Part XIX: 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 XIX of the series.

 

Reading List: Stat-Spotting, Agencyspy,  Dec. 30, 2008

Part XIX: Ethics and a Jurisprudence of Responsible Investment:  The Statistics--

I have considered each of the Ethics Council's determinations in some detail.  The purpose was to consider the extent to which the determinations might suggest both the approach of the Ethics Council to its duties.  The second objective was to explore the character of the determinations internally (do they begin to form a coherent set of standards and applications that become self referential and serve to augment and develop the "law" of the Ethics Guidelines).  We will also consider the character of the determinations externally (do they begin to contribute to the set of rules that are use by corporations to guide their behavior, are they considered by other regulators, do they serve as a basis for guiding the Norge Bank's active shareholder programs).  The determinations were considered using the categories specified in the Ethics Guidelines and regulations.  Those categories, it was assumed, provided a reasonable basis for organizing the Ethics Council's jurisprudence (a conclusion that remains to be proven).

With this post we begin to consider these determinations in the aggregate. The statistics presented here represent a first cut at analysis.  It is based solely on information available in English and will require refinement.  There is irony in this last statement--if there is substantially greater information that is not available, that in itself would suggest a significant lack of transparency that ought to be troubling.  The absence of data is noted below.
    

Here are some general conclusions to whet your appetite:

1. The largest percentage of NGO's came from states which had the largest percentage excluded.

2. The excluded universe comes to less than 1% of the total companies on the Fund, but 3 out of the 30 stocks on the Dow Jones Industrial Average were at least at one point in time excluded.

3. U.S. companies constitute nearly half the excluded companies while only 1 in 6 of the reincluded companies.

4. The most cases of precedent was seen with Freeport McMoRan where there was little international law to back up the Council and they were not able to use Norwegian law. Just the criteria they had developed and domestic law.

5. Not noted on the graph, but interesting to take into account. It took years for Rio Tinto to be excluded, but just months for Freeport McMoRan to be excluded over the same mine in violation.

Exclusions by Country/:
Australia: 1
Brazil: 2
Canada: 1
Czech Republic: 1
China: 1
France: 2
Germany: 2
India: 1
Indonesia: 1
Israel: 2
Italy: 1
Japan: 1
Malaysia: 2
Mexico: 1
Netherlands, The: 1
Russia: 1
South Africa: 1
South Korea: 2
Sweden: 1
UK: 5
US: 23

These numbers, in the aggregate, evidence the inefficiency of the use of the Ethics Council exclusion process as a basis for eliminating companies on ethics grounds.  It suggests that the value of Ethics Council determinations must be also to some extent exogenous to the determinations themselves. Value might be derived from the development of norms or standards that help in the development of international standards, or that the standards developed are then applied directly by Norges Bank  and other funds, in the context of their active shareholder activities.  The data suggests that some testing for this effect might be useful.

  

By Year (Number of Exclusions only, date recommendation resolved):
2002: 1
2003: 0
2004: 0
2005: 16
2006: 4
2007: 5
2008: 5
2009: 21
2010:  1

Exclusions appear to come in waves in part because the Ethics Council has sometimes aggregated  a number of companies in making a single determination (for example, with respect to tobacco problems).  But it also suggests inefficiencies in the ability of the Ethics Council to monitor and process companies.  Alternatively, it suggests either a judicial like passivity (companies only considered when referred) or the use of the Ethics Council as a tool of the Foreign Ministry.  That would in turn suggest that both the rate of case determination and the specific companies considered are not based on an institutionalization of monitoring and analysis, but is based on the direction of the Ministry and thus cloths political decisions in ethical terms.  To test this notion it would be necessary to determine how many other companies int he investment universe are also likely candidates for exclusion but never investigated.      

 

Nationality of non-governmental organizations either making a complaint or participating in the proceedings:
US: 7
UK: 6
Norway: 3
Holland: 2
Australia: 2
Sweden: 1
Brazil: 1
Hong Kong: 1
Belgium: 1
Uruguay: 1
Switzerland: 1
Mexico: 1
NGO’s from location of violation: 7
Multinational NGO’s: 1

It is not clear that there is a statistically significant correlation between the nationality of NGOs involved in the determinations and the nationalities of companies excluded.  But it is sensible to theorize that the larger to pool of NGOs from a particular state the more likely that a company from that state will be the subject of proceedings (with a likely sub-hypothesis on language and NGO connections within English speaking states, accounting for the US - UK NGOs).

Size of divestment (In NOK):
> 1 million:
1-2 million:
2-3million:
3-4 million:
4-5 million:
5-6 million: 1
6-7 million: 1
7-8 million: 1
8-9 million:
9-10 million:
10-15million:
15-20 million:
20-25 million:
25-50 million: 1
50-75 million:
75-100 million: 3
100-150 million: 1
150-200 million:
200-250 million:
250-300 million:
300-400 million: 1
400-500 million:
500-600 million:
600-700 million: 1
700-800 million:
800-900 million:
900-1000 million:
1-1.25 billion:
1.25-1.5 billion: 1
1.5-1.75 billion:
1.75-2 billion:
2-3 billion: 1
3-4 billion: 1
4-5 billion: 1
Not Stated: 18
The most interesting insight is actually about the information not available.  The issue of partial transparency will be taken up elsewhere.

Type of Exclusion:
(Total number of companies excluded, NOT including companies that were reevaluated)
Anti-Personnel landmines: 1
Burma: 1
Cluster munitions: 11
Corruption: 1
Environmental damage: 7
Human rights: 2 (3 publicly traded companies Wal-Mart & Wal-Mart de Mexico were written up in the same case)
Nuclear weapons: 9
Other: 5
Tobacco: 17

Exclusion Types in Which Companies Later Reinstated to Investment Universe:
Anti-Personnel landmines: 0
Burma: 0
Cluster munitions: 3 (Rheinmetall, EADS, and Thales)
Corruption: 1 (Siemens was put under “observation” status)
Environmental damage: 1 (DRD Gold)
Human rights: 0
Nuclear weapons: 1 (United Technologies Corp.)
Other: 2
Tobacco: 0

Number of Cases Where Recommendation were Made, but NO exclusion:
Anti-Personnel landmines: 3
Burma: 1 (Thales)
Cluster munitions: 0
Corruption: 0
Environmental damage: 0
Human rights: 0
Nuclear Weapons: 0
Other: 1
Tobacco: 0

Number of Reversals:
Anti-Personnel landmines:
Burma:
Cluster munitions: 3
Corruption:
Environmental damage: 1
Human rights: 1
Nuclear Weapons: 1
Other: 1
Tobacco:

Stock Exchange Traded on:
NYSE: 18
FWB: 3
EuroNext: 3
FTSE: 2
JSE: 1
NASDAQ: 1
ASX: 1
LSE: 6
SEHK: 2
BMV: 1
S&P: 1
SGX: 1
BMAD: 1
KRX: 2
DOW: 3
BIT:1
TASE: 2
TSX: 1
RTS: 1
MICEX: 1
No longer publically traded: 1
None: 1