Monday, February 21, 2011

Part XXI: 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 XXI of the series.

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Part XXI: Ethics and a Jurisprudence of Responsible Investment:  First Run at the Characteristics of Companies in the Excluded Universe

We have been considering the characteristics of companies that are excluded from the NSWF investment universe.  Together they constitute the exclude company universe of the NSWF.  Is it possible to generalize from this aggregate of members of the excluded company universe?  This post makes a preliminary assessment of that possibility. 

The overarching characteristic for companies that are excluded from the Fund appears to be notoriety.  All are companies prominent enough  to have come to the attention of the Council. As such, it appears that the political value of the exclusion may play a role in the willingness of the Ethics Council to consider exclusion.  There is a substantial leveraging effect in the Ethics Council's actions.  That, in turn, may be a function of the limits of the Ethics Council's resources and the inefficiency of their determination process.  Alternatively, it might also be a function of the Ministry of Finance and their privileging of political consideration, including the ability to leverage media coverage of the ethics work of the Ethics Council.  There is "more bang for the buck" excluding Wal Mart than a company less well known among global media enterprises that can, in turn, be able to provide a broader coverage of the actions of the Ethics Council and increase the influence and prominence of the  responsible investment project undertaken through the NSWF.  That, in turn increases the ability of the Norwegian state to influence the development of international standards that then affect Norwegian domestic law applicable to the work of the Ethics Council.  Out of the fifty companies excluded from the Fund and thirty from the Dow Jones Industrial Composite, three are excluded. 
Excluded companies also tend to be on the "radar" of influential non-governmental organizations.  The Ethics Council tends to rely, and sometimes heavily, on information acquired through NGOs.   It also relies on media reports.  A reason for this may be capacity--the Secretariat is small and the amount of evidential work required for an exclusion determination can be substantial.  The surprising thing is that exclusion is plausible at all.  That, in part, is a function of the unwillingness of companies ot cooperate.  It would be interesting to see the result as companies come to spend more resources to defend against exclusion determinations.  Ironically, the failure of companies to take the proceedings seriously is augmented by their loquacious habits on line.  The Ethics Council has been able top leverage the work of its Secretariat merely by carefully harvesting informational provided on company websites, and on the web sites of other entities that may have information about the company or related parties.  

Membership in the exclusion universe is also significantly related to the government's perception of  the shifting views and political perceptions of the people of Norway. As can first be seen with Singapore Technologies Engineering excluded in 2002 under the grounds of the Ottawa Treaty (1997).  There, the Council was asked to see if investment into the company is in violation of Norwegian law international obligations under the basis that it is a signature of the Ottawa Convention, and it was found that it was not, but the Council put forth the guidelines that the production of anti-personnel landmines were in violation of fundamental human rights.  Indeed, where the Ethics Council has provided the greatest willingness to break new ground on ethics, in the form of the development of rules and standards for ethics violations, has been in those cases where the Ethics Council has sought to apply domestic political sensibilities to international standards.

That pattern repeated, to a certain extent, with respect to product exclusions.  This marked the domestication in law of global movements to ban landmines, and to ban cluster munitions, both issues taken up by the Council. With the first recommendation made in June of 2005 the Council set the foundation for exclusion from the Fund based on the production of these weapons. The global adoption of law in these areas came later.  It would not come till three years later in 2008 that the Oslo Convention was adopted and ratified, for example. Once ratified the Council took into account the more explicit terms of the agreement as the cornerstone of their recommendations, giving the Council more legitimacy in the decisions it reached, while leaving interpretation of the agreement and Norway’s obligations open to the Council.

While there is little agreement or global consensus as to the status of Burma, the Council took a proactive stance to ban investments that would in there nature support any aspect of the military junta in that state. It was mentioned, but in the context of the time it can be seen that the decision of the Council was based on attempts by Norway to gather support against the Burmese Government. Other responses to the political pressures put on by various entities in Norway can be seen in the Council’s decision to exclude companies involved in the production of tobacco as well as in response to public sentiment on Wal-Mart’s growing influence around the world and sentiment about Israel’s actions in 2008.
Yet the Burmese action suggests the intense relationship between ethics and politics in the development of the responsible investment principles of the NSWF.   The most interesting contrast to Burma is the Israel-Palestine conflict.  That conflict appears to have been singled out for special treatment by the Norwegian Ethics Council.  It certainly has been prominent in Council considerations and in the horizon of the Foreign Ministry, especially the use of the Ethics Council to put pressure on Israel to conform to Norwegian expectations.    While the OECD, for example, has focused on other conflict zones--Somalia, the Congo, for example, these areas remain somewhat opaque to the Ethics Council.  Yet its jurisprudence suggests that both conflict zones are ripe for Ethics Council action, especially with respect to extractive industries.  It is not clear whether that focus is a function of the interests of the Finance Ministry, of the NGOs whose work tends to draw the attention and resources of the Ethics Council, or the serendipity of companies that come to the Council's attention.

The Ethics Council's tastes for what it is looking for when it looks at companies for exclusion seems to have changed slightly over time. Up till 2010 the only companies excluded on the basis of environmental degradation were companies who had mining operations, specifically in the South Pacific and Russia, this all changed recently with the exclusion of Samling Global and Lingui Development Berhad Ltd. who were excluded on the grounds of illegal logging practices.   It is likely that the exclusion universe is more likely to grow with respect to exclusions based on conduct than product based exclusions.  It is with conduct exclusions that the Ethics Council's work is likely to produce the most creative application and extension of the Ethics Guidelines and contribute, in a positive way, to responsible investing in ways that may affect global corporate behavior.  

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