The road to transparency is seldom traveled by Gulf financial institutions, but the Abu Dhabi Investment Authority’s (ADIA) publication last month of its first financial disclosure since its inception in 1976, entitled the ADIA Review, is perhaps the beginning of a new journey.
ADIA is a sovereign wealth fund (SWF) which we estimate to manage some $400 billion is assets, though the fact that analysts like myself can still only provide ballpark estimates is telling of how far the Review goes, or does not go, in providing transparent and open disclosure.
Despite its shortcomings, however, the publication is a strong indication of a nascent commitment among ADIA’s leadership to good governance, accountability and transparency arrangements, as codified by the so-called “Santiago Principles”, a code of conduct that 26 SWFs signed and pledged to implement in October 2008.
ADIA is one of the biggest members of this increasingly powerful investor group, which, by our estimates collectively control assets of some $2.3 trillion.
For years, SWFs have come under pressure to opportunistically support the domestic and international political objectives of the governments that own them, rather than operate purely on the basis of financial considerations.
When SWFs committed themselves to the Santiago Principles they ceded, in principle, a degree of autonomy to establish policy objectives and governance arrangements. And to some degree at least, ADIA now appears to have engaged the Santiago concept.
ADIA has provided important information about how its leadership perceives its position in the broader global political environment that has been so critical of SWFs lately. This information includes insights into how ADIA perceives the different dimensions of risk it faces and a great deal about the professional quality of its staff and how it selects external investment managers.
But the Review is limited in scope. The Santiago Principles require SWFs to publicly disclose relevant financial information to contribute to stability in international financial markets and enhance trust in recipient countries. Many other SWFs meet this request by providing precise information about the value of assets under management, strategic asset allocation, benchmarks and information about equity holdings.
ADIA, on the other hand, restricted itself to providing rudimentary information about its strategic asset allocation and its long-term performance, in the form of 20 and 30-year annualized rates of return.
Few facts about ADIA’s funding and withdrawal policies are provided. The Review states that the government of Abu Dhabi provides ADIA with funds that are surplus to its budgetary requirements and the withdrawals that ADIA is required to make available to the government have occurred infrequently, depending on commodity price developments.
This is well short of the industry benchmark set by the Santiago Principles, since information about precise funding and withdrawal arrangements, as well as the actual cash flows in and out of the fund, are the norm rather than the exception.
The Review also claims that ADIA carries out its investment program independent of the government of Abu Dhabi, ostensibly an attempt to reconfirm that ADIA is operating purely on the basis of financial considerations. But this too reveals a missing link in ADIA’s accountability arrangements. If it does not invest in line with the guidelines that the government sets, who else is the leadership of ADIA accountable to?
ADIA’s governance and accountability arrangements are therefore questionable. Members of the ruling family occupy most of the relevant leadership positions at ADIA, very much reflecting the overall governance arrangements of the emirate’s political institutions.
Though the Review might be too weak to build confidence and credibility with regards to ADIA’s investments in Western countries and industries, it should be seen as a good first step down a new path.