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 II of the series.
Part II: The Structure of the Norwegian Sovereign Wealth Fund.
As an instrumentality of the state, the NSWF falls under the control of the Ministry of Finance (Provisions on the management of the Government Pension Fund As of 1 March 2010, article 2). The Ministry of Finance is charged with the management of the funds deposited under regulations it may promulgate, and the Ministry is empowered to adopt supplementary regulations to implement the act establishing the NSWF. (Id., art. 7). NSWF Funds are deposited with and managed from the Norges BankNorges Bank (domestic funds are managed through the Folketrygdfondet). (Id., at 2). The Storting allocates funds for the NSWF from the "net cash flow from petroleum activities," as and when such may be transferred from the central government budget. The NSWF is also permitted to fund its operations from "the results of financial transactions associated with petroluem activitiea and the return of the Fund's capital." (Provisions on the management of the Government Pension Fund As of 1 March 2010, article 3). The term "net cash flow from petroleum activities" is specifically defined:
The net cash flow from petroleum activities consists of the gross revenues in the third paragraph minus the expenses in the fourth paragraph.
The following gross revenues are part of the cash flow from petroleum activities:
1. total tax revenues and royalties deriving from petroleum activities collected pursuant to the Petroleum Taxation Act (no. 35 of 13 June 1975) and the Petroleum Activities Act (no. 72 of 29 November 1996),The following expenses shall be deducted from the gross revenues in the third paragraph:
2. revenues deriving from tax on CO2 emissions due to petroleum activities on the continental shelf pursuant to Act relating to CO2 tax in the petroleum activity on the continental shelf (no. 72 of 21 December 1990),
3. revenues deriving from tax on NOx emissions due to petroleum activities on the continental shelf,
4. operating income and other revenues deriving from the State’s direct financial interest in petroleum activities,
5. Gcentral government revenues from net surplus agreements associated with certain production licences,
6. dividends from Statoil ASA,
7. transfers from the Petroleum Insurance Fund,
8. government revenues deriving from the removal or alternative use of installations on the continental shelf,
9. any government sale of stakes representing the State’s direct financial interest in petroleum activities,
1. government’s direct investments in commercial petroleum activities (the State’s direct financial interest),
2. operating costs and other costs directly related to the State’s direct financial interest,
3. government expenses in connection with the Petroleum Insurance Fund,
4. government expenses in connection with the removal or alternative use of installations on the continental shelf,
5. any government purchase of stakes as part of the State’s direct financial interest in petroleum activities.
(Provisions on the management of the Government Pension Fund As of 1 March 2010, article 3).The term "net results of financial transactions associated with petroleum activities" is also defined "gross revenues from government sale of shares in Statoil ASA less government purchase of shares in Statoil ASA, defined as the market price paid by the government for the shares, and less government capital contributions to Statoil ASA and companies attending to government interests in petroleum activities, as well as financial transactions connected to companies in the petroleum sector in which the Government has ownership." (Id.). Beyond that, the establishing provisions define NSWF income as the return of capital under management (id., at 4) and vests the Storting with the power, by resolution, to transfer the NSWF's capital (Id., art. 5).
One of the starting points for this review has been to elucidate the division of responsibilities and roles between the Ministry of Finance and Norges Bank, along with imposing stricter requirements for regulating risk management.The new mandate is broader than the three sets of rules it replaces (regulations, guidelines and management agreement). The mandate regulates areas that the current framework does not cover, and the provisions are more comprehensive.
"In line with the Norwegian Parliament’s (the Storting’s) view I have emphasised that the regulation of the GPFG should continue to be framework-based, so that Norges Bank must fill out the general framework and principles with more detailed internal regulations for the operational management. This is an arrangement that works well. Micromanagement by the Ministry is neither possible nor desirable," says the Minister of Finance. (Id.).
Approximately 12 percent of the fund’s assets were under external management at the end of 2009, down from 13 percent a year earlier. There were a total of 75 mandates managed by 45 different institutions, 70 of which were equity mandates. The market value of externally managed equity mandates was 286 billion kroner at the end of 2009, equal to 17 percent of the fund’s equity investments. Externally managed fixed-income mandates had a market value of 32 billion kroner at the end of 2009, equal to about 3 percent of the fund’s fixed-income investments. (Norges Bank Investment Managers (NBIM), External Mandates).The "highest possible return" obligation is not left to the discretion of the Norges Bank but is defined in the regulation as an amount net of management costs "measured in the currency basket of the actual benchmark index." (Management Mandate for the Government Pension Fund Global, sec. 1-1). Management costs are regulated as well. (Id., Ch. 6). The process for the determination of management costs is specified in the regulations and requires the submission of a substantiated proposal for an upper limit on costs (Id., sec. 6-1) beneath which actual costs may be reimbursed. The Fund is to be maintained in a separate account to be invested in the name of Norges Bank (Id., Sec. 1-2). The Norges Bank is charged to develop a strategic plan, updated and evaluated regularly. (Id., Sec. 1-3). Though the Norges Bank is expected to make investment decisions independently of the Finance Ministry, those decisions must be made in conformity with an investment strategy approved by the Ministry and to some extent reflected in "Management Mandate." With respect to that strategy, the Norges Bank is accorded the right to advise the Ministry on its initiative or that of the Finance Ministry. (Id., Sec. 1-5).
Voting at annual general meetings, Shareholder proposals, Dialogue with companies, Legal steps, Contact with regulatory authorities, [and] Collaboration between investors." Ministry of Finance, Government Pension Fund Global: Responsible Investment (Brochure) at 22). Currently, Norges Bank focuses on issues of equal treatment of shareholders, shareholder influence and board accountability, standards for well functioning and efficient markets, children's rights,climate change and water management., (Id., at 24). "Norges Bank has developed publicly available principles for voting. It is Norges Bank’s aim to vote at all annual general meetings. Each year, Norges Bank votes at about 10,000 general meetings. The number of resolutions voted on every year now exceeds 85,000. Norges Bank votes on all issues, including those that fall outside the focus areas. The voting records are made public every year." (Id.).
The effect is to provide the Fund with another avenue for extending its governance role to the corporations within its investment pools, irrespective of the policy of the states in which those corporations are chartered and their determination of the value and importance of the international instruments now incorporated into Norwegian Fund management regulation. To that end, the "Bank shall have internal guidelines for its exercise of ownership rights that indicate how those principles are integrated." ((Management Mandate for the Government Pension Fund Global, Sec. 2-2). The Norges Bank has been aggressive in meeting its obligation in this regard. See, e.g., Norges Bank Investment Management, Pension funds urge chocolate industry to end child labour, May 31, 2010 ("The recent cocoa industry meeting in Utrecht showed companies are still far from fulfilling their 2001 pledge to eliminate child labour in the sector. Industry leaders must take concrete action to remedy this, say pension fund managers Norges Bank Investment Management and APG Asset Management.").
The Management Mandate for the Government Pension Fund Globalsuggests the complex relationship between law and norm, between state regulatory policy and state projections of power through active participation in private markets, through which state policy is effected by the exercise of the rights of private ownership, and between national legal structures and the internationalization of behavior standards. Responsible investing is not constructed merely to produce the highest achievable returns, but also to bend that objective to other Norwegian political objectives. It suggests the determination by the Norwegian state that private power is critical to achieving global economic objectives, and that this private power ought to be managed through law--state law to be sure, but state law which itself incorporates international norms. As such the NSWF serves as both bridge and framework. It is a bridge between the public and private governance efforts of the state, and it is a framework through which the law-state can project its power inward into private governance across borders and outward into the construction of governance norms at the international level. Norway means to stand at the center of this web, and the NSWF provides thew vehicle through which such a complex and interactive system might be constructed. Consider in this regard the role of private entyerprises in development, one of the elements of responsible investing: "Through knowledge, experience, presence and influence, the private sector can help address the many challenges facing developing countries. . . . However there is no automatic convergence of the interest of foreign companies and the needs of the local population. . . . Norway is seeking to persuade developing countries to accede to international conventions and to implement and enforce them nationally. . . . . Norway is . . . actively participating in efforts to strengthen international guidelines for CSR." (Norway Ministry of Finance, Report No. 10 (2008-2009) to the Storting, Corporate Social Responsibility in a Global Economy, at 5.5).
This assessment is not to suggest judgment, but it does suggest the way in which indirect regulation can be extended extra territorially through the expedient of a well executed strategic program implemented through projections of financial power (and state policy) in private markets. This objective is made directly by the Finance Ministry. "The Bank shall actively contribute to the development of good international standards in the area of responsible investment and active ownership," (Id., sec. 2-3). This reflects a state policy determination that Norwegian law ought to reflect international standards, and that international standards ought to be incorporated into the governance framework of all entities touched by NSWF investment. For the Ministry of Finance, of course, the notion is plain enough. The internationalization of its policy choices incorporated into the investment strategies of the NSWF serve as a defense of its policies--they are not extraterritorial in the sense of advancing the parochial policy goals of the Norwegian people. Rather, the responsible investing and active management principles reflect the Norwegian state's international obligations to implement international standards, obligations shared by all states. In this sense, then Norwegian extraterritorial intervention does not serve the state but rather the international community. All states should be working toward the same ends. These notions will be tested, of course, in the materials that follow. They will be found wanting to some extent as well--both in the sense that Norway all too readily gives in to national aspirations and policy preferences in their determinations of the meaning and form of the international rules they champion, and in the sense that Norway's strategic investment goals may sometimes trump its economic investment goals.
Lastly, the Guidelines for Norges Bank’s work on responsible management and active ownership of the Government Pension Fund Global (GPFG) require the preparation of an annual report on the Norge Bank's work on active ownership and integration of good corporate governance and environmental and social issues." (Id., Sec. 4).
a) a report on the Bank’s work integrating good corporate governance and environmental and social issues into its management, cf. section 1.
b) a report on the Bank’s exercise of ownership rights and other aspects of its active ownership activities. The report should describe how the Bank has acted as the owner’s representative in safeguarding the goals of sections 1 and 2. The Bank’s voting record at annual general meetings and the Bank’s guidelines for voting shall be made public.
c) an account of the Bank’s contribution to the development of good international standards in activities concerning responsible investment and active ownership, cf. section 3. (Id., Sec. 4).
a) tradable debt securities and other tradable debt instruments, and depository receipts for such fixed income instruments
b) equities listed on a regulated and recognised market place, listed securities that are equivalent to listed equities, and depository receipts for such equities
c) securities as mentioned in letter b in unlisted companies in which the board has expressed an intention to seek a listing on a regulated or recognised market place
d) financial derivatives and fund units that are naturally linked to equities, fixed income instruments or commodities. (Id., sec. 3-6(1)).
The Norges Bank manages the NSWF through its asset management unit, the Norges Bank Investment Management (NBIM). Established in 1998, NBIM is an integrated global organisation with about 290 employees from 25 nations, with offices in Oslo, London, New York, Shanghai and Singapore. (Norges Bank Investment Management (NBIM) About Us). "Our global presence brings us closer to the markets we invest in, helping form stronger ties with partners in different parts of the world. NBIM has more than 290 employees from 25 nations." (NBIM's Organization). With a nod to the realities of globalization, the working language of the NBIM is English. (Id.). "The Executive Board is responsible for Norges Bank’s operations. It has seven members appointed by the King in Council. The Governor and Deputy Governor of Norges Bank are chairman and vice-chairman. NBIM’s governance model differs from other parts of Norges Bank. NBIM’s Executive Director has the responsibility and authority of CEO of the unit. He reports directly to the Executive Board and is subject to continuous oversight by the Governor on behalf of the board." (NBIM, About Us, Executive Board).
The focus on responsible investments is not solely the province of the Norges Bank in its managerial and investment functions. In addition to the obligations of the Norges Bank as Fund manager, the Storting has created a set of Ethical Guidelines. Guidelines for the observation and exclusion of companies 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. These Guidelines bind on the Ministry of Finance and the Norges Bank, but administered through an Ethics Council. It is to the place of the Ethics Council and the Ethical Guidelines that we turn to next.