a
strategic manner with very large or even controlling stakes in companies.


Environmental and Social Factors in Investments

There is very limited evidence that QIA takes environmental and social factors into account when analyzing its
investment strategies. QIA does state that it takes ethical considerations very seriously and that such issues are




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always taken into account when selecting investment opportunities. However, there are no details as to how this
decision process is conducted or what criteria are considered.


There is evidence that QIA has made investments in companies with an environmental theme. Reportedly it has
invested in Fisker, a USA-based car manufacturer and coachbuilder, which is developing a plug-in hybrid electric
car50.


Engagement Strategy

QIA does not publish any information regarding its engagement strategy. It does not state whether it seeks board
seats at companies in which it has large investments. As part of our research approach, a survey was sent to QIA;
however, the company failed to respond.


Portfolio companies where QIA holds significant stakes were contacted. The research team spoke to J Sainsbury Plc
where QIA holds a significant 27.27% stake. Sainsbury‟s stated that QIA is not given any preferential treatment;
like any other institution investors, Sainsbury‟s has meetings with QIA. According to Sainsbury‟s, “QIA supports the
management of the company.” London Stock Exchange (LSE) was also contacted. LSE stated QIA behaves like any
mainstream institutional investor. With its significant shareholding of 15.1%, QIA does not receive or seek
preferential treatment. LSE confirmed QIA has been a shareholder since September 2007, and all its shares carry
voting rights; however, it would not comment on whether QIA excises the rights (please refer to the Proxy Voting
Analysis section). During 2008‟s credit turmoil, Qatar Holding invested in Credit Suisse, gaining a total stake of
8.9% in registered shares and 1% through derivates, adding up to 9.9% of voting rights. Credit Suisse confirmed that
QIA attended the 2009 AGM in April 2009 and exercised its voting rights. The Swiss bank commented that QIA does
not have or seek a board seat. As part of the regular investor relations activities, Credit Suisse engages with large
institutional investors with regard to the company and market performance. Credit Suisse informed the research
team that QIA has access to the management and it is also a client to Credit Suisse‟s banking business. Further to
the shareholder and investor relationship, Credit Suisse sees this investment as strategic as it helps strengthen the
bank‟s business in Qatar and the Middle East. Similar comments were made by Barclays, where Qatar Holdings has
a 5.82% stake.


Based on our communication with portfolio companies, it does not appear that QIA aims to impose influence on the
daily operation and management of its portfolio companies. In the absence of any reporting of its engagement
policy or records, QIA‟s active investment management could be a source of concern to the regulatory bodies and
fellow investors.


Proxy Voting Analysis

QIA does not publish any information regarding its general ownership approach and proxy voting practices. In our
contact with QIA‟s portfolio companies, it seems QIA does exercise its voting rights. However, it is difficult to
make any conclusive judgment on how QIA votes.


International Code Commitments

QIA is a member of the International Working Group on Sovereign Wealth Funds and as such has been involved in
the development of the Santiago Principles. However, QIA does not publish any reports regarding steps taken on




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compliance to the principles. Based on our assessment, QIA discloses to the public its general legal and governance
framework. However, information on investment policy, ownership approach, risk management, and performance
measurement is lacking.




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6.9. Libyan Investment Authority (LIA)                               Country:              Libya

                                                                     Inception:            2007

                                                                     Assets     Under USD 64.2 billion (as of
                                                                     Management       Dec of 2008)

                                                                     Analyst:              Tim Barnett




Figure 45 LIA Analysis Overview


                                 Board of directors and executive management appear to be a mix of
                                 government and independent individuals
 Governance
                                 The board takes extensive advice from a team of investment professionals as
                                 well as consultants
                                 Significant experience within the supervisory board and the board of directors
                                 Headquartered in Tripoli - no evidence of additional offices
 Capabilities                    Has engaged consultants to assess and appoint external managers
                                 Almost 75% of employees have international experience; 4% of the workforce
                                 consists of non-Libyan nationals
 Investment Behavior             Limited information available on investment strategy
 Engagement                      No information available
 ESG Investments                 No information available
                                 Public disclosure is limited - website is under construction
 Disclosure
                                 New legislation in place for fund to publish annual report


General Outlook

The level of disclosure of The Libyan Investment Authority (LIA) is limited, with no website or annual reports
available to third parties at the time this report was researched. However, there are plans to improve the
transparency levels at the fund. LIA‟s website is currently under construction, and there is a reported intention to
publish annual reports through the website when it is operational. However, at the current time, the majority of
information comes from a telephone interview with the fund, third-party reports and news articles.


The interview process and subsequent documents provided to the research team show that the fund has a strong
set of guiding principles already in place. However, LIA is still in the stage of developing engagement and
investment policies. While the fund provided a significant amount of information through interviews, its public
disclosure remains weak.


Overview

LIA was founded in 2007 and took ownership of the Long-term Investment Portfolio, the Libya-Africa Investment
Portfolio, the Oil Investment Company and the Libyan Foreign Investment Company, which still operate as




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subsidiaries of LIA. In addition, excess revenues from the sale of the country‟s oil reserves are transferred to the
fund. The fund is headquartered in Tripoli, and there are currently no international offices. However, the fund
confirmed that they intend to open new offices in international locations. At the current time the fund is reported
to employ 74 people, the majority of whom have at least three to five years of investment experience. The
breakdown of nationalities is not provided, but the fund did confirm that they employ non-Libyan nationals.


The intention of the fund is reported to be the establishment of a high-quality and well diversified investment
portfolio in order to create a sustainable source of revenue other than the country‟s oil reserves.


As of December 2008, the total assets under management were reported at USD 64.2 billion. It is unclear how the
fund has been affected by falls in the equity markets in 2009.


Governance

LIA operates as a government agency and as such has independence from the country‟s central bank and ministry
of finance. New laws are currently being put in place to manage the operations and governance procedures of LIA.


The fund is managed by two separate boards, the Board of Trustees and the Board of Directors. The Articles
setting out the formation of the LIA state that the Board of Trustees shall consist of no less than nine members,
including a chairman and deputy. These positions are to be appointed by the General People‟s Committee on a
five-yearly basis. The Board of Trustees holds ultimate responsibility for the oversight of the investment process as
well as the appointment and monitoring of the Board of Directors and the Chief Executive Officer (see below). In
addition, the trustees are responsible for the appointment of external auditors. The current Board of Trustees has
14 members, four of whom hold current government positions, including the Prime Minister, the Governor of the
Central Bank of Libya, the Minister of Finance, and the Minister of Planning.


The Board of Directors sits immediately beneath the Board of Trustees and consists of no less than five members,
including a Chairman, Deputy Chairman and the Chief Executive Officer of LIA. The Board of Directors holds
responsibility for the management of LIA as well as the development of policies and strategies. In addition, it is in
charge of the appointment of managers and consultants. It also holds responsibility for publishing an annual
report. The current Board of Directors consists of seven members, two of whom are reported as holding a
government position. Neither the Chief Executive Officer nor any of the executive management holds any
government position. All of the directors are Libyan nationals, and 80% of them have over 30 year experience
within the financial sector. The presence of non-government directors should help to reassure fellow investors that
LIA has the expertise to invest on an international scale.


The Articles setting out the fund‟s structure stipulate the need for an annual report to be published and submitted
through the Board of Trustees to the national parliament of Libya, the People‟s Congress. In addition, this report
will be made publically available through the LIA website and will be externally audited.


Investment Strategy

Information regarding the investment strategy of LIA is limited. However, the IWG survey states that LIA has
contracted an international consultant to conduct a process of selecting and evaluating fund managers for various
asset classes, a statement which has been confirmed through contact with the fund.




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There is no information available to indicate any specific regional focus. However, a Bloomberg report of October
2008 reveals that the fund currently holds approximately 10% of its portfolio in European, Asian, U.S. and emerging
market equities, a proportion it plans to increase by 2-3% through investments in companies “less affected by the
economic downturn.” This suggests that a relatively small proportion of the fund is intended for international
investment. Due to the lack of information, it is hard to know whether this is due to a specific regional focus or
whether it simply indicates that the fund is only at an early stage of making its investments.


There is no information available with regard to return requirements, portfolio breakdown by asset class, or future
investment strategy.


The Articles setting the formation and management of the fund lay down certain limits on withdrawal of assets
from the fund. These state that funds may only be withdrawn within the limits of accumulated returns of LIA
investments, without doing any harm to the actual value of the assets thereof. This statement suggests that
withdrawals will be at most equal to the annual investment returns of the fund. This protection of the funds
should help to reassure other stakeholders as to LIA‟s long-term intentions.


Investment Outsourcing

It is clear from the information available that the fund is aiming to have at least a proportion of its assets managed
by external sources. LIA has contracted a consultant to recommend external managers for the fund‟s assets. This
suggests that the intention, at least initially, is to have the fund, or a proportion of the fund externally managed.
Especially considering the short lifespan of the fund, the use of external managers would help to alleviate any
concerns that LIA lacks the capability to invest on the international stage.


Equity Portfolio Analysis

LIA does not publish any information regarding its investment portfolio. However, a number of sources provide
hints as to the current portfolio held by the fund. In October 2008, LIA was reported as looking to invest in
Telecom Italia51. More recent reports state that this transaction did not come to fruition52. Whether this was due
to market conditions or some other obstacles is unclear.


A Bloomberg report of October 2008 states that LIA plans to increase its holdings in European, U.S., Asian and
emerging market equities by around USD 2 billion and that it is concentrating its investments in the
telecommunication, pharmaceutical, retail and utility sectors.


Environmental and Social Factors in Investments

There is no evidence that LIA takes environmental or social factors into account in its investments, nor is there any
evidence of investments in equities or other asset forms for environmental or social reasons.


Engagement Strategy

There is no information available at this stage regarding the way in which LIA engages and interacts with its
investments or whether it seeks influence in the companies in which it has investments. The funds forming LIA
operate as subsidiaries and hence are likely to have engagement policies of their own. It is unclear to what extent




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this will be brought into LIA‟s management although the research team‟s communications with fund management
indicated that centralized policies are under development. We believe that clear engagement policy statements
would help to reassure fellow investors of the intentions of the fund and alleviate any fears that the fund may be
investing for reasons other than financial returns.


Proxy Voting Analysis

LIA does not publish any information regarding its proxy voting strategies or policies. In addition, the fund does not
publish any records of how it has voted. Communication with the fund has indicated that it is in the process of
developing proxy voting policies and guidelines. In addition, fund management stated that, at the current time,
the separate subsidiary funds are responsible for whether to vote at holdings. The existence of guidelines
regarding the fund‟s voting at its holdings would help to reassure fellow investors, regulators and recipients of
investment as to the intentions of the fund.


International Code Commitments

LIA is a signatory of the International Working Group on Sovereign Wealth Fund‟s Santiago Principles. Membership
of this working group suggests that LIA is willing to look at ways in which the transparency of sovereign wealth
funds can be improved. In addition, the fund reports that it is in compliance with the OECD Principles of Corporate
Governance and the OECD Guidelines on Corporate Governance of State-Owned Enterprises.




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6.10. Australian             Government              Future
Fund (AGFF)
                                                                   Country:           Australia

                                                                   Inception:         2006

                                                                   Assets   Under AUD 58.09 billion (USD 45.8
                                                                   Management     billion) 53 as of 31 March,
                                                                                  2009

                                                                   Analyst:           Tim Barnett



Figure 46 AGFF Analysis Overview

                              AGFF maintains a high level of independence from the government
 Governance
                              Board members are all non-government
                              Uses a range of established external asset managers
 Capabilities                 Highly diversified, independent and experienced management and board staff
                              Relatively new to the market and limited track record regarding investment
                              approach, given the launch of the fund in 2006
                              Long-term investment horizon
                              Has a wide-ranging portfolio in a broad range of asset classes
 Investment Behavior          All funds externally managed
                              Does not publish detailed information about individual equity holdings
                              Government withdrawals from the fund restricted before 2020
                              Has recently published new guidelines on engagement
 Engagement                   No records on proxy voting – Clear commitments to improve in this area in near
                              future
                              Planning to further integrate ESG factors in its risk management
 ESG Investments
                              No strategic focus on environmental and social investments
                              Above-average disclosure - annual reporting as well as interim reports
 Disclosure                   Financial information kept up-to-date on its website
                              Does not publish detailed information on its investments at individual holding level




General Outlook

The Australian Government Future Fund (AGFF) is a relatively new entity. It has generally very good disclosure of
its activities and its investment strategies as well as of its portfolio breakdown. However, it does not have direct
engagement with any of its investments, and one of its targets for the future is to increase its in-house
engagement capabilities. Currently proxy voting is carried out through its external money managers and is based
on a set of voting principles set by the fund. The fund has one of the highest compliance levels with the Santiago
Principles among the SWFs.




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Overview

AGFF was created through the Future Fund Act of 2006. The fund‟s objective is to strengthen the long-term
financial position of the Australian Government by making provisions for unfunded Commonwealth superannuation
liabilities, which will become payable at a future time when an ageing population places increased pressure on the
Government‟s finances. The fund received about AUD 18 billion (USD 15.4 billion) of seed capital from the
government at the time of its launch in 2006. Since its launch, the fund has received multiple capital transfers
from the government such as privatization proceeds of the incumbent telecommunications operation of Australia,
Telstra (about AUD 9 billion – USD 7.7 billion at the time) as well as transfer of government‟s Telstra shares to the
fund and also transfers of annual government budget surpluses. In total, as of 21 November 2008 the transfers to
the fund have amounted to about AUD 60.5 billion (USD 51.7 billion)54.


The fund is managed by a board of directors, known as the Board of Guardians as well as the Future Fund
Management Agency. The Board is responsible for the fund while the Agency provides recommendations, advice
and implementation. In addition to the Future Fund, the Board of Guardians has been given the responsibility for a
number of other government funds including the Education Investment Fund, the Building Australia Fund, and the
Health and Hospitals Fund. In total, the assets in these funds amount to AUD 10 billion (USD 7.9 billion).


AGFF has grown from 11 employees in 2007 to 39 staff as of 30 June, 2008. The small size of the team is due to the
fact that the fund outsources all its investment management activities.


The fund operates its main office in Melbourne, Australia with one member of staff reported as working from
Sydney. The fund has reported that there are no international offices.


Governance

AGFF is split into two separate entities. The Board of Guardians operates as a body corporate while the Future
Fund Management Agency (FFMA) operates as a prescribed agency under the Financial Management and
Accountability Act of 1997. Legislation is in place to ensure the fund‟s independence from other government
agencies, and while its aim is to offset future public sector pension liabilities, it holds no direct responsibilities in
this area. This delineation of the activities of the fund from general government activity should help to retain the
independence of the fund from government influence.


The Board of Guardians is composed of seven members, all of whom are reported as being from outside
government. They must meet strict statutory requirements; having substantial expertise and professional
credibility in investing or managing financial assets or in corporate governance. The board members are appointed
by the Treasurer and the Minister of Finance. The independence of the board is maintained through a number of
arrangements. The expenses of the funds are met through draw down of the fund‟s assets rather than from other
government sources. This should help to keep the board at a greater distance from government influence. In
addition, there are very few limitations on how the assets of the fund must be managed beyond the long-term
return objectives. This gives the board full reign to invest where it sees fit, provided that returns are maximized
without excessive risk.


The fund discloses reports on an annual basis with an extensive annual report detailing its activities for the
previous year. In addition, the fund publishes quarterly portfolio updates in addition to the annual report. Copies




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of the annual report are available through the website along with copies of the Investment Mandate, investment
policies, as well as links to the government legislation which set up the fund.


The Board of Guardians also operates an audit committee consisting of all the board members with the exception
of Mr. David Murray who, as chief executive of the fund, is excluded. The audit committee engages
PriceWaterhouseCoopers to provide internal audit services for the audit committee. In addition, the Australian
National Audit Office undertakes external audits of the fund, for which it employs a professional auditing firm.


Investment Strategy

AGFF appears to operate solely on a portfolio basis with the entirety of its funds (with the exception of Telstra)
invested through external asset managers. The Future Fund is secure from withdrawal until 2020 with the
exception that funds may be withdrawn for operating costs of the fund itself or if the fund exceeds the target
asset levels defined in the original Future Fund legislation. The fund predicts that the average annual earnings post
2020 will exceed annual withdrawals for many years. This suggests that the fund operates as a long-term investor.
In addition, the legislation setting out the workings of the fund limit AGFF to a maximum holding of 20% of total
equity for any one foreign company and to holding levels which do not trigger a takeover under Australian
legislation for Australian companies.


In spite of the protections in place, there has been talk of using income from the fund for alternative uses prior to
2020. In 2007, as part of its campaign for government, the Labor party in Australia stated that it would use up to
AUSD 2.7 billion (USD 2.3 billion) to help fund a national broadband network infrastructure. At the time it was
stated that this funding could be drawn from the income of the Future Fund, which caused a wide range of
criticisms from both the government at the time as well as from senior leadership at the fund 55. The scheme has
been subsequently changed and will now be sourced from another fund, the Building Australia Fund, set up by the
new Labor government with the specific aim of investing in infrastructure projects56.


The target for AGFF is to achieve an average return of at least 4.5-5.5% (inflation adjusted) over the long term
through investments in a diversified range of security classes including alternative securities with the objective of
maximizing returns without taking „excessive risk‟. For the purpose of this calculation, long term is interpreted as
rolling ten-year periods.


The portfolio breakdown as of 31 March, 2009 is as follows:


Figure 47 AGFF Portfolio Breakdown Based on Asset Class

 Asset Class                              AUD m (USD m)                             % of Fund (ex Telstra)
 Australian Equities                      4,751 (3,830)                             9.3

 Global Developed Market Equities         7,940 (6,400)                             15.5

 Global Developing Market Equities        1,461 (1,178)                             2.9
 Private Equity                           1,055 (850)                               2.1
 Global Property                          529 (426)                                 1
 Infrastructure                           1,267 (1,029)                             2.5




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 Debt Securities                          11,231 (9,053)                            21.9

 Alternative Assets                       1,984 (1,599)                             3.9
 Cash                                     21,029 (16,952)                           41
 Total (ex Telstra)                       51,247 (41,311)                           100
 Telstra Holding                          6,844 (5,517)
 Total Future Fund Assets                 58,092 (46,828)


As is evident from the table above, AGFF makes investments both within Australian as well as international
markets. There is a leaning towards global assets, which represent approximately double that of Australian assets.
However, it should also be noted that a significant proportion of the fund is still held in cash. The long-term asset
allocation target of the fund is to have an asset breakdown with equities making up 35% of the portfolio, tangible
assets 30%, debt 20%, alternative 15% and cash 0%.


Investment Outsourcing

AGFF reports that the legislation put in place to set up the fund requires the use of external managers for the
entire portfolio. Fund managers are listed in AGFF‟s annual report. In addition, a list is maintained on the fund‟s
website, which is updated on a quarterly basis.


Equity Portfolio Analysis

AGFF does not publish any information regarding its portfolio breakdown beyond geographic breakdown and the
spread between asset classes. As such, it is very difficult to make any assessment regarding any sectoral focus of
the fund. The fact that the fund invests exclusively through external managers would suggest that it generally
holds small investments in a wide variety of assets, across a wide range of sectors.


Environmental and Social Factors in Investments

AGFF does not appear to take environmental or social issues into account when choosing its investments, or when
selecting its external managers. However, the fund has recently announced the appointment of a responsible
investment manager 57 whose day-to-day focus is on integrating environmental and social risks into the fund‟s
investment risk management platform with the aim of achieving superior long-term financial performance. This
might lead to more activities and disclosure in this area in the future.


Engagement Strategy

AGFF does not currently engage directly with the companies in its investment portfolio. However, as of April 2009,
the fund has set proxy voting guidelines for the external money managers that vote on its behalf. These guidelines
are mostly focused on governance improvements in the portfolio companies with the aim of improving long-term
risk-adjusted portfolio returns. It should be pointed out that the fund‟s definition of corporate governance is very
broad and includes a wide range of issues such as stakeholder relationships, internal policies, culture and
processes of the companies. It remains to be seen how successful AGFF will be in translating these engagement
policies into actual engagement practices across its portfolio companies.




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Proxy Voting Analysis

As explained in the previous section, AGFF does not engage directly with the companies in its portfolio at the
present time. This includes direct proxy voting in its investments. However, the fund reported that the external
manager employed by the fund conducts proxy voting on its behalf using policies set out by the fund.


In April 2009, AGFF published new investment policy guidelines which expand on its management of ownership
rights. This document states that the board has a statutory responsibility to consider governance issues in its
investment portfolio. The policy states that the fund will exercise its ownership rights, specifically proxy voting, in
order to maximize investment returns in the long term. This process will be conducted either directly or through
its external fund managers.


In July 2009, AGFF announced the appointment of a new staff member whose role will include the management of
proxy voting, in particular bringing voting in Australian entities in-house.


International Code Commitments

AGFF is a member of the International Working Group for Sovereign Wealth Funds and as such was involved in the
development of the Santiago Principles for Sovereign Wealth Funds. David Murray, chairman of the Board of
Guardians, chaired a subgroup of the IWG drafting the Principles. In addition, AGFF is a member of the
International Forum for SWFs and the Chairman of AGFF acts as the Forum‟s Chairman. Based on our assessment,
we believe that with few exceptions the fund has a high level of compliance with the Santiago Principles.




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7. REFERENCE
              Sovereign Wealth Fund Institute, http://www.swfinstitute.org/

              International Working Group of Sovereign Wealth Funds, http://www.iwg-swf.org/

              Monitor Group, “Assessing the Risks: The Behaviors of Sovereign Wealth Funds In The Global
              Economy”, June 2008

              Deutsche Bank, “SWFs and foreign investment policies- an update” (Oct 2008)

              Abu Dhabi Investment Authority, http://www.adia.ae/

              Australian Government Future Fund, http://www.futurefund.gov.au/

              China Investment Corporation, http://www.china-inv.cn/cicen/

              China Investment Corporation Annual Report 2008

              Government of Singapore Investment Corporation, http://www.gic.com.sg/

              Kuwait Investment Authority, http://www.kia.gov.kw/En/Pages/default.aspx

              Norwegian Government Pension Fund – Global, http://www.norges-bank.no/

              Qatar Investment Authority, http://www.qia.qa/QIA/

              Russian Stabilization Fund, http://www1.minfin.ru/en/stabfund/about/

              Temasek Holdings, http://www.temasekholdings.com.sg/

              IMF, Global Financial Stability Report

              Norges Bank website: http://www.norges-bank.no/default____25991.aspx

              Government Pension Fund- Global Holdings of equities at 31 Dec 2008

              Government Pension Fund- Global 2008 Annual Report

              Norges Bank Investment Management Voting Guidelines

              Ministry of Finance (Norway), http://www.regjeringen.no/en/dep/fin/The-Ministry/Underliggende-
              etater/The-Government-Pension-Fund-.html?id=270410




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8. APPENDICES


Appendix A.         Overview of Important SWFs Worldwide




Source: Deutsche Bank “SWFs and foreign investment policies- an update” (Oct 2008)




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Appendix B.         Assumptions for International Equity Size Estimation in Figure 5


For the purpose of this analysis, we have made a number of assumptions regarding the initial value of the funds,
the change in assets under management due to the credit crisis, as well as the asset breakdown. The current size
of the fund figures has been calculated using either information published by the funds, or, in cases where there is
insufficient information, estimates are based on third-party reports. This figure also accounts for changes in the
assets under management due to the current credit crisis. It should be noted that, due to government transfers, a
number of funds have not seen reductions in the size of their assets, or there has been only a small drop in total
assets held. Also, in a few cases, the funds have actually seen an increase in their total assets under management.
The figure for assets designated by the funds for international investment has, in the majority of cases, been
calculated using information provided by the funds themselves. However, in a number of cases this information is
not publicly available. In these cases a figure of 100% has been used in order to avoid underestimation. The
percentage of international assets held in equities has again been calculated from fund disclosures where possible.
Where the information has not been available, a figure of 60% has been used. This figure was derived from the
anticipated risk appetite of SWFs and the expectation that equity holdings would be likely to fall in the 40-60%
range, as is the case with other large institutional investors such as Government Pension Fund Global. In all cases
where a range of figures are provided for assets under management to avoid underestimating the impact of the
SWFs, the larger figure has been used. In the table all the cells that are estimated are dark gray and all the cells
disclosed by the fund are light gray.




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Appendix C.        Analysis Criteria


   General Profile
   Category            Data point                         Description

                                                          Indicates its institutional relationship with the local
                       Type of Entity
                                                          government

                       Number        of   International   International presence is a sign of integration into the
                       Office                             international financial community
   General
   Information                                            The size of its workforce relative to asset size
                       Number of Employees                combined with quality of the hiring process indicates
                                                          its technical capability
                                                          Reflects      its   investment   mindset    and    local
                       % of Employees local
                                                          embededness
                                                          The size of the fund relative to its economy size can
                                                          significantly affect its investment time horizon. The
                       Total Asset                        smaller the fund is relative to the GDP; the larger the
                                                          chances of withdrawal in the case of an national or
                                                          international economic downturn

   Disclosed           Portfolio Breakdowns Across        Indicates its risk appetite which can in turn affect the
   Portfolio           Asset Class                        investment time horizon of the SWF
   Structure                                              The part of capital which is a source of concern for
                       % Local markets                    the international investors and regulators is the
                                                          international equity holdings rather than local
                                                          The part of capital which is a source of concern for
                       %        International   Equity
                                                          the international investors and regulators is the
                       Markets
                                                          international equity holdings rather than local
                                                          Demonstrates        investment   horizon    and    also
                       Frequency
                                                          accountability


                       To Whom                            Relationship with the local government


   Financial                                              Can be an indicator of its investment motives –

   Reporting                                              Seeking political or strategic goals is not considered
                       Performance                        compatible with high returns and acceptance of
                                                          sustained year or year loss can signify existence of
                                                          non-economic objectives
                                                          Can help allay concerns about the funds’ investment
                       Public Availability
                                                          objectives
   Stated Strategies and Policies




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   Stated Strategies and Policies

                                                       Helps clarify economic and non-economic nature of
                     Investment Motives
                                                       the funds’ investment and engagement motifs

                                                       While SWFs as long term investors can be a source
                                                       of stability – if they invest with a short term time
                                                       horizon they can be source of significant risk to the
                     Investment Horizons               stock performance of the target companies and also
                                                       the returns of their co-investors. In smaller capital
                                                       markets such investors can even endanger the
                                                       overall market performance.
                                                       Whether the fund updates the portfolio weights
                     Portfolio Strategy – update
                                                       frequently – this signifies short term mindedness.
                     frequency
   Investment                                          Does it focus on l
   Management                                          SWFs which hold large portfolios of small holdings
   Policy            Portfolio strategy – size of      raise less concern about their influence than SWFs
                     holdings                          which     have   fewer   numbers     of    large   strategic
                                                       holdings.
                                                       Explicit return requirements can signify economic
                     Return Requirements               focus – however very high return requirements might
                                                       result in short term oriented investment behavior.
                                                       One source of short term investment behavior and
                                                       sudden dangerous divestment is the withdrawal of
                     Limits      on   Government       fund’s capital by the government to fulfill short term
                     Withdrawals                       capital   obligations.   Some      funds   such    as   the
                                                       Australian Future Fund and the Norwegian SWF have
                                                       explicit withdrawal constraints.
                                                       The background of the governors and their past or
                                                       present roles with the government can signify a high
                     Board of Governance
                                                       level of government involvement in the fund’s
                                                       operations
                                                       The background of the executives and their past or
   Governance
                                                       present roles with the government can signify a high
                     Executive Management
                                                       level of government involvement in the fund’s
                                                       operations
                                                       The influence of the government on the fund’s
                     Role of the Government
                                                       management and daily operations



 ESG    Investment   ESG Investment Strategy        Whether the fund has any ESG integration into its investment




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 Practices                                         practices.

                      Assets earmarked for ESG     Whether the fund has earmarked part of its assets for ESG
                      investments                  focused investments.

 Engagement and Proxy Analysis

                      Proxy Voting Guidelines      Whether the fund has guidelines for its voting practices.

 Engagement
                                                   Whether the fund manages its proxy voting internally or
 Management
                      Proxy Voting Management      externally and whether it is sufficient to maintain high active
                                                   management standards of practice
                      % of Portfolio Engage With   The scale of influence sought by the company
                                                   In this section a detailed analysis of the proxy voting records
                                                   from many different perspectives will be carried out (we the
                                                   records are accessible to us). The analysis will look into the
                      SWF- Proxy Voting Records
                                                   stance on many issues such as governance improvement,
                                                   disclosure, social issues, political or strategic shareholder
 Proxy       Voting
                                                   resolutions etc.
 Analysis
                                                   In this section we reflect any information about the
                                                   company‟s engagement approach obtained from the target
                      Investee Companies- Proxy
                                                   companies, obtained through their disclosure or through
                      Voting
                                                   individual engagement by the research team, through email
                                                   or phone calls.




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Appendix D.         SWF Survey Questionnaire


              Thank your for participating in this study on behalf of the Investor Responsibility Research Centre
              Institute for Corporate Responsibility (IRRCi). The objective of this survey is to understand Sovereign
              Wealth Funds‟ (SWF) engagement and proxy voting practices. It will take approximately 30 minutes to
              complete the questionnaire.

              If you have questions at any time about the survey or the procedures, you may contact Chaoni Huang
              at +44 (0) 207 397 8763 or at the email address:   chaoni.huang@riskmetrics.com.

              Unless requested otherwise by the SWF, the data provided through this survey will be used by
              RiskMetrics Group and IRRCi for both internal analysis and communications with key stakeholders.

              Please complete the survey by 31 March 2009.

              Section 1: Basic fund info


SWF name:


Fund contact person:


Name:


Title:


Phone Number:


Fax Number:


Email:


Fund size (in fund currency):       as of


Number of employees:         ;       % of the workforce are foreign employees.

                       Section 2: Investment


The fund classifies its investment strategy as:    Active                  Passive


Please explain:


The fund classifies its investment strategy as:    Long term               Short term


Please explain:




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How often does the fund revise its investment portfolio‟s weights?


Please explain:


Does the government have withdrawal rights to the fund?


Please explain:


What is the fund‟s current asset allocation in terms of asset class?


What is the fund‟s target rate of return for 2009?


Please explain:


What was the fund‟s actual rate of return in the last reporting period?


Please attach any available financial performance reports.


Does the fund outsource management of its assets to external managers?

                          Yes          No


If yes, % of assets whose management is outsourced out of total USD:




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                       Section 3: Corporate Governance and Proxy Voting


Does the fund produce any annual report?

                          Yes          No
                       To whom?


Does the fund seek voting rights in its investments?

                          Yes          No
                       Please explain:


Does the fund have a proxy voting policy?

                          Yes          No
                       If yes, please include or attach the fund‟s proxy voting policy.
                    


Does the fund manage its proxy voting in-house?

                          Yes          No


If yes, what percentage of the fund‟s portfolio does it engage with?




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Does the fund disclose its proxy voting records?

                          Yes           No


If yes, please detail/email all proxy voting history including name of the company, date and issues voting
    for/against.




Does the fund commit to the Santiago Principles?

                          Yes           No


If yes, is it currently compliant with the Santiago Principles?


If no, does it plan to fully comply and when?


Does the fund commit to any other international investment or governance codes or voluntary initiatives?

                          Yes           No


Please explain:




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                       Section 4: Environment, Social and Governance (ESG) Engagement


Does the fund have any ESG criteria for selection of portfolio companies?

                           Yes         No


If yes, please list any ESG criteria:


Does the fund attempt to change the ESG performance of its invested companies through engagement?

                           Yes         No


Please Explain:


Has the fund filed shareholder resolutions on ESG issues?

                           Yes         No
                       If yes, on what ESG issues?
                       If yes, how many times during the last reporting period?
                       If yes, how many times during the last reporting period did filing a
                        shareholder resolution lead to a favorable ESG outcome?




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                       Section 5: Additional Information


Please feel free to use the space below to explain to us any other issues related to the fund‟s investment strategy
    and engagements.




Please   email any      additional engagement   and   proxy voting    policies or performance      information   to
    chaoni.huang@riskmetrics.com




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RiskMetrics Group                                                                           www.riskmetrics.com




Appendix E.         The Santiago Principles


Source: Sovereign Wealth Funds Generally Accepted Principles and Practices “Santiago Principles”, International
Working Group of Sovereign Wealth Funds




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RiskMetrics Group                                                                              www.riskmetrics.com




Appendix F.         RiskMetrics Rating Methodologies: IVA and GC+

                                   TM
Intangible Value Assessment             (IVA)

The IVATM model uses over 100 different performance metrics to assess relative corporate positioning in each of
the five major categories addressed by the model. The following list provides a broad outline of the analytical
approach taken within each of these four categories:


The IVA model breaks down into four distinct components. These are set out in the table below, together with the
main issues we assess under each of these four main headings:



  Stakeholder Capital                                     Strategic Governance


          Regulators and policymakers                               Strategic scanning capability


          Local communities/NGOs                                    Agility/adaptation


          Customer relationships                                    Performance indicators/monitoring


          Alliance partners                                         Traditional governance concerns


          Emerging markets                                          International "best practice"


  Human Capital                                           Environment


          Labor relations                                           Board and executive oversight


          Health & safety                                           Risk management systems

          Recruitment/retention strategies                          Disclosure/verification


          Employee motivation                                       Process efficiencies


          Innovation capacity                                       Health and safety


          Knowledge development & dissemination                     New product development


          Progressive workplace practices                           Environmental/climate risk assessment




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RiskMetrics Group                                                                                www.riskmetrics.com




Appendix G.         Compliance Rating Guidelines


GAPP 1. Principle


This principle looks at the soundness of the legal framework of the SWFs. Even though all funds state their legal
entity as incorporated, government body, or integrated into a government body, there is a lack of sufficient
evidence to judge the soundness and robustness of the overall legal framework. As such, no compliance rating is
made.


GAPP 2. Principle


Full compliance is given to those SWFs that have a clearly defined the policy purpose of the fund and disclose it to
the public. On the other hand, no compliance means that the funds fail to meet the requirement.


GAPP 3. Principle


Macroeconomic linkages are outside the scope of this study, thus no compliance rating is made.


GAPP 4. Principle


SWF‟s general approach to funding and withdrawal is one of the key factors affecting the funds‟ sustainability of
investments and hence the level and type of impact on the global capital markets and portfolio companies. Full
compliance refers to the funds that explicitly state the source of the initial capital, and limits and procedures for
government withdrawal; SWFs that only disclose either source or withdrawal are rated as partially compliant. No
compliance means failure to produce both source and withdrawal approach to the public.


GAPP 5. Principle


Coordination between the SWFs and their respective governments to assure that the macroeconomic implications
of the SWF transactions are taken into consideration in the government decisions is of paramount importance.
However, this issue is outside the focus area of this report, which primarily studies the impact of the SWFs on the
companies in their portfolio. Consequently no rating for this GAPP has been carried out.


GAPP 6. Principle


Like GAPP 1, this principle is too broad to make compliance assessment possible.


GAPP 7. Principle


SWFs that disclose the role and responsibility of their owners are rated as being in full compliance with this
principle, otherwise they are non-compliant.


GAPP 8. Principle




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This criterion includes independence and competency of the governing bodies. If the governing body is fully
independent and members have extensive economic and/or investment backgrounds, the rating is full compliance.
If the board consists of government officials and members from the private sector, and its skill set consists of
economic and investment competency, then the rating partial compliance is given to the fund. If the fund‟s
governing body comprises solely government officials and lacks the expertise in economics and finance, then the
fund is considered as failing to be in compliance with GAPP 8.


GAPP 9. Principle


The key requirement is independence of the operational management. As such, assessment is based on the number
of government officials in the executive management team. SWFs are rated as being in full compliance if their
executive management is fully independent, e.g. selected from the private sector. Partial compliance is granted
to those that have a mix of private and government involvement. No compliance regarding this principle is given to
the funds whose executive team only consists of government officials.


GAPP 10. Principle


Full compliance is given to the SWFs that disclose their accountability framework; otherwise they are rated as
being non-compliant.


GAPP 11. Principle


As public disclosure of annual reports and financial statements are not required, disclosure of whether the SWFs
provide annual reports and financial statements to their owners is the primary consideration on the compliance
level. SWFs that state reporting of annual reports and financial statements presenting the performance of their
assets are given full compliance rating; SWFs that fail to state whether periodic reports are provided to owners are
rated as being non-compliant.


GAPP 12. Principle


If a fund clearly confirms the existence of its internal and external auditing procedures for its financial
statements, it is considered to be in full compliance. While partial compliance is given to funds that carry out only
internal audits, the rating of non-compliance is given if no auditing information is found in the public domain.


GAPP 13. Principle


This principle is too broad to make an assessment possible; therefore no compliance rating is made.


GAPP 14. Principle


It is common for SWFs to use external fund managers to manage part of their assets. Assessments are made based
on how the funds select and monitor their external fund managers. Full compliance is given to funds that detail
the selection and monitoring process; partial compliance is given to funds that state key selection requirements;
and no compliance is given to those that do not publish any information with regard to dealing with any third
parties.




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RiskMetrics Group                                                                                 www.riskmetrics.com




GAPP 15. Principle


Depending on the type of legal framework, compliance assessment refers to disclosure of the constitutive laws and
regulations that govern SWFs in their host countries. If the SWFs make the applicable laws and regulations known
to the public, full compliance is given; otherwise they are given the rating no compliance.


GAPP 16. Principle


Compliance rating is based on whether the SWFs disclose their governance framework (relationship between
owner, governing body and operational management) and whether there is a clear division of roles within the
governance framework (i.e. independence from government). Full compliance is credited to those funds that fulfil
the two criteria; partial compliance is given to those that only meet one requirement; and no compliance is given
to those funds that do not have a clearly defined governance framework.


GAPP 17. Principle


This important criterion covers the disclosure of relevant financial information including asset allocation,
benchmarks where relevant, and rates of return. Thus, full compliance is given to the SWFs that disclose this
information. If they disclose part of the information, they will receive partial compliance ratings, whereas no
disclosure results in a rating of no compliance.


GAPP 18. Principle


As public disclosure of a fund‟s full investment policy is not required by the GAPP, we have laid down the minimum
criteria defining an investment policy that will assure various stakeholders of SWFs‟ commercial objectives. A
sufficient description should include investment horizon, sector and geographic focus, active or passive investment
style, and the usage of external fund managers. If the funds meet the minimum requirement, they are considered
as fully complying with the principle; for those that only provide partial information in the description of their
investment policy, a partial compliance rating will be given. If no disclosure is provided, the fund is rated as being
non-compliant.


GAPP 19. Principle


SWFs‟ investment objectives should be economic and financial, leading to full compliance to principle 19. In cases
where an explicit or hidden non-economic agenda is found, the rating would be no compliance.


GAPP 20. Principle


The compliance rating for the requirement of fair competition is based on whether the SWFs address the issue of
seeking advantages such as access to government information and resources. Full compliance is given to funds that
explicitly state their position on this matter and have legal or other institutional barriers in place to assure
compliance; a no compliance rating is given to funds that fail to demonstrate such mechanisms. As public
disclosure is not required by this principle, only disclosure on the existence of such mechanisms is expected rather
than details on the compliance approach.




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RiskMetrics Group                                                                                www.riskmetrics.com




GAPP 21. Principle


This principle emphasizes SWFs‟ general approach towards ownership rights. Full compliance is given to those
funds that have a clear ownership policy that includes voting guidelines. Such funds are considered to be in full
compliance with the principle. SWFs that do not make any statements regarding their proxy voting approach are
rated as non-compliant, regardless of whether they exercise their ownership rights or not. Disclosing ex-poste
information regarding voting records is optional in the wording of the principles; consequently has not affected the
scoring.


GAPP 22. Principle


To be in full compliance with this principle, SWFs need to have an effective risk management framework. Full
compliance is given to funds that have well disclosed information regarding the existence and sufficiency of their
established risk management frameworks. Funds with no risk management related disclosure are given the rating
no compliance.


GAPP 23. Principle


Performance measurement is the key factor in assessing the level of compliance. For SWFs that disclose how to
measure financial performance, a rating of full compliance is given. No compliance is given to the SWFs which do
not publish such information.


As disclosure is only required to their owners, the mere existence of such a measurement and reporting system is
considered in the rating process rather than demands of details about such a measurement system or the result of
the measurement.


GAPP 24. Principle


A review process is required according to this principle. Full compliance is given to those funds that have a process
of regular reviews and internal/external audits in place. No compliance is given to the SWFs that have not
established any process for the auditing and monitoring of the principles.




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       RiskMetrics Group                                                                                 www.riskmetrics.com




       Appendix H.         Compliance Rating Overview


       GAPP 2- GAPP 5


        GAPP2              Explanation                                                     GAPP 4       Explanation
        Full               "To secure and maintain the current and future prosperity       No           No disclosure
        Compliance         of the Emirate of Abu Dhabi through the prudent                 Compliance
ADIA




                           management of the Emirate‟s investment assets."

        Full               "Strengthen the Australian Government's long term financial     Full         "Funding arrangements by Government are discretionary and reliant
        Compliance         position by making provision for unfunded Commonwealth          Compliance   on budget surpluses and asset sales proceeds. Withdrawals from the
                           superannuation liabilities."                                                 Future Fund can only take place after 2020 or if the value of the
AGFF




                                                                                                        Future Fund exceeds the value of public sector pension liabilities
                                                                                                        defined by the target asset level declaration."
        Full               "To make long-term investments that maximize risk               Partial      Only disclosed funding. "CIC was established on September 29th
        Compliance         adjusted financial returns for the benefit of its               Compliance   2007 with the issuance of special bonds worth RMB 1.55 trillion by
                           shareholder."                                                                the Ministry of Finance. These were, in turn, used to acquire
                           "To recapitalize domestic financial institutions as a                        approximately USD 200 billion of China‟s foreign exchange reserves
                           shareholder abiding by relevant laws in order to maintain                    and formed the foundation of its registered capital."
                           and increase the value of state-owned financial assets in its
CIC




                           wholly owned subsidiary Central Huijing."
        Full               “To preserve and enhance the international purchasing           Partial      It does state that the Constitution of Singapore mandates that a
        Compliance         power            of          Singapore's           reserves.    Compliance   proportion of the fund‟s income can be used to support the
                           For medium-term performance monitoring, to outperform                        government‟s budget when needed. There is no information as to
                           an appropriate composite of recognized market indices,                       what proportion of the fund can be affected in this way or under
                           through optimal allocation among and within asset classes.                   what terms.
                           To build a cohesive organization of excellence that will
GIC




                           attract, develop, motivate and retain quality employees.”




       IRRCi SWF Report www.irrcinstitute.org                                                                           - 142 -
            RiskMetrics Group                                                                                  www.riskmetrics.com




             GAPP2              Explanation                                                      GAPP 4       Explanation
             Full               "To achieve long term investment returns on the financial        Partial      The General Reserve Fund (GRF) is the repository of all of the State
             Compliance         reserves of the State of Kuwait, providing an alternative to     Compliance   of Kuwait's oil revenues and income earned from GRF investments.
                                oil reserves and enabling Kuwait‟s future generations to                      The Future Generation Fund (FGF) was injected 50% of GRF's
                                face the uncertainties of the future with greater                             balance, and receives 10% of all state revenue each year.
KIA




                                confidence."
             Full               To protect and develop the value of Libya‟s oil revenue          Partial      "Oil revenues in excess of budgeted amounts are transferred to the
             Compliance         reserves and to diversify the sources of national income         Compliance   LIA" (source: Santiago Principles); “LIA funds may be withdrawn
                                away from dependences on these                                                only within the limits of the accumulated returns of LIA
                                                                                                              investments, without doing harm at any time to the actual value to
                                                                                                              the assets thereof, and within the limits approved in the annual
                                                                                                              balance. “ (Source: Article 28 in the Articles of Association) –
                                                                                                              Articles of Association is not yet publicly available and the only
LIA




                                                                                                              statement on the website is a broad policy statement
             Full               "To support government saving to finance pension                 Full         The inflow of GPFG consists of all state petroleum revenues, net
             Compliance         expenditure and underpin long-term considerations in the         Compliance   financial transactions related to petroleum activities, as well as the
                                use of Norway‟s petroleum revenue."                                           return on the GPFG's investments. The outflow from the fund is the
                                                                                                              sum needed to cover the non-oil budget deficit, making net
GPFG




                                                                                                              allocations to the Fund equal to the total budget surplus including
                                                                                                              oil revenues.
             Full               Strengthen the economy of the State of Qatar through             No           No disclosure
QIA




             Compliance         diverse investments in a number of asset classes.                Compliance
             Full               RRF- To provide “... an oil and gas transfer in case of          Partial      Oil and Gas proceeds in excess of the transfer are to be channeled
             Compliance         insufficiency of oil and gas incomes for financial support of    Compliance   to RRF until its amount reaches 10% of GDP. If there is an excessive
                                the                    specified                    transfer.”                amount after the transfer to RRF, then it will be channeled to NWF.
RRF & NWF




                                NWF- To ensure pension payments to the citizens of the
                                Russian Federation as well as cover budget deficit of
                                pension fund.
             Full               "Our investments are centered on four themes:                    Partial      Source of funding include: dividends from portfolio companies,
Temasek




             Compliance         Transforming economies; Growing the middle class                 Compliance   commercial borrowings, bond issues divestments, and occasional
                                Depending comparative advantages; Emerging champions."                        asset injections by the government.




            IRRCi SWF Report www.irrcinstitute.org                                                                         - 143 -
  RiskMetrics Group                                                                           www.riskmetrics.com




  GAPP7- GAPP9


SWF      GAPP7          Explanation               GAPP8        Explanation                                                   GAPP9        Explanation
         Full           Sets objectives    and    Partial      The board is made up largely of members of the                No           No information
         Compliance     oversight                 Compliance   government and ruling family of Abu Dhabi; skill set          Compliance
                                                               unclear but appears to include economics.
 ADIA




         Full           Oversight          and    Full         The Board of Guardians is fully independent, selected         Full         Outsourced         to
         Compliance     appoints/removes          Compliance   from the private sector, and all of them have extensive       Compliance   external         fund
                        Board of Guardians                     knowledge and experience in investments.                                   managers
 AGFF




         Full           Sets        objectives,   Partial      Five of the non-executive directors currently hold senior     Full         None       of    the
         Compliance     oversight          and    Compliance   government positions, and the rest of the board members       Compliance   Executive
                        appoints/removes                       came from various government backgrounds. Skill set                        Committee hold any
                        board directors                        mainly lies in economics, and investment related                           current
                                                               competencies seem to be lacking.                                           governmental
                                                                                                                                          positions, but many
                                                                                                                                          have     held   past
                                                                                                                                          government
 CIC




                                                                                                                                          positions
         Full           Sets        objectives,   Full         The board is a mix of government officials and members        Full         From private sector
         Compliance     oversight          and    Compliance   from the private sector; skill set includes economics and     Compliance
                        appoints/removes                       investments.
 GIC




                        board directors
         Full           Oversight                 Partial      KIA's Board of Directors consists of four ex-officio          Partial      Mix of government
         Compliance                               Compliance   members and five members representing the private             Compliance   and private sector
                                                               sector; skill set not very clear but some of the ex-officio
                                                               members have extensive knowledge in economics and
                                                               finance as they came from the Ministry of Finance and
 KIA




                                                               the Central Bank of Kuwait.




  IRRCi SWF Report www.irrcinstitute.org                                                                  - 144 -
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SWF         GAPP7         Explanation               GAPP8        Explanation                                                   GAPP9        Explanation
            Full          Oversight           and   Partial      The Board of Trustees is headed by the Prime Minister         Full         All executives are
            Compliance    appoint/removes     the   Compliance   and three other senior government officials. It is a mix of   Compliance   independent
                          board of trustees                      government officials (4) and members from the private
                                                                 sector (10). Skill set includes economics and investments
 LIA




                                                                 background.
            Full          Oversight                 Full         Entrusted to Ministry of Finance; – the Investment            Full         Operationally
            Compliance                              Compliance   Strategy Council which gets independent advice from           Compliance   managed by NBIM
                                                                 external parties provides investment strategy advice to
 GPFG




                                                                 the parliament.
            Full          Oversight                 No           Only partial disclosure of the board members. Board           No           Government
            Compliance                              Compliance   appears to consist of all government officials and royal      Compliance   officials and royal
                                                                 family members; skill set unknown.                                         family members
 QIA




            Full          Oversight                 No           Entrusted within Ministry of Finance; skill set appears to    No           Managed by Ministry
 RRF& NWF




            Compliance                              Compliance   include economics.                                            Compliance   of Finance



            Full          Oversight                 Full         Independent board; most of the directors are from             Full         Private      sector
            Compliance                              Compliance   various industrial backgrounds, but one has extensive         Compliance   background only
 Temasek




                                                                 fund management experience.




    IRRCi SWF Report www.irrcinstitute.org                                                                  - 145 -
       RiskMetrics Group                                                                                   www.riskmetrics.com




       GAPP 10- GAPP 15




                               Explanation




                                                               Explanation




                                                                                             Explanation




                                                                                                                                   Explanation




                                                                                                                                                                        Explanation
            GAPP10




                                                  GAPP11




                                                                                GAPP12




                                                                                                               GAPP14




                                                                                                                                                          GAPP15
SWF




        Full           Management          -   No          No                Full        Internal          No            No Disclosure                 Full        Law No. (5)
        Complianc      Board- Government       Complianc   informatio        Complianc   Audit     and     complianc                                   Complianc   of 1981
        e              of the Emirate of       e           n                 e           Audit             e                                           e
ADIA




                       Abu Dhabi                                                         Committee
        Full           Management Agency       Full        Annual            Full        Audit             Full          Discloses investment          Full        The Future
        Complianc      - Board of Guardians    Complianc   report            Complianc   Committee         Complianc     mandates,    selection        Complianc   Fund   Act
        e              -          Australian   e           publicly          e           and               e             criteria, and update          e           2006
                       Government                          available                     Australian                      the    list of   fund
                                                                                         National                        managers
AGFF




                                                                                         Audit Office
        Full           Executive               Full        Annual            Full        The Internal      Partial       Only discloses          key   Full        The
        Complianc      Committee - Board       Complianc   report            Complianc   Audit             Complianc     selection criteria            Complianc   Company
        e              of Directors - State    e           publicly          e           Department        e                                           e           Law and its
                       Council                             available                     and National                                                              Articles    of
CIC




                                                                                         Audit Office                                                              Association
        Full           Management – Board      Full        Annual            Full        Auditor-          No            No Disclosure                 Full        The
        Complianc      - Ministry of Finance   Complianc   report            Complianc   General    of     Complianc                                   Complianc   Companies
        e                                      e           publicly          e           Singapore         e                                           e           Act
GIC




                                                           available
        Full           Management - Board      Full        Annual            Full        State Audit       Partial       Only discloses          key   Full        Law No. 47
        Complianc      of    Directors   -     Complianc   reporting         Complianc   Bureau            Complianc     selection criteria            Complianc   of 1982
        e              National Assembly       e           to       the      e                             e                                           e
                                                           Kuwaiti
                                                           Council of
KIA




                                                           Ministers




       IRRCi SWF Report www.irrcinstitute.org                                                                           - 146 -
           RiskMetrics Group                                                                                    www.riskmetrics.com




                                   Explanation




                                                                   Explanation




                                                                                                  Explanation




                                                                                                                                        Explanation




                                                                                                                                                                          Explanation
                GAPP10




                                                      GAPP11




                                                                                    GAPP12




                                                                                                                    GAPP14




                                                                                                                                                            GAPP15
SWF




            Full           Management - Board      Full        Annual            Full        The People‟s       Partial       The Board of Trustees      Full        The Articles
            Complianc      of Directors - Board    Complianc   reporting         Complianc   Supervision        Complianc     appoints          fund     Complianc   of
            e              of Trustees - The       e           to People‟s       e           Authority          e             managers;          but     e           Association
                           People‟s Congress                   Congress                      and external                     selection      criteria
LIA




                                                                                             audit firm                       unknown
            Full           NBIM- Ministry of       Full        Annual            Full        Internal           Full          Discloses investment       Full        The Pension
            Complianc      Finance - Storting      Complianc   report            Complianc   Audit              Complianc     mandates,    selection     Complianc   Fund Act
            e                                      e           publicly          e           Committee          e             criteria, updates the      e
                                                               available                     and Central                      list of fund managers
                                                                                             Bank Audit;                      and performance
                                                                                             Deloitte AS;
                                                                                             The Office of
GPFG




                                                                                             the Auditor
                                                                                             General
            Full           Management          -   No          No                Full        The      State     No            No Disclosure              Full        The      Emiri
            Complianc      Board- Government       Complianc   informatio        Complianc   Audit Bureau       Complianc                                Complianc   Decision No
QIA




            e              of the State of Qatar   e           n                 e                              e                                        e           (22) of 2005
            Full           Ministry of Finance-    Full        Monthly &         Full        Accounts           No            No Disclosure              Full        The Budget
            Complianc      Russia Federation       Complianc   quarterly         Complianc   Chamber of         Complianc                                Complianc   Code
RRF& NWF




            e                                      e           reports           e           the Russian        e                                        e
                                                               publicly                      Federation
                                                               available
            Full           Management – Board      Full        Annual            Full        Externally         Full          Established     internal   Full        The
            Complianc      - Ministry of Finance   Complianc   report            Complianc   audited by         Complianc     rules on dealing with      Complianc   Companies
Temasek




            e                                      e           publicly          e           private            e             third parties; stated in   e           Act
                                                               available                     sector audit                     its Code of Ethics
                                                                                             companies.




           IRRCi SWF Report www.irrcinstitute.org                                                                            - 147 -
      RiskMetrics Group                                                                            www.riskmetrics.com




      GAPP 16- GAPP19


SWF            GAPP16       Explanation                          GAPP17       Explanation            GAPP18         Explanation           GAPP19       Explanation
ADIA           Partial      Management – Board - Government      No           No disclosure          Partial        Brief disclosure of   Full         No evidence
               Compliance   of the Emirate of Abu Dhabi; but     Compliance                          Compliance     investment policy     Compliance   of political
                            not fully independent                                                                   – No Disclosure on                 motives
                                                                                                                    Outsourcing
AGFF           Full         Management Agency - Board of         Full         Disclosure      in     Full           Full disclosure of    Full         No evidence
               Compliance   Guardians - Australian Government;   Compliance   annual     report      Compliance     investment policy     Compliance   of political
                            and independent                                   and      quarterly                                                       motives
                                                                              update
CIC            Full         Executive Committee – Board -        Full         Disclosure      in     Full           Brief disclosure of   Full         No evidence
               Compliance   State Council; and independent       Compliance   annual report          Compliance     investment policy     Compliance   of political
                                                                                                                                                       motives
GIC            Full         Management – Board - Ministry of     Full         Disclosure    in       Full           Brief disclosure of   Full         No evidence
               Compliance   Finance; and independent             Compliance   annual review          Compliance     investment policy     Compliance   of political
                                                                                                                                                       motives
KIA            Partial      Management - Board of Directors -    No           No disclosure          Full           Brief disclosure of   Full         No evidence
               Compliance   National Assembly; but not fully     Compliance                          Compliance     investment policy     Compliance   of political
                            independent                                                                                                                motives
LIA            No           Management - Board of Directors-     No           No disclosure          No             Brief disclosure of   Full         No evidence
               Compliance   Board of Trustees - The People‟s     Compliance                          Compliance     investment policy     Compliance   of political
                            Congress; and independent –                                                             – nothing available                motives
                            However not yet publicly available                                                      publicly
GPFG           Full         Management- Ministry of Finance -    Full         Disclosure     in      Full           Full disclosure of    Full         No evidence
               Compliance   Storting; and independent            Compliance   annual     report      Compliance     investment policy     Compliance   of political
                                                                              /quarterly                                                               motives
                                                                              update




      IRRCi SWF Report www.irrcinstitute.org                                                                  - 148 -
  RiskMetrics Group                                                                              www.riskmetrics.com




SWF        GAPP16       Explanation                            GAPP17       Explanation            GAPP18         Explanation           GAPP19       Explanation
QIA        Partial      Management – Board - Government        No           No disclosure          Partial        Brief disclosure of   Full         No evidence
           Compliance   of the State of Qatar; but not fully   Compliance                          Compliance     investment policy     Compliance   of political
                        independent                                                                               - No Disclosure on                 motives
                                                                                                                  Outsourcing
RRF&       Partial      Ministry of   Finance - Russian        Full         Monthly                Partial        Brief disclosure of   Full         No evidence
NWF        Compliance   Federation;    but   not  fully        Compliance   disclosure   and       Compliance     investment policy     Compliance   of political
                        independent                                         quarterly update                      - No Disclosure on                 motives
                                                                                                                  Outsourcing
Temasek    Full         Management – Board - Ministry of       Full         Disclosure      in     Partial        Disclosure       of   Full         No evidence
           Compliance   Finance; and independent               Compliance   annual report          Compliance     investment policy     Compliance   of political
                                                                                                                  - no disclosure                    motives
                                                                                                                  about investment
                                                                                                                  management
                                                                                                                  outsourcing




  IRRCi SWF Report www.irrcinstitute.org                                                                    - 149 -
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       GAPP 20- GAPP 24


                            Explanatio
SWF         GAPP20                       GAPP21      Explanation          GAPP22      Explanation          GAPP23           Explanation       GAPP24      Explanation
                           n

            No             No            No          No disclosure        No          No disclosure        No               No disclosure     No          No    review
            Complianc      disclosure    Complianc                        Complianc                        Complianc                          Complianc   process
            e                            e                                e                                e                                  e
ADIA




            No             No            Full        Active Owners;       Full        Internal   risk      Full             Used benchmark    No          No    review
            Complianc      disclosure    Complianc   Disclosure     of    Complianc   management           Complianc        index             Complianc   process
            e                            e           voting guidelines    e           system               e                                  e
AGFF




            No             No            No          No disclosure        Full        Risk Management      No               No disclosure     No          No    review
            Complianc      disclosure    Complianc                        Complianc   Committee            Complianc                          Complianc   process
            e                            e                                e                                e                                  e
CIC




            No             No            Partial     Exercise             Full        Risk Committee       Full             Used     return   No          No    review
            Complianc      disclosure    Complianc   ownership rights     Complianc                        Complianc        targets     and   Complianc   process
            e                            e           but no disclosure    e                                e                market            e
                                                     of          voting                                                     benchmarks
GIC




                                                     guidelines
            No             No            Partial     "KIA exercises its   Full        Risk        and      Full             Used benchmark    No          No    review
            Complianc      disclosure    Complianc   voting rights" but   Complianc   Performance          Complianc        index             Complianc   process
            e                            e           no disclosure of     e           Unit                 e                                  e
KIA




                                                     voting guidelines




       IRRCi SWF Report www.irrcinstitute.org                                                                    - 150 -
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                                Explanatio
SWF             GAPP20                       GAPP21      Explanation         GAPP22      Explanation          GAPP23          Explanation         GAPP24      Explanation
                               n

                No             No            Partial     Exercises, but no   No          Risk Committee –     Full            Used benchmark      No          No    review
                Complianc      disclosure    Complianc   voting guidelines   Complianc   not      disclosed   Complianc       index               Complianc   process
                e                            e                               e           publicly             e                                   e
LIA




                No             No            Full        Active Owners;      Full        Risk Management      Full            Used benchmark      No          No    review
                Complianc      disclosure    Complianc   Disclosure     of   Complianc   and           full   Complianc       index and full      Complianc   process
                e                            e           voting              e           disclosure of risk   e               disclosure of the   e
                                                         guidelines;                     measurement                          performance of
GPFG




                                                         disclosure     of               over time                            benchmark index
                                                         voting records
                No             No            No          No disclosure       No          No information       No              No disclosure       No          No    review
                Complianc      disclosure    Complianc                       Complianc                        Complianc                           Complianc   process
                e                            e                               e                                e                                   e
QIA




                No             No            No          No disclosure but   No          No information       No              No disclosure       No          No    review
RRF& NWF




                Complianc      disclosure    Complianc   currently    does   Complianc                        Complianc                           Complianc   process
                e                            e           not hold any        e                                e                                   e
                                                         equities
                No             No            Full        Exercises;          Full        Risk Management      Full            Used     "Wealth    No          No    review
                Complianc      disclosure    Complianc   discloses voting    Complianc   Unit                 Complianc       Added       (WA)    Complianc   process
                e                            e           guidelines          e                                e               factors"     and    e
Temasek




                                                                                                                              Total
                                                                                                                              Shareholder
                                                                                                                              Returns




           IRRCi SWF Report www.irrcinstitute.org                                                                  - 151 -
RiskMetrics Group                                                                               www.riskmetrics.com




9. End Notes
    1.    OECD DECLARATION ON SOVEREIGN WEALTH FUNDS AND RECIPIENT COUNTRY POLICIES,
          http://www.oecd.org/dataoecd/0/23/41456730.pdf
    2.    Norway           should         make           oil        fund        greener;        Khaleej       Times
          http://www.khaleejtimes.com/DisplayArticle08.asp?xfile=/data/business/2008/October/business_Octobe
          r871.xml&section=business
    3.    Qatar,     U.K.     Establish    $400     Million    Clean-Energy    Investment    Fund    ;  Bloomberg;
          http://www.bloomberg.com/apps/news?pid=20601085&sid=a5mMnLNrvO40&refer=europe
    4.    Future Fund Statement of Investment Policies, April 2009
    5.    “Working Group Announces Creation of International Forum of Sovereign Wealth Funds”: http://www.iwg-
          swf.org/pr/swfpr0901.htm
    6.    Source: Thomson One Banker
    7.    Source: Zawya, http://zawya.com/cm/profile.cfm/cid1000152, Accessed 16th March 2008
    8.    Source: Gulfnews: http://www.gulfnews.com/Business/Investment/10275562.html, Accessed 17th March
          2008
    9.    Source: Thomson One Banker
    10.   Source: Thomson One Banker
    11.   Reuters; March 1, 2009 - http://www.reuters.com/article/topNews/idUSTRE52012320090301
    12.   Currency conversion is based on www.xe.com
    13.   “Norway announces €2.3bn environmental and sustainable investments for Government Pension Fund”,
          Responsible                                                                                      Investor,
          http://www.responsibleinvestor.com/home/article/norway_announces_23bn_environmental_and_sustain
          able_investments_for_governm/
    14.   Source: Reuters, http://www.reuters.com/article/usDollarRpt/idUSSIN24438120090310, Accessed 25th
          March 2009
    15.   Source:        Forbes,        http://www.forbes.com/2007/12/21/merrill-lynch-mortgage-markets-equity-
          cx_er_1221markets08.html, Accessed 25th March 2009
    16.   Source: Reuters, http://uk.reuters.com/article/fundsNews2/idUKGICFACTBOX20090304, Accessed 25th
          March 2009
    17.   Carnegie Papers (October 2008), Sven Behrendt, When Money Talks: Arab Sovereign Wealth Funds in the
          Global Public Policy Discourse,
    18.   International              Herald              Tribune,            February            10,          2009,
          http://www.iht.com/articles/ap/2009/02/10/business/NA-US-Sovereign-Funds-Losses.php
    19.   Source: Thomson One Banker
    20.   Source: Thomson One Banker
    21.   Reuters India: http://in.reuters.com/article/asiaCompanyAndMarkets/idINLA75792420090210
    22.   Source: Thomson One Banker
    23.   GEA Group Annual Report, 2003, 2004, 2005, 2006, 2007 and 2008
    24.   Source: International Working Group of Sovereign Wealth Funds (IWG): www.iwg-swf.org/
    25.   As of 1st March 2009, Source: Ministry of Finance of the Russian Federation
    26.   As of 1st March 2009, Source: Ministry of Finance of the Russian Federation
    27.   China Investment Corporation: http://www.china-inv.cn/cicen/about_cic/aboutcic_overview.html
    28.   “Lou     Suffers     Blackstone's    'Fat    Rabbits'    in    China    Fund    (Unpdate1)”,  Bloomberg:
          http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=at7tCLylbz2U#




IRRCi SWF Report www.irrcinstitute.org                                                                      - 152 -
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    29. China Investment Corporation: http://www.china-inv.cn/cicen/about_cic/aboutcic_overview.html
    30. China     Investment      Corporation      Articles      of      Association      (abstract):    http://www.china-
        inv.cn/cicen/governance/articles.html
    31. “China      Investment       Corporation       unveils        investment         plan”:          http://www.china-
        embassy.org/eng/xw/t379014.htm
    32. China Xinhua News: http://news.xinhuanet.com/fortune/2008-04/24/content_8042890.htm
    33. FT Chinese “CIC should pay for its interest”: http://www.ftchinese.com/story.php?storyid=001017791
    34. “Lou     Suffers    Blackstone's     'Fat    Rabbits'       in     China       Fund     (Unpdate1)”,    Bloomberg:
        http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=at7tCLylbz2U#
    35. The                             US-China                                Business                            Council:
        http://www.uschina.org/public/china/govstructure/govstructure_part6/cic.html
    36. “China's       Sovereign         Wealth        Fund          CIC         Responds          to       Its    Critics”:
        http://www.businessweek.com/print/globalbiz/content/apr2008/gb2008043_512513.htm
    37. “Day            of            Reckoning              for             China's             Sovereign           Fund”:
        http://www.eeo.com.cn/ens/finance_investment/2008/01/31/92109.html
    38. China Investment Corporation: http://www.china-inv.cn/cicen/investment/investment_asset.html
    39. “China       Investment        Corporation        unveils         investment         plan”:      http://www.china-
        embassy.org/eng/xw/t379014.htm
    40. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGaRja_0HcIg
    41. “M.      Stanley       property       fund       raises        $6       billion,      CIC       helps”,    Reuters,
        http://www.reuters.com/article/innovationNews/idUSHKG17951420090331
    42. “China Investment Corporation Announces Investment in Teck Resources Limited”: http://www.china-
        inv.cn/cicen/resources/resources_news08.html
    43. “China's        CIC        sees        opportunities           in        natural          resources”,      Reuters:
        http://uk.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUKPEK13672720090304
    44. “China‟s State Investment Company to Acquire Non-Voting Minority Stake in Blackstone”:
        http://www.blackstone.com/news/press_releases/05-20-2007.pdf
    45. “China's sovereign wealth fund raises stake in U.S. company to 12.5% ” People‟s Daily Online:
        http://english.people.com.cn/90001/90776/90884/6517276.html
    46. “CIC           to          invest           $500             mil             in          Blackstone          Fund”:
        http://www.reuters.com/article/marketsNews/idINN1942810220090619?rpc=44
    47. “China's       CIC       to       launch         $4         billion       fund         with       JC      Flowers”:
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    53. Based on exchange rate as of 7th July 2009, http://www.x-rates.com/calculator.html




IRRCi SWF Report www.irrcinstitute.org                                                                              - 153 -
RiskMetrics Group                                                                         www.riskmetrics.com




    54. Australian Government Department of Finance and Deregulation, http://www.finance.gov.au/investment-
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        id=50




IRRCi SWF Report www.irrcinstitute.org                                                                - 154 -

				
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