Part XIII: 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 XIII of the series.

From Mary J. Loftus, Beyond the Wall, Emory Magazine, Autumn 2007

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

II.  Conduct--Complicity
   3.  Serious Violations of Ethical Norms

There are two principal determination:

1. 01.09.2006 Exclusion of Kerr-McGee reversed
The press release from the Ministry of Finance
The recommendation from the Council on Ethics
AND
06.06.2005 Kerr-McGee Corporation
The press release from the Ministry of Finance
The recommendation from the Council on Ethics
 
2.  03.09.2009 Elbit Systems Ltd
The press release from the Ministry of Finance
The recommendation from the Council on Ethics

Summary:  The basis for the exclusion of this category of cases appears to be based on the determination by the Council of the existence of a violation of international norms or Norwegian national policy that is not otherwise covered elsewhere.  There is a certain amount of flexibility exercised here for broadening the scope of the international  norms incorporated  into the NSWF's regulatory framework that was contemplated in the fashioning of the Ethics Guidelines themselves, now in Ethics Guidelines Section 2(3)(e).   The first company excluded was Kerr-McGee,  excluded on the basis of a contract entered into with the government of Morocco for the exploration for minerals off the coast of Western Sahara. While exploration for minerals neither breaches domestic law (of Norway or Morocco) or international norms in itself, the issue became complicated because of the unsettled political status of part of the territory covered, the Western Sahara over which Morocco was asserting de facto sovereignty at the time.  As a consequence, under international law, Morocco was obligated to respect the culture of the peoples concerned.  The official position of the Norwegian state was that no governmental agency should act in a manner that might prejudice ongoing peace efforts (Kerr McGree, 2005, 3).  That policy applied to the NSWF as well as the political branches of state.    Though the occupation might be considered invalid by the Norwegian state, some activity might still be deemed lawful within such a situation.  For that purpose, the Council referred to the UN Convention on the Law of the Sea and a contradictory opinion of the UN Office of the Legal Advisor (id., 3-4). In that context the Ethics Council developed a standard for applying internal law through the Ethics Guidelines: "in a situation of contradictory interpretations of international law, treaty law would prevail over a legal opinion." (Id., 4).

In this case, the Ethics Council determined that though companies cannot be directly responsible for serious or systematic human rights violations, they might be complicit in such violation or profit form them.  The Council based its recommendation that the company be excluded since it had not properly consulted with or paid any reparations/compensation to the local people for the natural resources in their land and that the people of Western Sahara have not been properly consulted on the matter, but instead the company went through the occupying power of Morocco which is viewed by many organizations as an illegal occupier of Western Sahara.  Because such a violation did not comfortably fit within the other categories of conduct for exclusion, the Ethics Council  assessed the conduct and the standard for exclusion on the "catch all" provision.  (Id., 4-6).  That exclusion determination was ultimately lifted only after "the company has ceased its activities in the Boujdour field and that the licence to conduct explorations had expired" (Kerr McGee May 24, 2006).

From Fortune hunters eye Western Sahara oil riches, Kosmos Energy report on the Boujdour offshore field: «A high risk and a very high reward.» © afrol News

Elbit Systems Ltd., and Africa Israel Investments Ltd., were all excluded from the Fund for their role in aiding the Israeli government in its occupation of and purported violations of rights of the people of the West Bank following the large scale military action in 2008/09. Similar to the exclusion of companies for producing nuclear components, the items being produced by these companies are not illegal per se, the focus is on their use.  All the companies have contracts with the Israeli government to manufacture systems that through their intended use aids the Israeli occupation with respect to which many states and non governmental organizations have been championing the view that either the occupation or specific actions by Israel as the occupying power violate law, norms, or other standards that might be given effect by political bodies in the form of law or ethics.  Further the exclusion of these companies might be on the basis that the Council is giving a warning and applying pressure to Israeli companies without directly playing a political game with the government. In this case, the focus was on complicity.  "The Council on Ethics thus finds that the Fund’s investment in Elbit represents an unacceptable risk of complicity in particularly serious violations of ethical norms and that the company should be excluded from the Fund’s investment universe on these grounds" (Elbit pg. 9).  The Norwegian state did not want to hold shares of a company that might have contracts with the Israeli government, the purpose of which is to engage in actions that the Norwegian government objects to on political and legal bases.  

 To enter into the details of the many issues of international law that have been raised with
regard to the construction of the separation barrier would be outside the Council on Ethics’ mandate. In this context the Council will refer to the advisory opinion from the ICJ and the report from the UN Special Rapporteur, which both accept that the construction of the separation barrier along the chosen route is illegal. Israel’s Supreme Court has also
established that to the extent its purpose is to annex occupied territory, the separation barrier is not legal. The Council on Ethics is aware that the Israeli government deems the barrier a necessary and temporary measure to prevent terror attacks and that the considerations regarding the necessity of the barrier must carry more weight than the considerations vis-à-vis the disadvantages it entails. The Council on Ethics’ has not made an assessment of Israel’s right and duty to protect its citizens against terror attacks. A state’s construction of fences or other control mechanisms on its own territory cannot, in principle, be considered illegal or unethical. Neither does the ICJ’s advisory opinion concern the sections of the separation barrier that are located inside Israeli territory. Israel, however, has chosen to build a separation barrier of whose extension nearly 90% is located in areas occupied by Israel. This, and the humanitarian problems that the choice of the route causes, constitute the problematic aspects of the separation barrier.  (Elbit, pg. 8).

The Ethics Council thus fashions a determination by blending the legal opinions of the highest court of a domestic legal order within the state in which the complained of actions occurred as well as judicial determination of international bodies that produce something that functions like a jurisprudence.  To these it adds its own interpretative application fo the Ethics Guidelines to produce a standard for exclusion on the basis of complicity that is broader than prior Ethics Council decisions.  It remains to be seen whether the standard adopted is personal to the Israel situation (and Norwegian foreign policy goals in that relationship, such as it is) or whether Elbit stands for a more broadly applied principle of applying the Ethics Guidelines. 

 

Avatar protest at West Bank barrier, The Guardian UK, 12 Feb. 2010 ("Protesters painted themselves blue and donned long hair and loincloths to draw a parallel between their struggle and that of the film's alien characters.").

Case Summary:

1.  Recommendation of April 11, 2005 on exclusion from the Government Petroleum Fund’s Investment Universe of the Company Kerr-McGee Corporation; [12.04.2005]; and Recommendation of May 24, 2006 on suspension of exclusion of KerrMcGee Corporation [24.05.2006].

1.  Company subject to investigation
a. Name: Kerr-McGee Corp. http://www.anadarko.com/Home/Pages/Home.aspx (Parent  company)
b. form of organization (corporation, Partnership, etc.):  Public company at the time of the recommendation, since then it has been bought off
    c. home country: US
    d. countries (exchanges) where shares are traded:  US (Past)
e. largest shareholders (individual, state owned enterprise: Bought out
f. form of investment by the Norway SWF fund: Bonds & Equities

2.  Chronology
    a. Date complaint filed: 12 December 2004
    b. Date complaint resolved by the Ethics Council: 11 April 2005

3.  Complainant
a.  If the state, the office from which the reference was made: “The background for this request was that the Minister of Finance had received letters from the Western Sahara Support Committee and the Government of the SADR (Saharawi Arab Democratic Republic)” (Para. 1 Pg. 1).

4. Complain
a. Action constituting violation: Signing agreements with the Moroccan Government, who does not have legal jurisdiction under the UN for exploitation of resources off the coast of Western Sahara without the permission and compensation of the people of Western Sahara for the purposes of mapping oil fields in the region.
b.  “Legal” basis of violation: Numerous, cited below.

5  Determination
a.  Council recommendation (for example divest, retain, wait): Exclusion
b.  Legal basis for the determination (reference to the section of the Ethics Standard invoked): Kerr-McGee conducts operations in Western Sahara which is recognized around the world as an occupied power by Morocco. The Council invoked rulings from the UN and other organizations.
c.  Underlying legal basis: International law mainly used in the context of the Council’s own decision.

6.  Basis of Determination
a.  standard of decision (rule or test etc.): None
    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: “The framework of international law, including the UN Charter and the Convention on the Law of the Sea, lay down that economic activity which involves exploitation of natural resources in occupied or Non-Self-Governed Territories must be exercised in cooperation with the people inhabiting those territories. The local population also has a right to the potential profits of such activities” (Para. 5 Pg. 6). As well as statements from the company.
e.  Rationale: The company was in cooperation with the Moroccan Government over speculator advances off the coast of disputed Western Sahara, while not illegal in themselves, these speculations are geared for production of minerals if found, leading the future infringements on the Fund.

Legal Basis: “In the above mentioned legal opinion from the UN Office of the Legal Adviser,  however, it
seems that the assumption is that because there is yet no exploitation, only exploration, the activity of Morocco on the continental shelf is lawful (Para. 5 Pg. 4)…The company Kerr-McGee as such cannot be held responsible for serious or systematic human rights violations (Bullet point 1 of the Ethical Guidelines). Only states have direct obligations according to human rights treaties. Companies, however, can through acts or omissions, contribute to, or profit from, human rights violations conducted by states. One might argue that one possible legal basis for determining a human rights violation by Morocco could be Morocco’s alleged violation of the Sharawi peoples’ right of self-determination. In the view of the Council, however, it is not necessary, in this case, to pursue a discussion concerning the possible contribution by Kerr-McGee to Morocco’s alleged human rights violations… “The aim is to determine whether the company will, in the future, represent an unacceptable unethical risk for the Government Petroleum Fund.” It seems clear that it is the potential for future exploitation of natural resources that constitutes the driving force behind the exploration of the continental shelf outside Western Sahara” (Para. 5/1/4 Pg. 5/6)

2.  03.09.2009 Elbit Systems Ltd

1.  Company subject to investigation
    a. Name: Elbit Systems Ltd. http://www.elbitsystems.com/elbitmain/
b. form of organization (corporation, Partnership, etc.):  Public company
    c. home country: Israel
    d. countries (exchanges) where shares are traded:  NASDAQ, TASE
e. largest shareholders (individual, state owned enterprise: Unknown
f. form of investment by the Norway SWF fund: Equity

2.  Chronology
    a. Date complaint filed: Unknown
    b. Date complaint resolved by the Ethics Council: 15 May 2009

3.  Complainant
a.  If the state, the office from which the reference was made: Not stated, possibly due to a significant amount of public attention surrounding the construction of the barrier wall.

4. Complaint
a. Action constituting violation: “The company supplies an electronic surveillance system called “Torch” for the separation barrier. Torch is designed to detect persons attempting to cross the barrier and to provide this information to the staff that guards it” (Para. 6 Pg. 3).
b.  “Legal” basis of violation: “Elbit supplies a surveillance system that is part of the separation barrier being built by the Israeli government in the West Bank. The construction of parts of the barrier may be
considered to constitute violations of international law, and Elbit, through its supply contract, is thus helping to sustain these violations. The Council on Ethics considers the Fund’s investment in Elbit to constitute an unacceptable risk of complicity in serious violations of fundamental ethical norms” (Para. 2 Pg. 2).

5  Determination
a.  Council recommendation (for example divest, retain, wait): Exclusion
b.  Legal basis for the determination (reference to the section of the Ethics Standard invoked): Cited both the UN and ICJ in the determination that the wall was illegal, not the company directly.
c.  Underlying legal basis: International law mainly used in the context of the Council’s own decision.

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 directly noted, there are numerous cases against the state of Israel in the UN and ICJ as well as the Israeli Supreme Court.
d.  Reliance on other materials: Israeli government, UN, ICJ.
e.  Rationale: The company produces a surveillance devise which is used in the barrier which is deemed illegal by international bodies.