Part 20A UPDATE Norway SWFs (Pension Fund Global, Pension Fund Norway and Bond Fund)--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them. This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal. In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF. Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This post UPDATES Part 20 which considers the Norwegian Sovereign Wealth Funds (Pension Fund Global and Pension Fund Norway).  

In November, 2013 government-appointed commission, issued a report that recommended the abolition of the Ethics Council system, established by Royal Decree 19th November, 2004, and the transfer of some of its functions to the fund administrator--Norges Bank and NBIM. (Elroy Dimson, Idar Kreutzer, Rob Lake, Hege Sjo, and Laura Starks, Strategy Council 2013, Responsible Investment and the Norwegian Government Pension Fund Global, Main Report (November 2013)). Members of the Council are Professor Elroy Dimson of London Business School and Cambridge Judge Business School; Mr Idar Kreutzer, Chief Executive Officer of Finance Norway; Mr Rob Lake, consultant and formerly Director of Responsible Investment at Principles for Responsible Investment (PRI); Ms Hege Sjo, senior advisor to Hermes Investment Management; and Professor Laura Starks of the University of Texas. (Report p. 3).

The basis for this recommendation was both mindlessly simple -- benchmarking.

In particular, we reviewed the approaches to responsible investment followed by a number of funds that may be regarded as comparators to GPFG because of their size, purpose and interest in responsible investing. We considered standard setters and guidelines relevant for institutional investors. Finally, we reviewed how asset managers and sell-side analysts respond to clients’ ownership preferences. (Ibid.)

That benchmarking appeared to suggest that the Ethics Council system was somewhat unique and ought to be abandoned so that the Norwegian Fund should resemble the "average" or "conventional" fund.

"Other large sovereign wealth funds or major public pension funds do not have such an approach to responsible investing. Yet, even within our sample of funds, it is clear that responsible investment has no singular motivation and that there is no single strategy or set of approaches that is followed universally." (Elroy Dimson, Idar Kreutzer, Rob Lake, Hege Sjo, and Laura Starks, Strategy Council 2013, Responsible Investment and the Norwegian Government Pension Fund Global, Main Report (November 2013) ¶ 2.2).

This is a curious turn--a report recommending that a state cede its political, economic and international interests in the name of perhaps marginally larger financial gains.  The innovative features of the Fund, and especially its Ethics Council structures have served Norway well in advancing and leveraging its political as well as economic interests. This is especially true of the published reports of Ethics Council.

In other words, the council’s reports serve a shaming function as well as a financial one. Furthermore, the publication of the Ethics Council’s recommendations has helped focus international attention on corporate social responsibility and business and human rights. A number of other investors follow the council’s recommendations, which compounds the impact — and heightens the deterrent effect of — the Ministry’s decisions. Hiding the reasoning from view would lessen the shaming effect and give some investors cover for keeping Fund-excluded companies in their portfolios. (The Ethical Work of Norway’s Sovereign Wealth Fund, Triple Pundit, March 20, 2014).

Thus, "as World Wide Fund for Nature Norway chief executive Nina Jensen points out, “every decision Norway makes on this fund sends signals around the world.”" (Charlotte Wood, Lessons for Australia from Norway's petro-wealth debate, Climate Spectator, April 14, 2014)

Yet that is precisely the political charge with which the Ministry of Finance set the Strategy Council to work in 2013.

In January 2013, the Ministry of Finance requested the Strategy Council for the GPFG to assess how the joint resources and competencies of the Ministry of Finance, the Council on Ethics and Norges Bank can best be exploited to strengthen responsible investment practice. The mandate called on the Strategy Council to build on the previous responsible investment experience of the GPFG, as well as to compare it to other funds. The Council was instructed to examine how one might eliminate any deviation from best international practice, thus making the Fund a driving force for responsible investment development. The mandate allows for the Strategy Council to propose any changes it believes may strengthen responsible investment practice, including operational and institutional changes (Ministry of Finance, Report No. 19 to the Storting (2013-2014) Report to the Storting (white paper) The Management of the Government Pension Fund in 2013,  April 4, 2014, § 2.5.1).

Beyond the political language of obfuscation what emerges is a desire to conform, and by conforming, leading among the bench-marked group of funds into whose pack the Fund would insert itself (See, e.g., Ibid., Box 2.5). Thus, in the name of conventionality, it seems, then, the Report recommended that the functions of the Ethics Council might produce regulatory incoherence and might be as well undertaken, at least as to its objectives by the Fund managers. Indeed, reduced to insight, the work of the Ethics Council was viewed as better undertaken by Norges Bank and the Ethics Guidelines be integrated with its management objectives. "The Council on Ethics possesses valuable expertise about the issues that are governed by the current Guidelines for Observation and Exclusion. We recommend that these guidelines be integrated into the Investment Mandate from the owner to the Board of Norges Bank." (Elroy Dimson, Idar Kreutzer, Rob Lake, Hege Sjo, and Laura Starks, Strategy Council 2013, Responsible Investment and the Norwegian Government Pension Fund Global, Main Report (November 2013) p. 30).  The Report concluded:

 We believe the recommendations will further contribute to strengthening the work on responsible investment in GPFG. Applying a more unified and holistic approach will give the Fund a more powerful and influential responsible investment strategy. This is achieved through our recommendations to integrate the resources and insights developed by the Council on Ethics and Norges Bank, by utilising one overarching set of responsible investment principles, and one common procedure for ownership activities including portfolio monitoring and analysis. Our recommendations on research into issues relevant to long-term returns, and on initiatives to address relevant policy and regulatory issues, will strengthen the approach further. (Ibid. p. 31; discussed more fully HERE). 

The report also called for more research on the performance of ethical investments, saying a lack of such studies made it difficult to assess how the fund's stance compared with other strategies.

The Report produced a spirited defense of the Ethics Council system by the Ethics Council itself in 2013 Annual Report for the Council on Ethics for the Norwegian Government Pension Fund Global (Here for report in English; Nedenfor til rapporten på norsk; discussed HERE). What is most interesting is the way in which the Ethics Council quite rightly saw in the report an effort to reduce the political effectiveness of the GPFG as an actor, through private markets, in the development of corporate governance and social responsibility standards. More importantly, the Ethics Council correctly suggested that the turn toward less transparency and a greater masking of the political work of SWFs itself might be considered bad practice.  Most importantly, the Ethics Council response nicely illustrates the tension within SWFs of the political and policy objectives of sovereign activity and its financial goals, especially in states in which the norms and standards of international governance are, as a matter of state policy, an important objective of state activity, including investment activity.

And, indeed, outsiders noted the underlying politics of both the Strategy Council and the Ethics Council's defense-- the desire to uncouple investment decisions from human rights norms.

Oeystein Doerum, chief economist at Oslo-based bank DNB Markets, said such a reform could lead to fewer companies being excluded on ethical grounds.

"The more independent the council on ethics is, the better," Doerum told Reuters. "In other words, it should not be made into a section of the Norwegian central bank.

"If anything, a less independent ethics council could lead to more conservatism - i.e. fewer exclusions.". . . .


Non-governmental organisations roundly criticised the commission's proposal.

"There needs to be a strong and independent player who performs the screening of a company and comes with a recommendation about the impact it should have on an investment," Beate Ekeloeve-Syldal of Amnesty International told Reuters. (Norway's $800 bln fund should lose independent ethics panel -report, Reuters Nov. 11, 2013).

It appears that now the Norwegian government will take the Strategy Council's recommendations to heart.  It has been reported that 

Norway’s new centre-right government has laid out the biggest structural change in a decade to the country’s sovereign wealth fund by scrapping the ethical council that has excluded the $850bn fund from investing in companies such as Walmart, Boeing and Rio Tinto.

Norway has been seen as a trendsetter by preventing its SWF, which has quintupled in size in the past eight years, from investing in entire industries such as tobacco companies and nuclear weapons producers. (Richard Milne, Norway scraps oil fund ethics committee, Financial Times, April 4, 2014).

Norway's two large opposition parties, the Liberal Democrats (Venstre) and the Christian Democrats (Kristelig Folkeparti, KrF) criticized the move. "“Venstre believes the independence of the council is very important to safeguard,” said finance spokesman Terje Breivik. “I give all credit to the ethics council, which is one of the reasons that the Oil Fund garners international recognition.” It could be difficult for Jensen to disband the council without the two parties’ support when the government’s proposal is debated in Parliament after Easter."  (Critics attack Oil Fund changes, News in English.no, April 4, 2014) However both parties had signed an agreement to support the ruling party on key issues. (Norway Government to Scrap Oil Fund Ethics Committee, European News, April 4, 2014).  How this political chess game plays out remains to be seen.What is clear is that politics will play as role as Norway decides whether it wants its Fund to follow rather than lead, especially in the interlinking of international norms, investing and politics.

And perhaps the opposition was not without good reason. Under the new plan, it is reported, the Fund itself will determine the scope of its investment universe under a set of guidelines that have as yet to be revealed.

Ms Jensen mentions scrapping the Ethics Committee in her commentary published in Dagens Næringsliv. Their role is to recommend which companies the SWF should invest in.

"Today's three-way method organising the work between the Ministry of Finance, the Norwegian Central Bank, and the Ethics Committee is not optimal," she wrote.

"We propose that the Central Bank should be allocated responsibility for both the exercising of ownership and the exclusion mechanism, whilst deciding the Central Bank's mandate and exclusion criteria remains a political decision," added Minister Jensen. ( Michael Sandelson, Norway Finance Minister proposes scrapping SWF Ethics Committee, AEnergy, April 4, 2014).

 A new responsible investment strategy, perhaps more conventionally modeled, is likely to emerge. In lieu of body of experts that would apply the Ethics Guidelines, an "expert panel" would be constituted to monitor Norges Bank compliance. "An expert panel will be set up to monitor the overall responsible investment strategy and the oil fund will have to give regular reports, justifying its actions including exclusions and use of other “ownership tools” such as engaging with a company’s management. (Richard Milne, Norway scraps oil fund ethics committee, Financial Times, April 4, 2014).  But note the nature of the monitoring task--it is a macro function exercise.

Norway's finance ministry also named the members of the expert group that will consider whether the oil fund should pull out of all investments in oil, gas and coal companies. The group will be headed by Martin Skancke, a former government bureaucrat who once headed the finance ministry's asset management department, and will include British professor Elroy Dimson. (Richard Milne, Norway overhauls $850 billion oil fund,  CNBC, April 4, 2014).

In 2006, Mr. Skancke was appointed Director General in the Ministry of Finance Asset Management Department, which acts as the owners and decides the investment strategies of the Norse SWFs. He also appears to  have an interest in a SWF consulting firm. More interesting is that the responsible investing function may become far less transparent without an Ethics Council--with individual cases likely shrouded in secrecy and disclosure limited to macro-effects. This despite the Ministry of Finance's protestations to the contrary (e.g., (Ministry of Finance, Press release, 04.04.2014, No.: 13/2014, A sound and responsible management of the Government Pension Fund, April 4, 2014).).  There will certainly be lots of disclosure--but it will hardly likely be as granular as under the current regime--and that is likely to suit publicly traded companies well.

And indeed, ad hoc expert panels appear to  be the operational means throguh which the work fo the Ethics Council will be chopped up and carefully apportioned.  Thus for example, the Ministry of Finance announced on April 4, 2014 that "In line with a parliamentary decision in March this year, the Ministry has also established an expert group to consider whether the exclusion of coal and petroleum companies now appears to be a more effective strategy than ownership and the exertion of influence to address climate change." (Ministry of Finance, Press release, 04.04.2014, No.: 13/2014, A sound and responsible management of the Government Pension Fund, April 4, 2014).

Curiously, the Norwegian government appeared to have sought to "pay" for this move by promising more investment in so called "green" companies. Beyond the quid-pro-quo cynicism of the move, and it might have worked, the government's inability to keep even this promise (as a promise) generated opposition.

However, despite the scrapping of the ethical council, the new government disappointed activists expecting more radical change after prime minister Erna Solberg raised hopes last month of a big increase in green investments.

Ms Jensen said the fund should nearly double its current investments in renewable sources of energy from the current NKr20bn-NKr30bn ($3.34bn-$5bn) to NKr30bn-NKr50bn. The fund amounted to NKr5,206bn at the end of 2013 and some activists had called for it to invest 5 per cent of its portfolio in green infrastructure.

Ms Jensen’s own sister, Nina, head of the WWF in Norway, accused the government on Twitter of “gigantic broken promises”. Ms Smith added: “They have taken a gigantic step backwards. [The increase] is not very much. We were expecting much more.” (Richard Milne, Norway scraps oil fund ethics committee, Financial Times, April 4, 2014).

The Ministry of Finance referenced this deal as well in its Press Release announcing changes to governance ((Ministry of Finance, Press release, 04.04.2014, No.: 13/2014, A sound and responsible management of the Government Pension Fund, April 4, 2014) ("Following up on the Government's policy declaration (the Sundvolden-platform), the report presents plans for the near doubling of the environmental mandates, increasing the Fund's investments in renewable energy. The set allocation to environmental mandates will increase from the current 20 - 30 billion kroner to 30 - 50 billion kroner. In addition, Norges Bank shall report separately on the Fund's investments in emerging markets and renewable energy.")). But sadly the price paid appears to include the dismantling of the Ethics Council structure for investment.

I have been both positive and critical of this Norwegian experiment in internalizing transnational law norms through its domestic legal order expressed in the state's interventions in private markets as a market participant (e.g., Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment,  Georgetown Journal of International Law, Vol. 41, No. 2, 2009; Backer, Larry Catá, Sovereign Investing and Markets-Based Transnational Rule of Law Building: The Norwegian Sovereign Wealth Fund in Global Markets, American University International Law Review, Vol. 29:1-122 (2013)). I have been particularly critical of the use of the Fund in the global Jew-baiting tinged campaigns to demonize Israel as part of the NGO front of the Palestinian Israeli wars. (e.g., Norwegian-Funded NGOs Responsible for Norwegian Pension Fund Divestment, NGO Monitor, April 2, 2014).  Yet these are as much a criticism of the politics of the Norwegian state apparatus, including the Ministry of Finance, as it is of the specific work of the Ethics Council. Indeed, the Ethics Council experiment, I believe, tends top ameliorate rather than exacerbate these political strategies. It forms an important element that enhances Norway's power as a state, as a political player in international finance and economic regulation, and  as an influential voice in the construction of transnational norms that might be internalized by the non-state sector in its operations beyond the state and in markets. And not just me:

Virginia Gomes from the United Nations (UN) Committee on Economic, Social and Cultural Rights, was among those who remained unconvinced. “I see no reason to close down the ethics council,” she told news bureau NTB. “It is the ethics council that will ensure awareness of human rights violations. What advantage would the state have from this?”

Gomes said reduced openness could lead to less debate over the fund and the human rights aspects of the investments. “You could then experience a lack of trust from the public,” she warned. “I therefore see no reason for Norway to go down this path.” (Critics attack Oil Fund changes, News in English.no, April 4, 2014).

That the Ethics Council could be structured and operated to better enhance Norway's economic and political objectives is certainly true (though that could be said of any institution).  We have been told that part of the reason for the Ministry's move is to reduce the appearance that investment universe decisions may be political. "The move is in part an effort by the Norwegian government to make sure decisions to exclude particular investments from its high-profile sovereign wealth fund are not seen by the outside world as being politically motivated." (Rachel Fixsen, Norway's Pension Fund Global to shift exclusion powers to Norges Bank, Investments and Pensions Europe, April 4, 2014). Yet it is precisely because these decisions are informed by politics--and by a political determination to base investment decisions on the political values of the state, including its fidelity to international norms, that makes the SWF such a powerful enterprise in the private sphere and within private markets.   But that it should be abandoned ought to raise substantial questions, if not at the Ministry of Finance, at least within the office of the Prime Minister.