Thursday, February 17, 2011

Part XVII: 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 XVII of the series.

Part XVII: Ethics and a Jurisprudence of Responsible Investment:  The Cases--

III.  Non-Exclusion Actions
   2.    Other Forms of Interventions by the Ethics Council

1. Letter dated September 7, 2009, on the exclusion of Poongsan Corp.

2. Letter dated April 19, 2009, on the Council's assessments of investments in companies with activities in Israel

3. Letter dated April 18, 2008, on the Council's assessment of investments in Israel Electric Corp.

4. Letter dated October 11, 2007, on the Council's assessment of companies with operations in Burma

5. Response to Criticism Concerning the Exclusion of Companies from the Norwegian Government Pension Fund: Unofficial English translation of article published in Dagens Næringsliv, Sept. 11, 2006 (pdf)

6. Letter dated May 15, 2006, regarding investments connected to the Middle East

7. Letter dated March 22, 2006, on investments in Aracruz Celulose SA

Other Review Determinations:

    The move from exclusion to observation, described in the last post, suggests a pattern of governance that is replicated here.  The Ethics Council has, like the Ministry of Finance, sought to fill in the spaces within the regulatory scheme with additional processes and standards that, while not explicit in the Ethics Guidelines, are not prohibited.  This section explores some of the none exclusion, non observation measures that the Ethics Council has taken.  The first briefing is on Aracruz Celulose SA 22 March 2006 where the Council was asked by five Brazilian NGO’ to evaluate the Fund’s holdings in the company for complicity in helping the company violate land and personal rights against indigenous people in Brazil. After evaluating the company it was the decision of the Council to have increased scrutiny against the company, but to retain investment, allowing for the Brazilian courts and other bodies to form a solution.

The Ethics Council was also asked to review its investment in Israel.  It is unclear whether the action requested was part of a coordinated global effort, popular at the time among some religious and non-governmental organizations, to seek divestment in Israeli companies and companies that provided assistance to Israel.   The Ethics Council declined to proceed with exclusion proceedings on the basis of information it had then.  The letter is important as an expression of the Ethics Council's efforts to focus specifically on company action rather than on the political situation that provides context. The letter is also important for its application of precedent.   In 20087, the Ethics Council considered a request to exclude the Israel Electric Corporation for its part in reducing the  electricity supply to Gaza.  The consideration is important for a number fo reasons.  First, it evidences the growing importance of Ethics Council determinations--the investigation included the participation of governmental officials form Israel and Palestine, and the growing use of the Fund as an important source of Norwegian foreign policy projection. 

Another entry from 2006 comes from Ethics Council Chair Gro Nystuen specifically and was written in response to allegations of poor performance by the Council and that the Council was not doing enough to fully implement the Guidelines of the Ethics Council. Similar to the Aracruz cases, and having some of the same characteristics of the recommendation on Israel, the Council is responding directly to pressures from the outside (i.e. media, NGO’s, Norwegian press and public). In October 2007 the Council makes a formal assessment of investments in Burma. This follows the 2005 recommendation of Total SA in which the company was not excluded for aiding the government in atrocities. The stance of the Council is not to exclude companies that deal in or with Burma, but to only exclude companies on the basis that they directly contribute money, resources, weapons, or other items that are used by the government of Burma to commit human rights violations against the people of the country. Additionally the Council made the distinction that companies that aid the government solely through commerce and tax revenues are not excludable on those grounds. The only company that was excluded for involvement with the Burmese Government was Dongfeng Motors in 2008 for supplying the government with armored trucks and other equipment used by the military. The final part of the Others  section dealt with the reorganization of Poongsan Corp., the company through its subsidiaries was still found to be in violation of the Ethical Guidelines and should remain excluded.

Case Summaries:

1.  Letter dated March 22, 2006, on investments in Aracruz Celulose SA

1.  Company subject to investigation
    a. Name: Aracruz Cellulose SA
b. form of organization (corporation, Partnership, etc.):  Public company
    c. home country: Brazil
    d. countries (exchanges) where shares are traded:  Unknown
e. largest shareholders (individual, state owned enterprise: Unknown
f. form of investment by the Norway SWF fund: Equity

2.  Chronology
    a. Date complaint filed: 23 August 2005
    b. Date complaint resolved by the Ethics Council: 22 March 2006

3.  Complainant
a.  If the state, the office from which the reference was made: First of its kind. The problem was not brought to the attention of the Council by any part of the government. “Reference is made to the Ministry of Finance’s letter of 23 August 2005 in which the ministry forwards a request from five Brazilian organisations to exclude Aracruz Cellulose SA from the investment universe” (Para. 1 Pg. 1)

4. Complain
a. Action constituting violation: “Aracruz is alleged to have unlawfully acquired lands traditionally belonging to the Indian peoples in the area” (Para. 3 Pg. 1)
b.  “Legal” basis of violation:

5  Determination
a.  Council recommendation (for example divest, retain, wait): Wait
b.  Legal basis for the determination (reference to the section of the Ethics Standard invoked): “The land conflict goes back to 1979. Since then a process has been under way involving the authorities in the shape of the Ministry of Justice along with Brazil’s National Indian Foundation (FUNAI), representatives of Indian communities and Aracruz” (Para. 4 Pg. 1)
c.  Underlying legal basis: It appears to be looking at domestic Brazilian law and international customary law.

6.  Basis of Determination
a.  standard of decision (rule or test etc.): New, first of its kind
    b.  Use of prior Ethics Council recommendations as precedent or as persuasive: None
c.  Use of case law of other courts or bodies: None
d.  Reliance on other materials:  NONE, the recommendation does not cite any sources, just saying there were five organizations that brought up the complaint with no evidence cited.
e.  Rationale: Through the company’s operations in Brazil it has not properly compensated of consulted local inhabitants for land used. In all of this nothing is cited and there are numerous questions left out such as why this was excluded on the basis of human rights, why no sources were cited, location of the problem, any mention of domestic laws broken, and the source of the Council’s ruling, among others

2.  Letter dated October 11, 2007, on the Council's assessment of companies with operations in Burma

    The Council realizes that the Fund has approximately 20 companies that operate in Burma (Myanmar) to varying extents with the repressive government of the state. The Council states that exclusion for companies operating in Burma shall only come if there is complicity between human rights violations that country and the company in question though it normal business transactions. Further companies that are involved in the armament of the Burmese military shall be excluded from the Fund. The French company Total was specifically noted in the review and thus far it has not been excluded because the Council found that the company was not aiding the military along the Yadan Gas Pipeline, but was operating in the country, likewise other companies operate in the state and through the generation of economic revenue do in part help the Burmese Government, but are not active in helping the military or political suppression

3. Letter dated April 18, 2008, on the Council's assessment of investments in Israel Electric Corp.

    The use of the NSWF as a political instrument of the state, within the context of the Ethical Guidelines framework, was nicely illustrated by the 2008 consideration of the exclusion of the Israel Electric Corp.  The assessment was undertaken at the request of the Ministry of Finance, as well asa request for assessment by  domestic NGOs, the Norwegian People's Aid and Friends of Palestine (Palestinavenner).  The Ethics Council held meetings with representatives of the NGOs. The NGO representatives  confirmed UN and media reports and could not conform that reductions in lelectrical supplies had ceased.  Israel's ambassor to Norway also met with the Ethics Council.  The ambassador emphasized the security situation in the area and conceded a temporary reduction of half a percent of the power supplied through Israel.  Additional information was gathered through the Norwegian Foreign Ministry and from a report prepared by the United Nations Office for the Coordination of Humanitarian Affairs.  In addition, the Ethics Council considered by NGO based litigation in Israel itself.  The Ethics Council noted two things--first the litigation and the Israeli Supreme Court opinion, and second, its conclusion that assessments by that court "has no direct bearing on the Council's assessment."  (at pg. 2).    The discussion about the Israeli Supreme COurt decision is curious.  It's treatment suggested that judicial opinions rendered abroad, or at least this one, is not entitled to any deference.  Instead, they constitute "opinion"  to be balanced against the opinion of those petitioning for Ethics Council action. (at pg. 3).  The Council then opined that the quesiton was complicated that that, "in practice it is probably difficult to distribute the power according to humanitarian needs." (id.). Palestinian energy officials confirmed the size of the energy reduction and that it had ceased.  The Council opined that  the conflict had generated violations of international law but that the scope of its inquiry was limited to the behavior of companies, not states.  It noted that the motives of the Israel Electric company were not relevant. It also determined that any reduction of electricity would be deemed a gross violation.  Because the reductions had ceased, the Council then applied the additional test--was there an unacceptable risk of future breaches.  For that purpose it applied its "past practices as circumstantial evidence of future conduct" standard.  It concluded that such reductions could occur in the face of continued or renewed Palestinian rocket attacks but determined that this possibility was insufficient to meet its "unacceptable risk" standard. The letter is particularly interesting for its application of Ethics Council standards and its development of an approach  to the weighing of opinions and holdings of the highest ciourts of foreign states in the context of the Ethics Council's own analysis. 

4. Letter dated May 15, 2006, regarding investments connected to the Middle East

“On 6 January 2006 the Ministry of Finance received a letter from the Ecumenical and International Relations Council of the Church of Norway Council on Ecumenical and International Relations concerning ”investments in the West Bank”, meaning of course, investments that were perceived to advance the objectives of the Israeli state in that area, objectives opposed by the Church of Norway's Council. The object was to induce consideration of a withdraw of investments that contributed to Israel's political objectives to which the Church of Norway objected.  The form of that objection was couched in the standards of the Ethics Council with respect to inclusion in the NSWF investment universe.  The Ethics Council considered the involvement of a number of companies then in the NSWF portfolio, treating Israeli and non-Israeli companies separately.  With respect to identified Israeli companies the Ethics Council determined there was no reason to proceed with detailed assessments.   With respect to non-Israeli companies, the Ethics Council noted that the sale of arms to Israel is not a trigger for exclusion unless the products (specific weapon types) or their use is specifically subject to a different rule. A specific target for assessment was Caterpillar Company through its sale of bulldozers, sometimes used to demolish houses.  Drawing on its "dual uyse" doctrine from its nuclear weapons case, the Ethics Council determined that it would be difficult to find facts of Caterpillar's complicity in illegal activities.  

5. Response to Criticism Concerning the Exclusion of Companies from the Norwegian Government Pension Fund: Unofficial English translation of article published in Dagens Næringsliv, Sept. 11, 2006 (pdf)

The Council has come under fire domestically from the media for what companies they choose to exclude and possibly more important what companies they choose to include. The Council reiterates that they do not have a bias in the decisions and recommendations that they produce and that all companies in the Fund are continuously inspected to see if they should still be included or excluded from the Fund.
It has also been alleged that even if a company responds to the communications from the
Council on Ethics, this has no effect; companies that have answered have still been excluded. The latter claim is correct. To answer is not necessarily the same as not being excluded; we obviously have to assess the content of the answer. The Ethical Guidelines were, however, drafted with a view to securing a fair process and giving companies real possibilities for contradicting allegations. This was seen as important both with regard to the companies’ interests and with regard to the quality of the recommendations. We find it appropriate to point out that the system works as intended: because of their responses to the Council on Ethics, several companies that were assessed for exclusion were not excluded.
6.  Letter dated September 7, 2009, on the exclusion of Poongsan Corp.

"On September 6, 2006, the Council on Ethics submitted a recommendation to exclude the company Poongsan Corp. because of its involvement in production of cluster munitions. The company has been restructured and is now organized as a holding company with several subsidiaries.  The production of cluster munitions takes place in the subsidiary Poongsan Corp – New (Sedol: B3BDFS1KR). The Council’s recommendation to exclude should be applied to this company.

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