Changes in the Norwegian Sovereign Wealth Fund Ethical Guidelines and Active Ownership

The Ethical Guidelines serve as a critical component of Norway's investment sovereign wealth fund investment approach.   It serves both as a basis for  making investment decisions and for furthering Norwegian governmental policy through projections of economic power into foreign markets.  Its most powerful and media leveraging feature is the quasi judicial process for challenging investment in a particular company on grounds that it does not meet the  requirements of the Ethics Guidelines. See, Guidelines for observation and exclusion from the Government Pension Fund Global’s investment universe (Adopted by the Ministry of Finance on 1 March 2010 pursuant to Act no. 123 of 21 December 2005 relating to the Government Pension Fund, section 7).  For publicly held companies, an ethics guidelines challenge, or worse, an exclusion determination can substantially effect public (and investor) perceptions of company value.  See generally, Larry Catá Backer,  Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009; Chesterman, Simon, The Turn to Ethics: Disinvestment from Multinational Corporations for Human Rights Violations - The Case of Norway's Sovereign Wealth Fund. American University International Law Review, Vol. 23, pp. 577-615, 2008; NYU Law School, Public Law Research Paper No. 08-25.

Several weeks ago the Norwegians announced changes to the ethics guidelines that further refine the Norwegian efforts to align state investment abroad with state public policy.  Norway, Ministry of Finance, New guidelines for responsible investment practices in the Government Pension Fund Global (GPFG) Press release, 02.03.2010, No.: 11/2010.  The tenor of the announcement was congratulatory:

In 2009, the Ministry of Finance conducted a broad evaluation of the ethical guidelines, receiving more than 50 consultative comments. The general conclusion was that the ethical guidelines had worked well and could largely be continued. With a view to bolstering the Fund’s responsible investment practices, the Ministry of Finance also announced plans to introduce a number of new measures and changes linked to active ownership and exclusion of companies.

Norway, Ministry of Finance, New guidelines for responsible investment practices in the Government Pension Fund Global (GPFG), supra. The principal changes involved exclusion of tobacco related companies and a more sophisticated procedure for exclusion, permitting some dialogue and intervention with a target company before exclusion. 

The ethical guidelines from 2004 are being replaced by two new sets of guidelines: one on work linked to exclusion and observation of companies and one for Norges Bank’s work on responsible management and exercise of ownership rights.

“Production of tobacco has been introduced as a new criterion for exclusion, and we have already followed up the Council on Ethics’ recommendations to sell our holdings in tobacco producing companies,” says Minister of Finance Sigbjørn Johnsen.

In some cases, it is more useful to put a company under observation than to exclude; for example, if there is uncertainty about how the situation will develop. We monitor the companies that have been placed on this watch-list closely to see if they implement measures to remedy the situation before we make a final decision on whether to exclude the company or not,” says Johnsen.

The new guidelines enable a slightly broader assessment of the situation before a company is excluded on grounds of grossly unethical behaviour. The Ministry will in this context consider use of other measures. For example, this may be relevant if active ownership or observation might reduce the risk of continued violations of norms or for some other reason is deemed more appropriate. 

Id.

More interesting and perhaps far reaching is the well anticipated strengthening of Norway's active ownership rules.

“We are increasingly attaching importance to Norges Bank’s active ownership,” says Minister of Finance Sigbjørn Johnsen. The new guidelines for Norges Bank include a new, ambitious requirement of generally integrating considerations of good corporate governance and environmental and social issues into investment activities. This reflects international developments, says the Minister of Finance.
Norges Bank participates in a variety of formal and informal initiatives in collaboration with other investors. The new guidelines emphasise the importance of this by stipulating that the bank actively contribute to development of good international standards within responsible investment practice and exercise of ownership rights. New requirements have also been defined regarding transparency and reporting in Norges Bank.

Id. The Guidelines on active ownership are worth a careful read.  See Norway, Ministry of Finance, Guidelines for Norges Bank’s work on responsible management and active ownership of the Government Pension Fund Global (GPFG) Adopted by the Ministry of Finance on 1 March 2010 pursuant to Act no. 123 of 21 December 2005 relating to the Government Pension Fund, section 2, paragraph 2, and section 7. The Guidelines declare the "Bank’s primary goal in its active ownership is to safeguard the Fund’s financial interests."  Id., Sec. 2(1).  It then ties the substantive principles of active governance to an important set of transnational voluntary governance codes. "Active ownership shall be based on the UN Global Compact, the OECD Guidelines on Corporate Governance and the OECD Guidelines for Multinational Enterprises. The Bank shall have internal guidelines for its exercise of ownership rights that indicate how these principles are integrated in its active ownership."  Id., Sec. 2(2).  The last two might well be understood to constitute an important component of the transnational constitution of corporate governance.  See, Larry Catá Backer, Transnational Corporate Constitutionalism?, Law at the End of the Day,  Sept. 21, 2009. But the Guidelines are not merely the imposition of passive transnational standards. "The Bank shall actively contribute to the development of good international standards in the area of responsible investment activities and active ownership." Norway, Ministry of Finance, Guidelines for Norges Bank’s work on responsible management and active ownership of the Government Pension Fund Global (GPFG), supra, at Sec. 3.

Together these incremental changes to the conventional Norwegian position reminds us of the importance of pubic policy in the operation of the private investment activities of the Norwegian sovereign wealth fund.  They provide a sophisticated mechanism for regulating extraterritorially not through law but through the governance mechanics of investment.  It also serves as a reminder of the substantial irrelevance of international efforts to draw a strong connection between public and private investment in private markets through instruments like the Santiago Principles.  The Norwegians may formally comply with its provisions, especially GAAP 19, but it substantially avoids its spirit.  Yet it is all for a good cause, as the Norwegian people see it through their governmental representatives.  It is thus interesting to witness the way the rules of sovereign wealth fund operation are being rewritten by the actions of great sovereign wealth fund actors--Norway in this case, China and Singapore in others. Its shape will not be the product of convergence of the interests of host states, but more likely the policies of SWF home states and the needs of host states.  In the meantime, there will be plenty of dialogue for the press to follow.  See, e.g., International Working Group of Sovereign Wealth Funds,  Working Group Announces Creation of International Forum of Sovereign Wealth Funds, Press Release No. 09/01, April 6, 2009.