Part XXVI: 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 XXVI of the series.

From NBIM submits shareholder resolutions to four US companies 2009.

Part XXVI: Ethics and a Jurisprudence of Responsible Investment:  The Relationship Between the Ethics Guidelines and Active Shareholder Principles

The Ethics Guidelines provide only one part of the complex governance and regulatory structure of the NSWF's responsible investment framework. 

The term «responsible investment practice» has begun to take hold as a recognised and applied concept in the global investment community. It springs historically speaking from the idea that business has an ethical and social responsibility that extends beyond directives to comply with laws and regulations.

At the same time the debate about what constitutes responsible investment practice has gradually moved back to the core of investment management: managing capital with the aim of achieving the highest possible financial return within an acceptable risk, in line with shareholders" interests. There has been a move away from a purely philanthropic or ethical point of view to greater awareness of self-interest. From a perspective of ensuring a long-term return on capital values, many investors consider the following questions relevant: What ensures the companies" assets in the long run? What risk factors must a broadly diversified, long-term investor consider? Are there sufficient converging interests between owners and managers of the capital? Should companies demonstrate that they take due account of environmental and social factors, so as to convince investors that they create value over time? (Ministry of Finance, Report No. 10 (2009-2010) The Management of the Government Pension Fund in 2009, Section 10.1).

The Ethics Guidelines project presents the regulatory and gatekeeper function of the NSWF investment framework.  The private regualtory role is tasked to the Norges Bank and its active shareholder project.  

“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. (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 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.   It also mirrors the thrust of the Ethics Guidelines, but now applied internally to specific corporations in which the NSWF has an interest under rules of private governance.

Avctive ownership is tied to the NSWF's notions of universal ownership.

An important prerequisite for influencing companies to change their behaviour is that such a change is also in the companies" interest, if not the results may soon become arbitrary. Where it is difficult to find a solution in isolation at the company level, a broader industry approach may be relevant. An example of successful ownership work in this context is the GPFG"s initiative in India which contributed to a new industry standard for combating child labour.

The most appropriate form of sustainable, long-term and predictable solutions to global problems will often be through regulation. In this case, the GPFG will primarily be interested in influencing global authorities in the direction of integrating the external effects with the economy, either directly or in partnership with portfolio companies and other investors. Work on climate change or regulation of the financial markets so that risk-taking is more in line with long-term interests are good examples of issues where global solutions are most appropriate. (Ministry of Finance, Report No. 10 (2009-2010) The Management of the Government Pension Fund in 2009, Section 11.4).

The universal ownership principles suggests the ways in which the state can access non-law based avenues of regulation through its shareholder power.  "The Fund is a universal owner by definition and should therefore have a concrete approach to what this means in practice. Such an approach should look at the need and possibilities for reducing the short- and long-term welfare losses by «lifting» the quality of the investment universe. It should also look at the dynamic need to «adapt» to the issues through changes in the investment strategy." (Id., at 11.6).

 

Active ownership is not meant to be applied only internally to the constitution of corporations.  It is also meant to have regulatory effects.  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.  Thus for example,

The Ministry of Finance and the Council on Ethics for the GPFG take part in a project coordinated by the UN Global Compact, where the goal is to develop a set of guidelines that provide guidance for responsible corporate and investment practice in conflict areas. Such guidelines are hoped to provide investors and companies a greater degree of insight into each other"s experiences and perspectives, contribute to better and more efficient use of suitable tools when companies operate in such areas, as well as raise awareness and clarity about what is acceptable, responsible behaviour. (Ministry of Finance, Report No. 10 (2009-2010) The Management of the Government Pension Fund in 2009, Section 10.3).

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.