Norwegian Sovereign Wealth Fund Excludes Makers of Reconstituted Tobacco Leaf in the U.S. and China

On May 8, 2013, the Norwegian Ministry of Finance published its decision to exclude the American company Schweitzer-Mauduit International Inc. and the Chinese company Huabao International Holdings Limited from the investment universe of the Norwegian Government Pension Fund Global (GPFG). The decision is based on a recommendation from the Council on Ethics for the Fund.

("Reconstituted Tobacco Leaf (RTL) was a concept pioneered by SWM and is now widely used throughout the tobacco industry for blend construction. By reclaiming remnants of virgin tobacco remaining after manufacture-elements that would otherwise be wasted-we combine them into a malleable sheet. This can then be used directly in the tobacco blend in combination with other tobacco leaf to form a very consistent and high quality cigarette blend."  SWM, Reconstituted Tobacco)

While the decision would not merit much notice--the NSWF has for years  excluded companies tyhat produce tobacco form its investment universe (NSWF Ethics Guidelines Section 2, Para. 1(b)--this decision merits attention because the Ministry this time considered the applicability of this exclusion rule to reconstituted tobacco leaf.  

The Minsitry's press release is available HERE.

The Ethics Council Recommendation is available HERE.

The post reviews these documents and briefly considers its effects on both form and function of due process.  

The Ministry of Finance Press Release:

The Ministry of Finance has excluded the American company Schweitzer-Mauduit International Inc. and the Chinese company Huabao International Holdings Limited from the investment universe of the Norwegian Government Pension Fund Global (GPFG) on account of their tobacco production. The decision is based on a recommendation from the Council on Ethics for the Fund.

The Council on Ethics gave this reccomendation to the Ministry of Finance on 24th January 2013. Schweitzer-Mauduit International Inc. and Huabao International Holdings are involved in the production of reconstituted tobacco leaf (RTL).[1]

According to the guidelines for observation and exclusion of companies from the Pension Fund Global, Section 2 (1) b), "The assets in the Fund shall not be invested in companies which themselves or through entities they control: [...] produce tobacco". As the Council on Ethics points out in its recommendation, the Ministry of Finance gave a further definition of this in the National Budget for 2010, section 5.4.4, stating that producers of products that contain tobacco shall be excluded from the GPFG. The Council underlines that RTL primarily is made from the tobacco plant and therefore must be regarded as a tobacco product. The two companies concerned state in their annual reports and investor presentations that they produce RTL. The Council on Ethics has based its recommendation on this information.

The Ministry of Finance has decided to exclude Schweitzer-Mauduit International Inc. and Huabao International Holdings Limited based on the recommendation from the Council on Ethics. In accordance with the guidelines, the decision to exclude is made public once the shares are sold.

Read more:
The recommendation from the Council on Ethics
Council on Ethics for the Government Pension Fund Global
A list of all the companies that have been excluded from the Fund's investment universe

[1] RTL is made from remnants, dust and other by-products of the processing of tobacco leaves and from parts of the tobacco plant that cannot otherwise be used (stems, etc.). These are processed through various techniques into a product that is used in the manufacture of cigarettes. RTL can constitute up to 10–15 per cent of the tobacco content of cigarettes.

The Ethics Council was of the view that "RTL is primarily made from the tobacco plant and must thus be regarded as a tobacco product. The production of RTL therefore constitutes grounds for exclusion from the GPFG. The two companies in this recommendation state in their annual reports and investor presentations that they produce RTL. The Council on Ethics has based its recommendation on this information." (Ethics Council, Recommendation on the exclusion of companies from the GovernmentPension Fund Global (GPFG) (24 January 2013). Interestingly, neither company participated in the work of the Ethics Council or in its investigation, choosing instead to ignore the Ethics Council. (Ibid., Para. 2).  This, of course, is not the first time.  But globalization and the technology revolution have made the need for a response more a matter of courtesy than a requirement for the harvesting of information.  Both companies had been quite free with information, and, for purposes of these proceedings, admissions.  (See, Schweitzer-Mauduit International, Investor Presentation, 5 November 2012; Huabao International Holdings Limited, Annual Report 2011-2012).  Given these admissions, it seemed hardly necessary for the companies to participate, their failure amounting to a concession of guilt.

Yet, at the same time, the ease with which institutions engaging in quasi judicial work may now develop evidence from information available generally through the Internet and related technologies should give some pause.  It suggests that the old forms of due process--of the need to permit a party to defend itself in the course of proceedings has also begun to change fundamentally. Due process could be understood as furthering two distinct interests--the first is factual (the participation of all parties in the development of the evidence form which the facts on which decisions can be made with some confidence); the second is equitable (the participation of all parties to provide explanations and interpretations of information gathered to construct the most plausible story and to explain excuse, or other explanations that might mitigate or excuse, or call into question the veracity or weight accorded to some or all of the information harvested). The Ethics Council is principally concerned with the factual component of due process. It is confident that it needed nothing from the objects of its investigations because of their own admissions from their reports and on their websites.  Yet it might still be possible for the equitable component of due process to have had an effect--for example by permitting an argument that RTL did not fall within the Ethics Guidelines (that is RTL production is not the production of tobacco; rather that it is an additive that is used as an ingredient in the assembly of cigarettes). 

But none of that matters here.  What is important is the way in which, without much consideration, the Ethics Council could, in performing its investigative functions with quasi judicial effect, could, without much thought, transform these inquiries from one centered on parties to one centered on information gathering.  That is a substantial movement away from old notions of due process--its character and form. While institutions, and especially conservative institutions like lawyers and courts, will continue to adhere to the old forms of due process, it is becoming clear that at least functionally, effective due process is likely to change in the next several years. If the law does not change to conform to changing expectations and the realities of information access, then it is likely that due process as practices by institutions, and especially legal institutions, will begin to suffer an increasing legitimacy deficit.