Part V: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme.  The Ruminations Series in 2009 produced a series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time.  For 2010, this site introduced a new series--Business and Human Rights.  The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum. 

For 2011, this site introduces a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model.  The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund.  The thesis of this series is this:  The Norwegian Sovereign Wealth Fund (NSWF) )investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF.  The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment.  That jurisprudence may contribute significantly both to the development of transnational social norm standards and  affect the way domestic corporate law is understood. This is Part V of the series.

Daniel Brooksbank, Giant Norwegian fund’s coal investments under scrutiny, April 9, 2010, Responsible Investor.com

Part V: Responsible Investment Through the Ethics Guidelines--Overview of the Exclusion Determinations.

We now understand the comprehensive and self-reinforcing construction of "responsible investment" under the Norwegian regulatory framework. "It is our ambition to continue to integrate considerations of good corporate governance and environmental and social issues into more aspects of our investment
strategy and management. This is in line with the UN Principles for Responsible Investment, which both Norges Bank and the Ministry of Finance have signed." (From Ministry of Finance, Government Pension Fund Global, Responsible Investment (Brochure) at 14). The idea behind the UN Principles is to provide a principled basis for the participation of investors in the governance of the entities in which they invest as well as to provide a framework for valuing choices in investment.

Responsible investment principles provide a means by which the state can direct the choices of investment consistent with the general obligation fo the NSWF to achieve the highest possible returns.  The direction is meant to constrain the universe of potential investments form which the maximization of returns can be achieved.  The object is to further the state's important political policy of advancing its policy of corporate social responsibility, environmental sustainability, human rights and economic development. For that purpose, the Norwegian state incorporates international soft law standards and prohibits investment in companies that engage in certain economic activity (product based exclusion) or whose conduct (conduct based exclusion) violate certain substantive standards incorporated into law.  It also participates in the development of international standards that it then applies to manage the universe of investment choices permitted the NSWF.  But responsible investment also has a private regulatory aspect.  Once the Fund has purchased shares in a company within the approved investment universe, principles of active ownership oblige the Norges Bank to use its position as a shareholder to advance the policies of the state (memorialized in its responsible  investment rules and incorporated international standards, along with additional corporate social responsibility standard identified by the Ministry of Finance or the Storting) through shareholder action. The task of ensuring that only companies conforming to the responsible investment standards are included in the investment universe falls to the Ethics Council and the Ministry of Finance.  The Ethics Counsel  makes recommendations on the exclusion of companies whose place within the investment universe is challenged, and forwards those recommendations ot the Ministry of Finance for final determination.   Those determinations are made in conformity to the principles and standards of responsible investment written into the Ethics Guidelines, and may, in the aggregate contribute to the development of international standards which are then reflected in the rules of responsible investment that constrains the Norges Bank in the choice of suitable investment.

  Norway denies tobacco producers access to pension funds, IceNews, Feb. 2, 2010 ("Acting on the recommendation of the Government Pension Fund Global (GPFG), the Norwegian Ministry of Finance has announced that seventeen tobacco producing companies will be excluded from the funding scheme, with share divestment in the companies having already been completed.")

The framework itself thus nicely evidences the sort of self-referential system that is both complete and self-reinforcing.  It offers a window on a possible approach to the resolution of the great issue of the 21st century--how to mediate the divide between public (law) and private (norm-contract) governance in which states and private actors can be managed by an integrated domestic-international system.  Sovereign investment thus combines the private objective of economic wealth maximization with the public objective of promoting certain behaviors and privileging certain values.

 The goal of good financial returns is closely linked to the ambition to be a responsible investor. This responsibility entails ensuring that the Fund is managed in a way that promotes well-functioning, legitimate and efficient markets and sustainable development in the broadest sense. Investors who are broadly diversified – both geographically and across different types of investments – are often referred to as «universal owners». Such owners will benefit from making sure that good corporate governance and environmental and social issues are safeguarded, since considerations of this type may influence their long-term returns. . . . It also follows from the mandate as manager of national savings that widely shared ethical values must be taken into account. In some cases, the concerns of ensuring long-term financial returns and taking widely shared values into account will coincide, but not always. . . . The GPFG is a major and visible investor and has, therefore, a special responsibility to monitor and contribute to the development of the leading international practice in this area.   (From Ministry of Finance, Report No. 10 (2009-2010): The Management of the Government Pension Fund in 2009, at Sec. 2.1.1))

Responsible Investment, then, serves not only as a vehicle for the coordination of state policy toward economic behavior.  It also serves as a means of projecting state power indirectly in areas of foreign policy with respect to which the Norwegian state has not been able to play a direct role.

The Fund is not capable of safeguarding all the ethical commitments we have as a nation. Other political, regulatory or financial instruments will often be better suited to safeguard these commitments. The Fund has the greatest chance of exerting a positive influence if the focus and instruments are a natural consequence of the Fund’s role as a financial investor. The Fund’s objective is not to act as for example a development aid or foreign policy instrument.  (From Ministry of Finance, Report No. 10 (2009-2010): The Management of the Government Pension Fund in 2009, at Sec. 2.1.1))

In this sense, responsible investment in general, and the work of the Ethics Council in particular, serves a s a means of levering the public power of Norway through private markets.

Oil Funds Give Israeli Outfits the Boot, Upstream Online.org, Aug. 23, 2010 ("Norway has excluded two Israeli companies from its $450 billion oil fund, claiming the outfits' activities in the Occupied Territories are in breach of the fourth Geneva Convention.")

Norway, then, seeks to retain the traditional goal of wealth maximization but to constrain the choices available for performance measured solely as a function of return on capital by applying public policy criteria that reflects the political preferences of the state,public policy that derives from regulation that itself is a product of the ethical values used to determine the universe of investments and the governance of the corporations in which investment is made.  All of this forms part of a larger strategy for the projection of Norwegian power abroad. 

The work of the Ethics Council plays a key role in this regulatory system.   First, the Ethics Council makes determinations of exclusion in individual cases.  For that purpose the Ethical Guidelines serve as the regulatory framework which the Ethics Council applies, the way in which a court applies statutes and regulations.  In the course of undertaking that function, the Ethics Council may be requires both to fill in gaps and to develop interpretive standards that it applies uniformly to companies with similar characteristics. These interpretations may also bridge conceptional and implementation gaps between product cases and conduct cases.  These standards may both shape and advance the development of the "rules" set forth in the Ethics Guidelines.  In the aggregate it may have an effect well beyond the narrow application to the particular company involved in a determination of exclusion.  It may be possible to understand this as the beginning of a jurisprudence jurisprudence of responsible investment.  Second, the aggregate of Ethics Council decisions, when generalized into a set of inter-related standards, will themselves contribute to the development of international standards of corporate social responsibility and corporate governance.   That development will then make its way back into Norway in the form of law, as the developing standards of international law are incorporated into Norwegian domestic law and are applied by the Norges Bank to help determine its investment choices, and then to help incorporate those standards within corporate governance structures through the active ownership obligations. 

 Malaysian Company Excluded From Pension Fund, SandAsia.com, Sept. 12, 2010(“The decision to exclude these companies from the GPFG is based on the Council on Ethics assessment that they are contributing to or are themselves responsible for grossly unethical activity,” says Minister of Finance Sigbjørn Johnsen. )

This short essay moves the analysis from its contextual base in the framework of responsible investment to the  Its principal purpose is to identify the decisions the form the current jurisprudential universe of the Ethics Council. (Appendix B, C & D).  It also identifies the categorical distinctions that have been made by the Ethics Counsel in framing approaches to exclusion in both product and conduct cases.  (Appendix B).   The Ethics Council itself has suggested the structure of its own jurisprudence, a structure that these essays will take as a starting point for analysis. 
 

Part VI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 1. Weapons production, a.  land mines.

Part VII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 1. Weapons production, b.  cluster munitions.

Part VIII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 1. Weapons production, c.  nuclear arms. 

Part IX: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 2. Weapons Sales to States, a.  Burma.

Part X: Ethics and a Jurisprudence of Responsible Investment:  The Cases--I.  Products, 3. Tobacco Production.

Part XI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 1.  Serious or systemic human rights violations. 

Part XII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 2.  Environmental damage.

Part XIII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 3.  Serious Violations of Ethical Norms. 

Part XIV: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 4.  Serious Violations of Individual Rights in War or Conflict.

Part XV: Ethics and a Jurisprudence of Responsible Investment:  The Cases--II.  Conduct--Complicity, 5.  Corruption.

Part XVI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--III.  Non-Exclusion Actions, 1.  Observation of Companies.

Part XVII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--III.  Non-Exclusion Actions, 2.    Other Forms of Interventions by the Ethics Council.

This structure suggests the way in which the substantive jurisprudence has been organized.  It will be seen whether it actually works as a coherent organization.  But the structure does not suggest the evolution of procedural mechanics that help shape the decision mechanics.  Principles of legality (all regulation must be clear, ascertainable and non-retrospective), legal certainty (legal rules must be clear and precise), proportionality (sanction should be in proportion to the severity of the act punished), margin of appreciation (range of interpretive discretion a function of strength of consensus among legal actors), predictability (similar facts should produce similar results) and the like are legal concepts essential to a legitimate jurisprudence.  We will see if these principles emerge as applied in the decisions rendered by the Ethics Council.  

These decisions will be considered in more detail, individually and collectively, in the essays that follow. First, the decisions will be presented in summary form, a form of summary raw data presentation extracted from the narratives of the determinations as published.  This will be followed by a simple quantitative analysis of the decisions.   Lastly the essays will develop a qualitative analysis of the decisions within the context of the categories developed by the Ethics Council.  Together these analyses will form the basis for understanding the jurisprudence of the  Ethics Council, which is the ultimate objective of this exercise.  For that purpose, the Ethics Council's structure of cases will be reshaped along its more plausible jurisprudential lines: (1) cases that rely directly on international law applied to Norway's holdings and the obligations of the investment entity, (2) cases that apply domestic law directly, (3) hybrid cases, (4) cases that advance rules of substantive construction originating with the Ethics Guidelines themselves, and (5) process rules.  The final essays will contextualize this jurisprudence within the responsible investment framework that marks the form of Norwegian sovereign investing.


 

Appendix B

Companies Excluded from the Investment Universe

Production of weapons that through their normal use may violate fundamental humanitarian principles
Anti-personnel land mines
- Singapore Technologies Engineering (26 April 2002)

Production of cluster munitions
- Alliant Techsystems Inc (31 August 2005)
- General Dynamics corporation (31 August 2005)
- L3 Communications Holdings Inc (31 August 2005)
- Lockheed Martin Corp (31 August 2005)
- Raytheon Co. (31 August 2005)
- Poongsan Corporation (30 November 2006)
- Hanwha Corporation (31 December 2007)
- Textron Inc. (31 December 2008)

Production of nuclear arms
- BAE Systems Plc (31 December 2005)
- Boeing Co. (31 December 2005)
- EADS Co (31 December 2005)
- EADS Finance BV (31 December 2005)
- Finmeccanica Sp. A. (31 December 2005)
- Honeywell International Corp. (31 December 2005)
- Northrop Grumman Corp. (31 December 2005)
- Safran SA. (31 December 2005)
- Gen Corp. Inc. (31 December 2007)
- Serco Group Plc. (31 December 2007)

Sale of weapons and military material to Burma
- Dongfeng Motor Group Co Ltd. (28 February 2009)

Production of tobacco
- Alliance One International Inc. (31 December 2009)
- Altria Group Inc. (31 December 2009)
- British American Tobacco BHD (31 December 2009)
- British American Tobacco Plc. (31 December 2009)
- Gudang Garam tbk pt. (31 December 2009)
- Imperial Tobacco Group Plc. (31 December 2009)
- ITC Ltd. (31 December 2009)
- Japan Tobacco Inc. (31 December 2009)
- KT&G Corp (31 December 2009)
- Lorillard Inc. (31 December 2009)
- Philip Morris International Inc. (31 December 2009)
- Philip Morris Cr AS. (31 December 2009)
- Reynolds American Inc. (31 December 2009)
- Souza Cruz SA (31 December 2009)
- Swedish Match AB (31 December 2009)
- Universal Corp VA (31 December 2009)
- Vector Group Ltd. (31 December 2009)

Actions or omissions that constitute an unacceptable risk of the Fund contributing to:
Serious or systematic human rights violations
- Wal-Mart Stores Inc. (31 May 2006)
- Wal-Mart de Mexico SA de CV (31 May 2006)

Severe environmental damages
- Freeport McMoRan Copper & Gold Inc. (31 May 2006)
- Vedanta Resources Plc. (31 October 2007)
- Sterlite Industries Ltd. (31 October 2007)
- Madras Aluminium Company (31 October 2007)
- Rio Tinto Ltd. (30 June 2008)
- Rio Tinto Plc. (30 June 2008)
- Barrick Gold Corp (30 November 2008)
- Norilsk Nickel (31 October 2009)
- Samling Global Ltd. (23 August 2010)
- Lingui Developments Berhad (15 Sept. 2010)

Other particularly serious violations of fundamental ethical norms
- Elbit Systems Ltd. (31 August 2009)

Serious violations of the rights of individuals in situations of war or conflict-
Africa Israel Investments Ltd. and Danya Cebus Ltd. (23 August 2010) 
___________________________

Appendix C: 

Companies that have been excluded, but where the decision to exclude has later been revoked

Production of weapons that through their normal use may violate fundamental humanitarian principles
Production of cluster munitions
- Thales S.A. (31 August 2009)
Production of nuclear arms
- United Technologies Corp (28 February 2010)

Actions or omissions that constitute an unacceptable risk of the Fund contributing to:
Severe environmental damages
- DRD Gold Limited (31 August 2009)
Other particularly serious violations of fundamental ethical norms- KerrMcGee Corporation (31 August 2006)

___________________________

Appendix D:

Observation of companies from the Funds's investment universe

In some cases there may be doubt as to whether the conditions for exclusion have been fulfilled or how the company's behaviour will develop in the future. In such cases, the Ministry may put the company under observation on the advice of the Council of ethics.

Currently under observation:
Siemens AG is under observation due to the gross and systematic corruption the group has been involved in over many years. Press release 24/2009