Wednesday, March 12, 2014

2013 Annual Report for the Council on Ethics for the Norwegian Government Pension Fund--Human Rights and Ethics in Investment Under Attack

The 2013 Annual Report for the Council on Ethics for the Norwegian Government Pension Fund Global is now online. Here for report in English; Nedenfor til rapporten på norsk.

The Ethics Council Secretariat welcomes comments.  Write to 
Hege Havig-Gjelseth
On behalf of Eli Lund Executive Head of Secretariat

This post includes excerpts from the Report, and principally the Ethics Council response to the Strategy Council’s report on the responsible management of the Government Pension Fund Global, along with my thoughts on that response.  

There are three sections of note.  

The first are the  opinion letters for 2013 for the following companies.  These make up the bulk of the Report.

-Zijin Mining Group Co Ltd 38
- Volcan Compañia Minera SA 50
- WTK Holdings Bhr 70
- AngloGold Ashanti Ltd 94
- Ta Ann Holdings Bhr 126
- Schweitzer-Mauduit Int and Huabao Intl Holdings Ltd 148
- Eni SpA 150
- Royal Dutch Shell Plc1 74
- Zuari Agro Chemicals Ltd 206
- Africa Israel Investments Ltd 218
- Alliant Techsystems Inc 224
- Lockheed Martin Corp 228
- Sesa Sterlite 232
- Daewoo International Corp, Oil and Natural Gas Corp Ltd, GAIL India Ltd, Korea Gas Corporation and POSCO 236
The second  is a brief summary of anticipated work for 2014

4. The Council’s work in 2014
In the past three years, the Council on Ethics has invested considerable effort in sectoral studies focused on environmental issues. Although the reviews concerning particularly polluting oil activities in the Niger Delta and the deposit of mining waste have now been completed, other sectoral studies will continue into 2014. New recommendations to exclude are particularly likely in connection with environmentally damaging fishing and the conversion of forest into plantations. Sectoral studies make it easier for the Council to make decisions in new cases, as the cases that have already been evaluated provide precedents when dealing with new cases.
In its initial sectoral studies, the Council on Ethics adopted a relatively wide approach, seeking to identify all companies in the portfolio engaged in the same type of activity. In the remaining sectoral studies (smelting plants, coal-fired power plants and certain types of chemical manufacturing), using this approach can be more difficult since some of the sectors contain very many companies engaged in widely varying activities and using different technologies. It may be just as effective to examine a smaller number of companies that appear to cause very severe environmental damage as to cast the net widely and gradually narrow down the search. In 2014, the Council will give greater priority to its work on environmental damage caused by various forms of industrial activity.
The Council on Ethics will continue to monitor companies operating in areas where there is a particular risk that companies may contribute to conflict or participate in human rights violations. Based on activities already known to the Council, it will be natural to pay particular attention to the production of minerals in Western Sahara. The Council will also continue to focus on labour rights, including in the textiles industry.
In its anticorruption work, the Council on Ethics will continue to look systematically at companies that are active in countries and sectors where the risk of corruption is particularly high according to international rankings. The Council has initiated a study of companies in the oil and gas sector that are operating in countries presenting a particularly high risk of corruption.
According to its exclusion guidelines, the Fund may not invest in companies that sell military materiel to certain countries. This follows from the “government bond exception” in the GPFG’s management mandate. Norges Bank ensures that no investment is made in government bonds, while the Council on Ethics is required to identify companies that may be selling weapons to the states in question. As of January 2014, the exception covers Syria, Iran and North Korea, while Myanmar is no longer included. The Council is currently reviewing the portfolio with the aim of identifying companies that are selling weapons or military materiel to these countries.


The third touches on the Ethics Council's defense of its own work and place within the governance structures of the Norwegian SWF.

That defense was woven into the Ethics Council response to the Strategy Council’s report on the responsible management of the Government Pension Fund Global, discussed earlier here (Part 20 Norway SWFs (Pension Fund Global, Pension Fund Norway and Bond Fund)--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets, Law at the End of the Day, March 9, 2014). 

What is most interesting is the way in which the Ethics Council quite rightly saw in the report an effort to reduce the political effectiveness of the GPFG as an actor, through private markets, in the development of corporate governance and social responsibility standards. More importantly, the Ethics Council correctly suggested that the turn toward less transparency and a greater masking of the political work of SWFs itself might be considered bad practice.  Most importantly, the Ethics Council response nicely illustrates the tension within SWFs of the political and policy objectives of sovereign activity and its financial goals, especially in states in which the norms and standards of international governance are, as a matter of state policy, an important objective of state activity, including investment activity.The Ethics Council response reminds us that the perhaps irreconcilable tension between the still fairly closed off (to each other) fields of international law and policy (on the one hand) and corporate law and finance policy (on the other) remain mutually suspicious and incompatible except among a very few of us willing to see the realities emerging out from under these ossified field boundaries. (Backer, Larry Catá, Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law. Columbia Human Rights Law Review, Vol. 37(2):287-389 (2006)). This rift is especially noticeable in the discussion about transparency in Section 3 of the Ethics Council's response.
 The Ethics Council response reflects, in some measure, the suggestions I had put forward about the nature and necessary political work of the GPFG as an instrument of the sovereign will of the Norwegian State. (Backer, Larry Catá, Sovereign Investing and Markets-Based Transnational Rule of Law Building: The Norwegian Sovereign Wealth Fund in Global Markets (December 1, 2013). American University International Law Review, Vol. 29 p. 1-122 (2013)). And in the process, I also suggested the way in which that political work was an important contributor to the shaping of transnational standards within which globally engaged business could operate with some confidence, not as a hierarchically ordered space (Backer, Larry Catá, Collisions of Societal Constitutions: Hierarchical Power Arrangements and Horizontal Effects in the Management of Human Rights Regimes Indiana Journal of Global Legal Studies, Vol. 20(2):805-879 (2013)), but rather as a polycentric space within which emerging consensus from state and non-state governance organs could be coordinated through their interactions (structural coupling for systems theory fans) (Backer, Larry Catá, Governance Polycentrism -- Hierarchy and Order Without Government in Business and Human Rights Regulation (January 1, 2014). Coalition for Peace and Ethics Working Paper No. 1/1 (2014)). 

For all that, the Ethics Council response suggests the need for greater coordination between the Ethics Council and NBIM--the two sides of the Norwegian sovereign investing house.  It appears that the Finance Ministry has sought to play these off against each other for a number of years.  It is time for coordination within Norway, if the GPFG is to preserve its role as a leading investment vehicle in private markets and as a leader in private polycentric efforts to coordinate global approaches to corporate conduit and regulation.  But those reforms will require political will (and a greater fidelity to the state rather than to individual ideologies and programs) than has been much in evidence from these papers.  
And that is regrettable indeed. Though I have been no great fan of some of the decisions of the Ethics Council--it has sometimes been too timid and sometimes far less timid than it ought to be, the former for example in its narrow legalisms about exclusions grounded in weapons and tobacco and human rights violations in Africa by developing state multinationals and their sovereigns, the later for example in its enthusiasm for projecting itself onto the Palestine-Israel wars)-- the decisions themselves provide a contestable road map for engagement about the social, cultural and human rights dimensions of responsible investing that has found a voice in few other places. But see the discussion Report at Part  4 (The Council's Work in 2014). Moreover, the NBIM has been altogether too  autonomous and undisciplined in its active shareholding.  Coordination among these two halves of the Norse sovereign investing house would do both some good for the overall objectives of the GPFG. In place of the hierarchical unified process advocated by finance interests, a coordinated policy with substantial and deep consultation might peroduce altogether better though more institutionally complex results.
The Comments from the Ethics Council follow Report pp. 270-279:
The Ministry of Finance
21 January 2014
Comments from the Council on Ethics in connection with the Strategy Council’s report on the responsible management of the Government Pension Fund Global
We refer to the Ministry of Finance’s hearing memorandum of 29 November 2013 in connection with the Strategy Council’s report on the responsible management of the Government Pension Fund Global.

In these comments, the Council on Ethics will primarily cover questions concerning the handling of individual companies in the Fund through the exercise of ownership and conduct-based exclusion.

By way of introduction, we would point out two overarching issues which are also treated in further detail in the main text:
■The Strategy Council proposes that the reasons for excluding companies from the Fund should no longer be made public, while more information should be provided on principles and strategies. The Council on Ethics is of the opinion that public recommendations have been one of the most important elements of the present system and disagrees with the proposal. The Council cannot see that the proposal would result in greater transparency about how ethical considerations are safeguarded in the management of the Fund.
■The Strategy Council takes the view that the Fund’s overarching financial objective should guide its ownership activities. The Council on Ethics would point out that, given such a mandate, NBIM would probably conduct little dialogue with individual companies on ethical challenges. The Council on Ethics would question whether this is desirable.
The Council on Ethics’ comments cover the following points.

Norway’s work with responsible investments has received international recognition since it began. The Council on Ethics identifies strengths and challenges present in the current model in section 1. The Ministry of Finance has to decide whether NBIM should influence individual companies on ethical – and not just financial – grounds. It is entirely possible, and desirable, for the Fund to have multiple objectives. This is detailed further in section 2.

Irrespective of the organisational model, the exclusion of companies for ethical reasons should be factually justified and made publicly available because this is important for the Fund’s legitimacy in the eyes of the public and because it supports the development of standards in both the finance industry and the business sector in general; see section 3.

Ethical considerations in the management of the Fund must be independent of financial considerations. The Council on Ethics therefore recommends the establishment of an independent council on ethics to make recommendations to the Executive Board of Norges Bank; see section 4.

The Strategy Council has only marginally commented on how the Fund should organise its work on responsible investment. The Council on Ethics proposes an alternative organisational model in section 5. It is important that exclusions are based on solid, expert assessments. Irrespective of the organisational model, therefore, it must be ensured that the expertise that is currently found in the Council on Ethics and its secretariat is retained and strengthened.

1. Experience gained through the work of the Council on Ethics

The exclusion of companies from the Fund has reduced the risk of the Fund contributing to gross breaches of standards, which was the original purpose of the system. The Council on Ethics’ recommendations are publicly available and are therefore thoroughly reasoned. This has strengthened the legitimacy of the Fund and helped to promote the development of international standards.

The Council on Ethics has found that financial institutions, interest groups and other parties have faith in the information contained in the Council’s recommendations and trust that the Council considers relevant cases. Several Norwegian and foreign investors follow the recommendations of the Council on Ethics, either by excluding the same companies or by using the recommendations as the starting point of their own ownership processes. Further, interest groups use the recommendations in their efforts to influence companies. The recommendations are also discussed in literature on – and research into – corporate social responsibility.

In the view of the Council on Ethics, the influence that exclusions and recommendations have results from a combination of the Fund’s size, the fact that the threshold for exclusion is high and governed by a relatively small number of clear criteria, the fact that the recommendations are thorough and well-documented, and the fact that recommendations are made public.

In the course of its work, the Council on Ethics has identified the following main challenges:


It often takes a long time for a final decision to be made on a recommendation sent to the Ministry of Finance by the Council on Ethics, particularly in cases concerning exclusion based on conduct. The Council on Ethics does not carry on a dialogue with companies after a recommendation is made. As a consequence, recommendations are not updated after publication, companies remain in the Fund for too long, and opportunities to exercise influence are not utilised while the recommendation is being considered by the Ministry of Finance.

The separation between exclusion and the exercise of ownership

The guidelines are construed in such a way that the Council on Ethics is tasked with considering the worst breaches of ethical standards, while NBIM shall exercise ownership where the Fund’s long-term return and ethical considerations pull in the same direction. There is a grey zone of cases that do not fully qualify for exclusion, but where NBIM also fails to intervene out of consideration for the Fund’s long-term return.

Although the Council on Ethics and NBIM inform each other when they are engaged in dialogue with a company, there is no coordination on the use of instruments such that an agreement may be reached on how a given company should be dealt with. The Council on Ethics may only recommend exclusion or observation to the Ministry of Finance. The Council on Ethics is of the opinion that there are matters that should be addressed through the exercise of ownership which, given the current situation, are neglected because there is no effective cooperation between the Council on Ethics and NBIM.

The allocation of responsibility between the Council on Ethics and NBIM is less clear now than when the system was established. One example of this is that NBIM this past year has independently sold its holdings in certain companies based on considerations of sustainability. In its annual report for 2012, NBIM stated that the Fund had sold its holdings in 23 companies because they “did not produce palm oil in a sustainable manner”.1 There was no dialogue between NBIM and the Council on Ethics in connection with the analysis and sales. Seen from the outside, it would appear that NBIM sold its holdings in companies that failed to meet certain overarching requirements without conducting a detailed assessment of each individual company. In the Council on Ethics’ view, this is an efficient but imprecise way of removing undesirable investments from the Fund.

2. Objectives for responsible investment

The Council on Ethics is of the opinion that the Ministry of Finance should set objectives for the exclusion of companies, for the exercise of ownership on ethical grounds and for the safeguarding of climate considerations.
The Strategy Council has included objectives for the Fund in its first main recommendation (pillar one). The Strategy Council’s proposal involves the retention of current objectives, namely to maximise the return on the Fund given a moderate level of risk and to avoid certain investments on ethical grounds. This raises a particular issue with regard to the exercise of ownership. Under the current economic mandate, NBIM has dealt with a limited number of individual companies through an ethics-centric dialogue. In the view of the Council on Ethics, retaining the same objectives will be counterproductive if the Ministry of Finance wants more individual companies to be dealt with through the exercise of ownership
2.1 more on the fund’s Objectives
The objective for the work of the Council on Ethics under the current rules is clear: to recommend to the Ministry of Finance the exclusion of companies whose activities contravene the criteria set by the Ministry.

The Council on Ethics takes the view that the primary purpose of exclusion should continue to be to prevent the Fund from contributing to particularly gross breaches of ethical standards. The basis for exclusion from the Fund should continue to be the grossest breaches of standards, and the mandate must be clear in this regard. This has proven operationally feasible throughout the Council’s existence. The exclusion criteria should be retained, not only because they express an overlapping consensus in Norway, but also because the criteria reflect a minimum standard that is widely agreed on through internaiional agreements and norms.
The objective for NBIM’s exercise of ownership is less clear. Initially, NBIM was only supposed to take financial considerations into account when selecting its investment strategy, although the guidelines assumed that a diversified, long-term fund would profit if the companies in the Fund respected fundamental ethical standards. On this basis, NBIM was ordered to take ethical considerations into account in its exercise of ownership, based on, for example, the OECD Guidelines for Multinational Enterprises and the Global Compact.2
As a general assumption, this was an uncertain relationship for which there was no scientific evidence. As the Council on Ethics understands it, NIBM did little on breaches of ethical standards by individual companies and more on general expectations that were communicated to groups of companies. An imbalance arose between what the Fund actually dealt with and what was expected of it.
In the Report to the Storting (the Norwegian parliament) describing the audit of the guidelines conducted in 2009, greater emphasis was given to influencing companies to change and to achieving synergies between exclusion and the exercise of ownership. Even though the main aim of NBIM’s management remained financial, the Ministry was also of the view that the Fund should ‘contribute to positive changes in sustainability issues and with respect to companies’ conduct in matters concerning corporate governance, society and the environment.’3 Like the Strategy Council in its report, the Ministry described a progression of instruments where exclusion was to be the last resort when efforts to achieve necessary changes through the exercise of ownership were unsuccessful.
The Council on Ethics’ internal processes, whereby the Council first obtains information, then contacts the company, obtains further information and, finally, asks the company to comment on a draft of the recommendation, is itself a progression of instruments like the one advocated by the Ministry. On the other hand, there have been no systematic synergies between NBIM’s exercise of ownership and the Council on Ethics’ recommendations. NBIM and the Council on Ethics rarely work with the same issues. This is not really surprising, given that the objectives for the exercise of ownership and exclusion are different. The Council on Ethics is required to conduct ethical evaluations, whereas NBIM primarily conducts financial ones.

The Ministry of Finance has to decide whether the Fund should deal with company-specific problems that would not generally result in exclusion. One such problem may, for example, be a planned activity that could result in exclusion if it is implemented, or conditions in the supply chain that are perhaps too far removed from the company to justify exclusion but where the company does not meet expectations set out in international guidelines. This includes, for example, customers of the textile factories in Bangladesh that collapsed, or the company Posco, which has encountered resistance from the local population while planning a steel mill in India. Other funds that follow responsible investment practice often raise such issues with companies, but it is difficult to see how this can follow from a financial mandate. The Council on Ethics is therefore of the opinion that, to ensure consistency in the use of exclusion on ethical grounds and other exercise of ownership, the Ministry of Finance must explicitly require NBIM to deal with such issues through dialogue with individual companies.
Setting a clear, distinct objective for the Fund regarding the exercise of ownership on ethical grounds will also ensure that management is undertaken in accordance with increasingly stringent international requirements regarding responsible management. A number of international instruments target public bodies, companies and investors, such as the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprise, the PRI and the Global Compact. The UN guiding principles and the OECD guidelines may be particularly relevant to the Fund as they also target public bodies in their official capacity, not simply in their role as a participant in business
activity on a par with other stakeholders. The development of standards that has taken place since the ethical guidelines were introduced in 2004 has intensified the requirements applicable to authorities, companies and investors, and the objective of the Fund should reflect this development.

2.2 Exclusion as the Conclusion of an Ownership Process

In its report, the Strategy Council describes a step-by-step process in which exclusion is to be the last resort when other instruments have been tried. At year end 2012, the GPFG was invested in almost 7,500 companies. The 200 largest investments accounted for half of the Fund’s value. The value of the four largest companies in the Fund was twice that of the 4,000 smallest investments. In 2,170 companies, the investment totalled less than NOK 10 million. The cost of conducting a thorough study and implementing an ownership process cannot be justified in the case of small investments if the aim is to safeguard the Fund’s financial interests. To ensure that companies in the Fund maintain a minimum ethical standard, it will probably be more effective from a financial point of view to sell small investments carrying a high ethical risk, rather than expending resources on a study or dialogue.

Given NBIM’s strategic changes, this development will occur irrespective of the organisational changes proposed by the Strategy Council. NBIM sold its holdings in five of the nine companies recommended for exclusion made public during the last three years, ahead of the Ministry of Finance’s decision to exclude. NBIM was aware of the Council on Ethics’ assessment. Given the proposed main objective, dialogue at the individual company level will probably only be conducted with a few large companies facing ethical challenges that would otherwise necessitate a sale of the investments in the companies

2.3 Objectives and strategies should be adopted for climate change

The Council on Ethics is also of the opinion that the issue of climate change should be addressed in the ongoing process concerning the Strategy Council’s report. 
Norway considers the threat of climate change to be one of the greatest challenges the world is facing, and wishes to push forward efforts to counteract climate change. As long as international agreements provide that individual states shall determine how their emissions are to be distributed, it will be difficult to assign responsibility for climate damage to specific companies in the portfolio. Thus far, the Council on Ethics has not recommended the exclusion of any company from the Fund based solely on climate damage and, moreover, has made little use of this ground as a supplementary criterion.
It appears reasonable to assume that climate damage will have financial consequences for the Fund, which is why the Ministry of Finance has also taken steps to identify climate-related consequences and to reorient the investments in a climate-friendly direction. Climate change has also been a priority area for NBIM in its exercise of ownership.
In the Council on Ethics’ view, the Ministry of Finance should continue to express clearly that the Fund is required to take the threat of climate change into account in its investments. In order for this to have the necessary weight, the Ministry must describe an objective and strategy for the work done in this area.

3. Transparency about exclusion decisions
The second of the Strategy Council’s main recommendations, pillar two, concerns transparency and verifiability. The Strategy Council recommends that the reasons for excluding companies from the Fund should no longer be published. Only the names of companies excluded pursuant to a decision of the Executive Board should be published. The reasons given by the Strategy Council for this proposal are that a company dialogue has the greatest chances of bearing fruit if it takes place behind closed doors, and that the Fund’s operational risk – including the risk of litigation – will be reduced. The Strategy Council assumes that publication of the Fund’s guidelines and strategies will generate sufficient confidence that the Fund is meeting its ethical obligations.
The Council on Ethics disagrees with this. The Council on Ethics is of the opinion that the proposal will result in less information being published about the Fund, and that the Fund will thereby lose some of the influence and international recognition that its work on ethical issues currently enjoys. The Council on Ethics would also point out that no litigation has ever been pursued against the Ministry based on one of its recommendations.
The Council on Ethics’ investigative process functions as a relatively closed ownership process potentially resulting in a publicly-reasoned exclusion, and there is often a relatively extensive dialogue between the Council and the company being assessed. In many such dialogues, companies have stated that they wish to avoid being excluded – not least due to reputational considerations. In other words, it is publication that the companies appear to be most worried about, not the actual sale of the Fund’s holding. The Strategy Council appears to assume that the chances of succeeding in a dialogue increase if nothing is published, either during or after the process. This is not consistent with the experience of the Council on Ethics. The experiences from boycotts of companies with operations in South Africa and Sudan to which the Strategy Council refers are only a narrow sample of examples, and appear largely inapplicable to the Council on Ethics’ methodology in cases concerning exclusion.
Public information on specific companies encourages other stakeholders to tackle the same issues, meaning that influence is exerted by multiple stakeholders simultaneously. If influencing companies in a positive direction is to be an independent objective, this is a factor to which weight should be given.
The publication of the Council on Ethics’ recommendations communicates to other companies how the Fund views different types of activity. The fact that several companies have contacted the Council on Ethics to discuss planned activities similar to activities previously considered by the Council on Ethics indicates that the recommendations are well-known, and that they can affect the conduct of companies. A general strategy or general CSR report by the Fund would not have the same effect.
Further, consideration for the Fund’s legitimacy suggests that reports should show how principles and strategies are converted into concrete action affecting individual companies and problem areas in the portfolio. This means publishing the names of companies with which NBIM engages in dialogue, the problems raised in dialogues, and the reasons for exclusion from the Fund.
By way of example, it can be mentioned that in October of last year, the Ministry of Finance published the Council on Ethics’ recommendations relating to the companies Royal Dutch Shell PLC and Eni Sp.A. Up until that date, no public information was available on how the Fund had dealt with the serious oil pollution in the Niger Delta. If the recommendations had not been published, the public would have had the impression that the Fund was not working on the issue. The same can be said about, for example, the construction of settlements on the West Bank, the management of mining waste, the exploitation of natural resources in Western Sahara and tropical deforestation.
Without public reports on how the Fund deals with companies, it will also be difficult for political authorities to develop guidelines, as it will be impossible to see how the guidelines result in concrete action.
The thorough, public explanations of the Fund’s exclusions set standards. Internationally, there are various guidelines and expectations of companies but few concrete examples of how these guidelines can be applied. The public recommendations contribute to the international debate on what can be expected of companies and funds. The Strategy Council’s report envisages removing this distinctive characteristic of the Norwegian model, which has functioned well and has received national and international recognition.
4. Independence in ethical decisions

When the Council on Ethics was established, it was emphasised that the Council should be independent of both financial considerations and the political authorities. The owner of the Fund had to make decisions on exclusion because they could have an effect on the Fund’s return. The decisions were to be based on advice from an independent body to ensure that there was no mixing of political, financial and ethical considerations.
The Strategy Council proposes moving exclusion decisions to the Executive Board of Norges Bank. The Council on Ethics agrees that these decisions no longer need to be made by the Ministry. However, in the Council’s view, it is important for decisions on exclusion to be made independently of financial considerations. This does not appear to be sufficiently safeguarded in the proposal to move decisions on exclusion to Norges Bank’s Executive Board. In particular, the sale of significant shareholdings in large companies may involve a conflict between ethical considerations and financial considerations. Independence is also important for the credibility and legitimacy of the Fund’s ethical
The independence of the Fund can be ensured by giving the Ministry of Finance continued responsibility for the appointment of a council on ethics that has its own secretariat and that advises the Executive Board on cases concerning withdrawal. If such a council were to be appointed by – and receive its mandate and budget directly from – the Ministry of Finance, it would be clear that the council’s only task is to safeguard ethical considerations without taking other aspects of the Fund’s management into account. The balance between financial considerations and ethical considerations, and the assessment of appropriate instruments, will be the Bank’s responsibility. The Council on Ethics’ proposal for the organisation of this work is discussed further in section 5.
5. The exclusion system in a new organisational model
The third main recommendation made by the Strategy Council (pillar three), concerns the integration of work on responsible investment issues. The Strategy Council proposes that exclusion decisions should be transferred to the Executive Board of Norges Bank. The report states that Norges Bank should receive sufficient expertise, and that Norges Bank’s board could appoint a committee to give advice on withdrawal issues. The knowledge and experience that the secretariat of the Council on Ethics has developed should be integrated into NBIM. The report contains no other discussion of how the work on responsible investment issues should be organised.
The Council on Ethics is of the opinion that the Ministry of Finance must give more thorough consideration to the organisation of the work on responsible investment. This is not sufficiently discussed in the Strategy Council’s report. Nevertheless, the Council on Ethics would like to make some comments on the outlined solution.
If Norges Bank is given a mandate to exercise ownership on ethical grounds, it may be appropriate to transfer the Council’s secretariat to the Bank. The organisational modelst ensure that the Bank has the expertise and incentives to implement the mandate, and a control system must be established to ensure that the mandate is implemented as intended. Such control can be exercised by requiring a council on ethics, appointed by the Ministry of Finance, to make annual public reports to the Ministry on its activities. The council should also be able to refer to NBIM cases not suited for exclusion but well suited for the exercise of ownership. Dialogues with companies require detailed knowledge, and those participating in a company dialogue must have expertise on the issues being discussed. In addition to having an investigative function, the secretariat should also participate in dialogues with companies.

However, if the Ministry does not believe that the Fund should raise ethical issues with individual companies unless required by a financial objective for the work on responsible investment issues, it will not be appropriate to transfer the secretariat to the Bank. In that case, the Council on Ethics can continue as at present, albeit making its recommendations to Norges Bank instead of to the Ministry of Finance.

The Council on Ethics otherwise agrees with the Strategy Council that, irrespective of the model used, these activities require an independent budget.

NBIM’s implementation of its ethical mandate will be the responsibility of the Executive Board, just as in the case of other major management decisions. Accordingly, the Executive Board also requires expertise on the ethical considerations that the Fund is meant to safeguard.

6. Conclusion
In recent years, international guidelines targeting companies have rapidly become more concrete and give practical guidance on, for example, how consultations should be run, how individuals who have to relocate due to expropriation should be compensated, and how companies should survey the consequences of their activities. A common feature of such guidelines is that they require transparency.
International guidelines aimed at investors, such as the Principles for Responsible Investment (PRI), are more general and contain less specific guidance on adequate courses of action. How managers deal with specific issues in practice is difficult to identify, despite a wealth of general objectives, principles and strategies. There is little reporting at company level.
The Strategy Council’s recommendation would bring the GPFG into line with other similar funds. The Fund is to be more transparent about strategies and principles than at present, but is not to publish information on specific companies. The exercise of owner-ship is to be based on an overarching financial objective.
Rather than copying this management model, the Fund should be clear about how ethical considerations are to supplement or take priority over financial considerations in individual situations. Accordingly, the Fund should have clear guidelines in place that state how the Fund is to deal with ethical issues at the individual company level, and be transparent about both what problems the Fund has tackled and how individual companies have been dealt with. In this way the Fund can contribute to “best practice” by being involved in determining how general principles can be translated into action.

Yours sincerely
Ola Mestad
Chair of the Council on Ethics
1 Government Pension Fund Global Annual Report 2012, page 35.
2 Revised National Budget 2004, Box 4.2.
3 Report to the Storting No. 20 (2008–2009), page 90.

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