How sovereign wealth funds could help drive Indigenous economic growth

Since the mid-1970s, the federal government has settled hundreds of claims with Indigenous communities to rectify historical wrongs, settle land disputes, and honour treaty rights. This has resulted in a substantial and long overdue transfer of wealth to Indigenous communities in the billions of dollars.

These settlements play an important part in Canada’s journey toward reconciliation with, and justice for Indigenous communities; and there are many more to come.

Over the past fifty years, Canada has settled nearly 700 specific claims alone – that is, claims for land mismanagement, appropriation and the breach of treaty rights. These settlements total over $14.7 billion, with half of these claims being settled in the last four years. This says nothing of the 640 cases still pending or the countless claims that have yet to be filed. Nor does it touch on comprehensive claims, treaty annuity claims or class actions, of which there have been many; one recent class action fetched a settlement of $23.3 billion.

These sums not only represent a recognition of past wrongs, but also a hope for the future – an unprecedented opportunity for many Indigenous communities to find new pathways to prosperity and build stronger, more sustainable futures. 

And yet, challenges remain. As Indigenous communities make advances asserting their legal rights and settling claims, they face legal and systemic challenges for the subsequent management and administration of settlement funds.

Trust shortcomings

Trusts, a centuries-old financial vehicle, are still the primary mechanism chosen by Indigenous communities to hold and manage settlement funds. As I’ve suggested in another article, while they may be the bedrock of estate planning, they come with serious shortcomings when used as wealth management tools by Indigenous communities.

• Indigenous economic growth: Good trusts, bad trusts, no trusts

For one, the governance structure of trusts generally requires separate management from the community whose assets are being administered. This separate management removes control over the assets from the Indigenous community and also creates difficulty in ensuring that the use of trust funds aligns with the priorities of that community.  

Further, legislative restrictions mandate the adoption of extremely conservative investment strategies, geared primarily towards the preservation of capital and the minimization of risk. And while a balanced and conservative investment strategy is not necessarily a bad thing, it often prevents an Indigenous community from investing back into itself in a manner that aligns with its economic development objectives.  The preservation of trust capital trumps the value of economic growth and development.

For example, requests by Indigenous communities to utilize trust funds to finance projects on their territory generally fail to meet the prudent investor standard mandated by trust law. While these projects are not particularly “risky,” they tend to fall outside of the permissible bounds of a balanced investment strategy. Similarly, requests to leverage trust property as security for lending are often prohibited by the trust instrument, creating a further limitation on the community to utilize its property to support economic development.

Despite these limitations, there are few alternatives for the long-term management of these assets.

The need for something different

Given the unprecedented transfer of wealth to Indigenous communities, it is time to address the shortcomings inherent in existing legal structures and create an entity better-suited to manage capital while also allowing for progressive economic development. The goal of capital preservation must be balanced against, and coupled with, the flexibility necessary to support economic self-sufficiency and empower Indigenous communities. 

One promising option, as advocated by the National Aboriginal Trust Officers Association, is the creation of an Indigenous sovereign wealth fund.

These entities could be created and structured in a manner akin to traditional sovereign wealth funds operated across the world by national and sub-national governments, including within Canada. The ultimate objective of these funds could be similar to that of existing trusts: to manage settlement funds to support communities today while preserving the funds for future generations and within a governance structure that optimizes risk-adjusted returns.

But these wealth funds could also be fundamentally different. The key difference being one of scope and ambition. Trusts by design are more narrow in scope, structured to carefully manage assets and provide a steady revenue stream for beneficiaries. Wealth funds by design could be focused on managing collective wealth for the broader long-term benefit of Indigenous communities.

Such wealth funds could be an embodiment of self-determination; a true patriation of wealth back to the community.

This objective would not be hard to accomplish, but it would require a lot of work. A true commitment to reconciliation and financial fairness, however, means this work is imperative. 

A brand new entity 

A brand new legal entity requires navigating regulatory frameworks, establishing governance structures and building capacity among stakeholders. Robust monitoring and evaluation mechanisms will need to be established.

The legislation would need to recognize the inherent sovereignty of Indigenous Nations over the management of their financial assets and include provisions for ownership, management structure, reporting requirements and even investment guidelines.

Funding would need to be allocated to facilitate capacity building and technical assistance programs.  

• How to navigate this tipping point in Indigenous economic growth

Of course, the first step would be to engage Indigenous communities in a manner that recognizes that they are not a homogenous group, but have different governance structures and differing needs. This would be a bespoke business and the legal framework needs to reflect this. 

Governance will be critical. Sovereign wealth funds would have to be insulated from the to-and-fro of politics. The bar to liquidating a fund on a political whim should be extremely prohibitive, for example. 

The law would outline fiduciary obligations of directors to manage these assets on behalf of beneficiaries, like legislation does for trustees under the Trustee Act or corporate boards under the Canada Business Corporations Act.

In fact, wealth funds would likely look like a hybrid between a trust and a corporation.  

Everybody knows what a corporate director is supposed to do and what obligations they owe to the corporation itself and to the shareholders. Legislation is reasonably detailed on this, and can inform how to assign rights to all of the parties relevant to any new wealth fund structure. 

To be sure, the creation of such a vehicle would require significant government leadership and collaboration with Indigenous leadership. It would be a heavy lift legally, requiring the creation of a new legal entity.

But advancing economic reconciliation should be the guiding principle. 

Sovereign wealth funds would effectively strengthen the fiscal powers of Indigenous peoples –  allowing them not only to exercise their right to self-government but providing the tools to leverage their assets to invest in their own communities.

It also makes a lot of economic sense for all Canadians.

Such a vehicle would unlock billions of capital to be invested in Canada, rather than in global financial markets – amplifying benefits across the country.