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The EU Trade Commissioner Peter Mandelson discusses the nature of Sovereign Wealth Funds, their role and how the legislators, regulators and other stakeholders in the western developed economies should approach them.

How can Chinese and Gulf sovereign wealth funds better understand the issues that are now confronting them in European institutions, on Capitol Hill and in the business pages?

The debate currently taking place on SWFs has emerged as governments, in particular those receiving SWF investment, feel they wish to know more about the investment objectives of the funds or their precise relationship with their sponsor governments.

I appreciate that SWF managers are not the type to court publicity. However, I do believe it is useful to have a constructive dialogue between countries receiving SWF investment, on the one hand, and SWFs and their origin countries, on the other.

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When travelling to SWF countries, I have therefore sought to reach out to SWF managers and their principals, just as fund managers have come to Brussels to dialogue with the European institutions and to national capitals to talk to governments.

This is how funds can understand the concerns of recipient countries, and recipient countries become more familiar with the funds.

It is important for SWF managers not to underestimate how important reassurance about systems of transparency and governance is.  Like it or not, they are operating in a political environment.

Should the West have any worries about the current trend of Sovereign Wealth funds which traditionally bought Treasury bills and are now buying equity and direct investment?

The classical argument goes that SWFs may not be solely motivated by shareholder value and profit-loss incentives, but possibly pursue objectives of a strategic or political nature, such as to secure control of strategically-important industries for political gain or to extract and acquire technology from a foreign industry.

I think the possibility that a SWF might seek to use its investments for these reasons is extremely slim, and certainly there is no experience of this happening to date.

However, these "what if…" scenarios are what citizens and politicians worry about. This is why I think it would be wise for SWFs to provide reassurance on their transparency and governance practices, which would come on top of the legislative instruments we already have in place to avoid market abuse, distortion of competition etc.

What in practical terms can they do to provide regulators and legislators with reassurance about their motives, intentions and future plans?

I think it is easier than the might funds fear to reassure regulators and legislators. It is not the first time that public anxiety has arisen about the intentions or business models of a class of investors. Such anxiety has been expressed not so long ago in relation to hedge funds and private equity funds.

These have responded by providing reassurance in the form of a voluntary code of conduct. SWFs can learn from this. Currently, the IMF is leading efforts in partnership with the funds to define best practices for the transparency, accountability and governance of SWFs. This needs the active input of SWFs and their principals. On the flip side, not participating actively in this process would send strong negative signals.

Let's not forget that, given the investment record of the funds, signing up to best practices should largely be about SWFs signing up to doing what they are already doing and not doing what they freely acknowledge they do not do.

The geo-politics of this are pretty immense aren’t they. We are talking about an era of state capitalism, often emanating from nations where democracy as we know it in the West (which is often the element which controls the markets) is not present?

Some of the anxiety about SWFs today is deepened by the perception – and sometimes the reality – that some of the countries that sponsor SWF take a different approach compared to us when it comes to the role of the state in trade and investment, with states directly running businesses, transparently or otherwise.

State capitalism requires the EU and other states to be vigilant; it requires that state-owned enterprises that want to compete in our markets meet our competition and monopoly rules, and it may require us to defend our own companies and workers from unfairly subsidised imports.

It requires that we take a hard-headed approach to tackling barriers to our exports in their markets so that our businesses get a fair deal and our voters see the two-way benefits of openness.

However, it would be a mistake for our own governments to get back into the business of state businesses themselves or to shelter our economies from state-backed capitalism.

We have learnt the lessons of these kinds of economic nationalism and state intervention the hard way, just as the new state capitalists are likely to learn them through inefficient companies, overheating export sectors or distorted capital markets.

But just because some have yet fully to learn from these mistakes doesn't mean that we, in our economies, should start repeating them. Moreover, the existence of state capitalism in some countries is not a rationale for protectionism by others.

When you call for transparency, what exactly are you calling for? The same kind of transparency that a publicly quoted company listed in New York or London would be required to give?

The IMF is currently reflecting, together with the funds, on what kind of transparency mechanisms may be useful. In my view, broadly speaking, transparency should as a minimum bring some clarity about the investment strategies and objectives of SWFs.

This can be as simple as periodic reporting and publication of business plans. I do not believe that transparency obligations should be either onerous or more than is required of other investment vehicles. SWFs should not be through transparency requirements be placed at a competitive disadvantage compared to other actors.

You have said the legal tools are already in place to ensure there is no market abuse or acquisition in sensitive areas such as defence. If legislation or new regulation is not the solution, what is?

Indeed, despite the political temptation to believe otherwise, OECD states already have the legal tools they need to regulate the establishment and the actions of foreign investors.

This is why new laws are not needed. What we need is reassurance that the benign conduct of funds in the past will remain a useful and consistent guide to the future.

You back a global, voluntary code – will you be able to carry the US with you?

Just like the EU, the US has a strong interest in making sure that no one reacts disproportionately in the current debate about SWF investment. The EU and US economies thrive because of their openness to investment and trade.

It would be a mistake to turn away sound investments or tolerate public scepticism about foreign investment. The EU is working in the IMF with the US and other partners, including SWF countries, towards a reasonable and reasoned response to SWF investments in the form of a global, voluntary set of best practices.

Given that in their own countries government controlled SWFs have never needed to “lobby” effectively, what are you expecting them to do – and to what ends?

Europe is open to foreign investment. What I expect from SWFs is to be open about their intentions and their relationship with their principals. There are many ways to being open.

I appreciate that transparency may resonate differently in different cultures. However, that should not prevent the fund managers from acting in their own interest and reassure that they operate beyond suspicion. Under these conditions, Europe's openness can be guaranteed.

How can Asian enterprises better understand the role of the European commission as they seek to access European markets?

The European Union is a single market, the largest in the world. The Commission is the voice of this market in the EU's trading relations with third countries.

It negotiates trade agreements between the EU and third countries, it pursues unfair trading practices and tries to remove barriers faced by European companies doing business abroad.

It also provides information to exporters wishing to access the EU market and will be the interlocutor with governments who might have issue with the EU's own trading practices or rules.

You know about the importance of the media. Do Asian companies and SWFs active in Europe understand that they need to win the media battle, not just the commercial battle or the regulatory fight, during potentially controversial M&A cases?

There is a risk that SWFs may get the facts right, but get the bigger picture wrong. Trust and confidence in capital markets, in particular today, and in its main actors are much needed.

I appreciate that SWFs are currently playing an important role in bringing stability to a sector in turmoil. I hope SWFs do not miss the bigger picture and pay close attention to the environment in which they are operating.

You have said the West needs to response in a “reasoned and reasonable way” to the shift in investment patterns. Can you expand on this?

A key policy in the EU is proportionality. This is enshrined in our Treaty. It means that the extent of an action must be in keeping with the aim pursued. That's what I mean when referring to a reasonable response.

Our means must be proportionate to the objectives pursued. No one should overreact. Hindering sound investment would certainly qualify as being disproportionate.

We should ensure that reason prevails and that we do not fall in the trap of protectionism or over-reacting to some of the anxieties that exist in relation to the rise of emerging economies.