Friday, February 04, 2011

Part IV: 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 IV of the series.

Part IV: Operationalizing the Ethics Guidelines--The Structure and Functions of the NSWF Council on Ethics.

We have seen how the Norwegian state has developed a legal framework for sovereign investing.  It serves as a variant of moves toward sovereign investing that have been attempted by other powerful sovereign participants in private globalized capital markets, a set of comparisons that will be made more explicit in later sections of these essays.  See, Larry Catá Backer,  Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience. Transnational Law & Contemporary Problems, Vol. 19, No. 1, 2009.  The grounding norm for state investment is the notion of responsible investing, which serves as the critical filter through which the economic objectives of the Fund, to achieve the highest possible return, is understood.   We understand the notion of responsible investing to consist of several inter-related parts: qualitative policy elements that must be incorporated into considerations of investment under the highest achievable return standard, incorporation of international standards within domestic law structures for the governance of corporate conduct, active participation in the development and implementation of international standards by public and private actors, active ownership principles, and ethical guidelines.  The substance of the Ethics Guidelines--Guidelines for the observation and exclusion of companies from the Government Pension Fund Global’s investment universe -- were explored, as a standard of normative conduct, and as a system of regulation connected to the structures of responsible investment.   While the Ministry of Finance and its Fund manager, the Norges Bank (through its Norges Bank Investment Management (NBIM establishment) are principally responsible for operationalizing the active management and investment strategies portions of Fund operations, the Ethics Guidelines themselves establish a separate and autonomous apparatus for the operationalization of the ethics guidelines, the Council on Ethics for the Government Pension Fund--Global (the "Ethics Council").  Though the regulations create a structure for coordination of operation and information sharing (Ethics Guidelines, sec. 6(1)) each operates from a significantly difference regulatory perspective within the responsible investment standard.  This essay provides a brief overview of the structure and operations of Ethics Council.

The Ethics Guidelines vest in the Ministry of Finance the authority to appoint a Council on Ethics.  (Ethics Guidelines Sec. 4(1)).  The Ethics Council is to consist of five members.  (Id.).  To ensure its own autonomy, it is to have its own secretariat (Id.) financed by the Ministry.  Both the size of the Ethics Council and the availability of a well staffed Secretariat is instrumental to shaping both the character and authority of the Ethics Council.
The Council consists of five persons who are all experts in the different areas covered by our guidelines. This expertise means that we know what we are talking about. It is not a “prominent-persons-have-been-politicians” kind of council, as it could easily have been. We have our own office space and a secretariat of six full time employed people. So we really have the time and the resources to think things through properly.  (From Sibylle van der Walt, Bringing human rights into pension finance. Interview with Gro Nystuen, Norway Govt Pension Fund, Responsible, April 21, 2009).
A number of prominent persons have served on the Ethics Council to date.  Current Members (along with links specified on the Ethics Council's web site) are:
Information about members past and current are set forth in Appendix A below.  There is some turnover in the members of the Secretariat.  The current members of the Secretariart include:  Eli Ane Lund (Executive Head of Secretariat), Hilde Jervan, Aslak Skancke, Pia Goyer, Pablo Valverde, Charlotte Hafstad Næsheim, and Svein Erik Hårklau. The Ethics Council apparatus appears to be well funded, though its strain on both time and fiances is acknowledged.  "It costs money to have us do the work that we are doing, even though it is not a huge amount. And it causes a lot of extra work for others as well, for the Central Bank, for the Minister of Finance. It requires a big effort." (From Sibylle van der Walt, Bringing human rights into pension finance. Interview with Gro Nystuen, Norway Govt Pension Fund, Responsible, April 21, 2009).

The Ethics Council is vested with four principle functions described in Sections 4(2)-(5) of the Ethics Guidelines as follows:
(2)   The Council shall monitor the Fund’s portfolio with the aim of identifying companies that are contributing to or responsible for unethical behaviour or production as mentioned in section 2, paragraphs 1 and 3 [the mandatory and discretionary exclusion criteria].
(3)   At the request of the Ministry of Finance, the Council gives advice on the extent to which an investment may be in violation of Norway’s obligations under international law.
(4)   The Council gives advice on exclusion in accordance with the criteria stipulated in section 2, paragraphs 1 and 3.
(5)   The Council may give advice on whether a company should be put under observation, cf. section 3.  (Ethics Guidelines, Sec. 4).
Norway acused of ‘hypocrisy’ over ethical investment, (Aug. 24, 2010). (The Norwegian government has sold its investment in one Malaysian logging and palm oil company but remains a big shareholder in another accused of destroying rainforest and orang-utan habitats). 

Only one of the Ethics Council's functions is expressly mandatory, the obligation to monitor companies in the Fund's portfolio for compliance with the normative ethics standards set out in Section 2 (products based exclusion and conduct based exclusion).  The rest of its obligations are, to some extent either triggered on request or discretionary.   It is obligated to give legal advice on the extent to which an investment may violate international law at the request of the Ministry of Finance.  However, its advice obligations may be exercised after a request from the Ministry of Finace or on its own initiative.  (Ethics Guidelines, Sec. 5(1)).     In addition,
The Ministry of Finance can put a company under observation on the basis of recommendations of exclusion or observation from the Council on Ethics. In these cases, assessments will be made regularly to determine whether the company should remain on the watch-list. If the risk of norm violations is reduced over time, the company can be taken off the watch-list. If the required improvements are not observed, companies on the watch-list may be recommended for exclusion from the Fund. (Council on Ethics for the
Government Pension Fund Global, Annual Report 2009,  at 13).
The nature of the Ethics Council's charge appears to have affected its approach to its duties in a particular way:  "The biggest difference between us and anybody else is the amount of resources we use and the level of distrust we have when we screen companies. We do not just rely on service providers who claim they can make sure that our portfolio is ethical. We think that nobody actually can do this better than ourselves. So although we use initial information from screening companies, we always check the quality of the information ourselves." (From Sibylle van der Walt, Bringing human rights into pension finance. Interview with Gro Nystuen, Norway Govt Pension Fund, Responsible, April 21, 2009). This attitude will be explored in more detail in the context of analysis of the Ethics Council's work.

A principal operational function of the Ethics Council is the harvesting of information.  It is given broad, though unspecified authority,  to  "obtain the information it deems necessary and ensure that the case has been properly investigated before giving advice on exclusion from the investment universe." (Ethics Guidelines, Sec. 5(2)).  The obligation to harvest information extends not only through the process of determining  exclusion from the investment universe but continues thereafter.  "The Council shall routinely assess whether the basis for exclusion still exists and may, in light of new information, recommend that the Ministry of Finance reverse a ruling on exclusion." (Ethics Guidelines, Sec. 5(5)). 

The Ethics Guidelines set out a rudimentary system of procedural protection applicable to the process of determining the appropriateness of Fund exclusion.  The process system evokes  a determination of qualitative minimum protections  of the rights of those affected by Ethics Council determinations balanced by the needs of the Ministry of Finance for efficiency in the operation of the system,  (Cf.  Mathews v. Eldridge, 424 U.S. 319 (1976); Case 17/74 Transocean Marine Paint v. Commission [1974] ECR 1063).   First,
A company that is being considered for exclusion shall be given the opportunity to present information and viewpoints to the Council on Ethics at an early stage of the process. In this context, the Council shall clarify to the company which circumstances may form the basis for exclusion. If the Council decides to recommend exclusion, its draft recommendation shall be presented to the company for comment. (Ethics Guidelines, Sec. 5(3)).
The Ethics Council has listed some of the factors it weighs in reaching its decision the a company "could expose the Fund to an unacceptable risk of contributing to grossly unethical practices" the touchstone standard for conduct based exclusion under the Ethical Guidelines (Sec. 2(2)).
The Council will, among other factors, assess:
  • whether the violations fall within the scope of the Fund’s Ethical Guidelines;
  • whether it is possible to establish a clear connection between the company’s practices and the violations;
  • whether the violations may be regarded as isolated incidents or whether they constitute an indication of present and future practices;
  • whether the violations are serious or systematic;
  • whether the violations will lead to long-term or permanent damage to humans or the environment;
  • whether there is sufficient documentation to substantiate allegations of violations; and
  • whether the company has implemented measures to prevent or remedy the violations. (From Ministry of Finance, Ethics Council, Frequently Asked Questions, No. 5)
Once it has reached a decision, the Ethics Council is required to produce a written opinion in which it describes the grounds for its  recommendations (Ethics Guidelines, Sec., 5(4)).
 These grounds shall include a presentation of the case, the Council’s assessment of the specific basis for exclusion and any comments on the case from the company. The description of the actual circumstances of the case shall, insofar as possible, be based on material that can be verified, and the sources shall be stated in the recommendation unless special circumstances indicate otherwise. (Id.).
The quasi-juridical  character of the process is made clear in the specification for the assessment of the basis for exclusion:  "The assessment of the specific basis for exclusion shall state relevant factual and legal sources and the aspects that the Council believes ought to be accorded weight." (Id.). The Ehtics Council has some latitude in the character of the information used in its proceedings.  Its only regulatory standard is the "verifiable" standard of Ethics Guidelines Sec. 5(4).

The Council on Ethics bases its work on a series of different sources. The main rule is that the information taken into account must be verifiable.
In order to gather information the Council on Ethics often maintains contact with special interest groups, local and national authorities, international organizations, local and international experts and the company itself. Important information may include documentation such as research and scientific reports, legal sources, environmental impact assessments, reports from non-governmental organizations, the company’s own documents, etc. The Council on Ethics does not have a mandate to subpoena anyone or order the release of documents. In certain cases the Council on Ethics hires external specialists to carry out field studies or other studies if considered necessary to sufficiently document the violations. (From Ministry of Finance, Ethics Council, Frequently Asked Questions, No. 16)
Moreover, the Ethics Council has chosen to limit the citation of its information sources under certain circumstances.  (Id., "in order  to protect personal safety").

The internal routines for managing proceedings to reverse exclusion, described as "cases" in the English translation of the Ethical Guidelines are to be publicly available and the affected companies informed.  (Ethical Guidelines, Sec. 5(6)). And the Ministry of Finance is required to publish Ethics Council recommendations "after the securities have been sold, or after the Ministry has made a final decision not to follow the Council on Ethics’ recommendation."  (Id., Sec. 5(7)).

There are limits to transparency, both to protect companies and to protect the state as well.
One problem is that publishing a list of companies that we are looking at causes itself reputational hazard for a company. It shows that they are under our scrutiny. And if we then publicized the details of all the companies we have looked at and decided not to exclude them from our investment programme, it would mean that we gave them a seal of quality, which we do not want to do. Some companies can be really bad, we know that but we just can’t get the documentation. And we do not want to give those companies a quality seal. And some companies, on the other hand, are falsely accused of things, for a number of reasons. (From Sibylle van der Walt, Bringing human rights into pension finance. Interview with Gro Nystuen, Norway Govt Pension Fund, Responsible, April 21, 2009).
Beyond that, the Ethics Guidelines frames the structure of cooperation between the Norges Bank, the Ministry of Fimamce and the Ethics Council.  (Ethics Guidelines, Sec. 6).  The framework for that cooperation is the responsible investment  norm.  The three entities meet regularly to exchange information, focusing on the Norge Bank's active ownership functions nd the Ethics Council's portfolio monitoring function.  (Id., Sec. 6(1).  Procedures for coordinating communication with companies are required.  (Id., sec.6(2)).  And the Norges Bank and Ethics Council are expected to consult with reach other with respect to their respective obligations.  "The Council on Ethics may ask Norges Bank for information about how specific companies are dealt with through active ownership. The Council on Ethics may ask Norges Bank to comment on other circumstances concerning these companies. Norges Bank may ask the Council on Ethics to make its assessments of individual companies available."  (Id., sec. 6(3)).

Upon the determination by the Ministry of Finance that a company is to be excluded from the investment universe of the NSWF, the Norges Bank is formally notified and has two calendar months from the time of notification to divest its holdings .  (Ethics Guidelines, sec. 7(1)).  Norges Bank may notify the excluded company, but only at the Finance Ministry's request (Ethics Guidelines, sec. 7(2).  In any case, companies and others receive notice of Finance Ministry actions by reviewing a periodically updated list of excluded companies (or companies put under observation) which the Finance Ministry is required to publish.  (Ethics Guidelines, Sec. 8).

What emerges from this review is a  body that is organized much like a constitutional court.  Its members understand their role as essentially political. Some but all of its members are lawyers.  They are chosen for their representative value (and to that extent can be understood as the embodiment of essentialist abstraction in the service of the state)  and their personal achievements and status.  But the forms used to  exercise authority are quasi-judicial, rather than administrative or legislative in character.  The Ethics Council produces information--principally of use to the Ministry of Finance and Norges Bank.  But more importantly, the principal authoritative product of the Ethics Council are its determinations of the compliance of companies with the product or conduct based exclusion rules specified in the Ethics Guidelines.  Those determinations are not mewrely specific instances of the application of the Ethics Guidelines.  To the extent that they suggest and develop a set of approaches to such determinations, standards for applying those Ethical Guidelines or rules for determining conformity thereto, the Ethics Council begins to develop a jurisprudence whose value as a governance tiool becomes significant. It is to a consideration of the work of the Ethics Council, it character, nature, meaning and effect, that these essays turn to next.

Appendix A:  Ethics Council Members

Gro Nystuen holds a doctorate in law and has specialized in international law. She is a Senior Partner at the International Law and Policy Institute (ILPI). Nystuen’s expertise includes international law, international humanitarian law/the law of war, as well as human rights including international rules regarding workers’ rights, among other things. Nystuen has 12 years’ experience in the foreign service, including the legal department and Norway’s delegation to the United Nations in Geneva. She has also served as legal advisor to Thorvald Stoltenberg and Carl Bildt under the peace process for the former Yugoslavia. Nystuen led the Council on International Law for the Petroleum Fund until its dissolution in November 2004 and was a member of the Graver Committee in charge of suggesting ethical guidelines for the Petroleum Fund. She has led the Council on Ethics since its creation in 2004. Nystuen is an associate professor at the University of Oslo and at the Norwegian Defence University College (NDUC).
Gro Nystuen
Gro Nystuen

Dag Olav Hessen received his doctorate in biology in 1988 and was named professor of biology at the University of Oslo in 1993. Hessen has authored a long list of articles and published a number of books. He has also been appointed to a number of boards, including those of the Research Council of Norway, the University of Oslo, The Sophie Prize and The National Committee for Research Ethics in Science and Technology (NENT by its acronym in Norwegian). Hessen is a member of the Norwegian Academy of Science and Letters.
   Dag Olav Hessen
  Dag Olav Hessen

Ylva Lindberg is managing director of SIGLA. She has more than ten years business experience, including as a consultant with McKinsey & Company, marketing manager in Orkla and equity analyst at KLP Asset Management. Her expertise is in strategy, corporate responsibility and marketing from Scandinavia and Russia. Ylva holds a degree in Philosophy, Politics and Economics from Oxford University and holds four board positions in Norway.  She joined the Ethics Council on November 30, 2009.

   Ylva Lindberg
  Ylva Lindberg 

Ola Mestad is dr. juris and Professor at the Centre for European Law, University of Oslo. He has been a partner in the law firm BA-HR for many years, mainly in charge of oil and gas law. Currently, he is working with international economic law, especially trade and investment, as well as contract law and EU law. Ola Mestad has also done work on legal aspects of corruption.
   Ola Mestad
  Ola Mestad

Bente Rathe is an economist by training and holds a master’s degree in Business Administration from the University of Denver. Among other things she sits on the board of directors of Norsk Hydro, Svenske Handelsbanken, Powel, Choice Hotel Scandinavia and Innovasjon Norge.  Rathe has extensive experience from the world of finance, not least as Vice President of Gjensidige NOR. She has also held a number of board positions, including the chairmanship of Petoro and appointments in the boards of Veritas and Statoil. Rathe is a member of the Financial-crisis committee and was a member of the Graver committee, which recommended the ethical guidelines for the Government Pension Fund Global.
  Bente Rathe

 Bente Rathe
Former Ethics Council Members

Professor Andreas Føllesdal (Co-Director), Professor of political philosophy, Director of Research, Norwegian Centre for Human Rights, Faculty of Law, University of Oslo, was in residence the whole academic year. A political philosopher, his own research mainly addressed issues of the normative legitimacy of human rights conventions and the various treaty organs. He edits, co-edits and contributes to two of the books and the two special issues of journals that stem from the project: on Legitimacy, the European Convention on Human Rights; on the Constitution of Nepal and reflection on the Legitimacy of international judicial review in Nytt Norsk Tidsskrift.

Andreas Føllesdal  On the Council between 2004 and sometime after February 2010.

Anne Lill Gade is Product Safety Manager at Jotun A/S. Ms.Gade is a MSc in limnology (freshwater ecology), with supplementary studies in toxicology, and has been employed at the Norwegian Pollution Control Authority (SFT). She is chair of the Committee of Environmental Policy at the Federation of Norwegian Process Industries (PIL). Gade’s work includes implementing the new EU chemicals directive REACH in Norway through the research programme “Innochem” and through participation in the EU Commision’s preparation of its guidelines. She is also a research scholar at the University of Oslo, Institute of Toxicology.
Anne Lill Gade
Anne Lill Gade: On the Council from 2004 till sometime after February 2010.

Bjørn Østbø, Economist HAE, Managing Director at First Securities ASA, Bergen. A member of the Ethics Council until 30 June 2009.


1 comment:

Anonymous said...

Excellent article. Many thanks for posting