Sunday, March 09, 2014

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

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them. This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal. In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF. Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This post considers the Norwegian Sovereign Wealth Funds (Pension Fund Global and Pension Fund Norway).  Also considered briefly is the Government Bond Fund

The Norwegian sovereign wealth funds are among the most interesting and complex. They are important not only for their ambitions in regulatory and financial markets, but because they are the largest such entities of their kind.  They simultaneously point to the emerging polycentricity in governance in which regulation is sourced both from outside and inside markets by states acting as both economic regulators and market participants.  Norway has been a pioneer in a new form of extraterritorial investment strategies, one grounded simultaneously in economic welfare maximization (a pension fund and wealth creation driven set of objectives) and in projecting their financial power for political ends (a state policy driven set of objectives). This makes the Norwegian Funds somewhat singular in its blending of political and economic objectives, one which has not been emulated by many funds (but see the Australian funds and the U.S. state pension funds, to some extent).

Like an increasing number of states, Norway has created multiple funds that are organized around functionally differentiated objectives.  All are operated under the authority of the Ministry of Finance, which retains overall authority for the operation and decisions made respecting these SWFs. Though the day to day activities are shielded from political interference, and thus there is very little space for structural corruption, the Ministry of Finance does set overall direction and has authority to determine exclusions and active ownership strategies that affect individuals companies. This is both a political and legal policy exercise.

The most well known of the two is the Government Pension Fund Global (GPFG). 
The GPFG was established in 1990 as a fiscal policy tool to underpin long-term considerations in the phasing in of petroleum revenues into the Norwegian economy. Renaming the Fund the Government Pension Fund Global in 2006 was part of a broader pension reform. Long-term, sound management of the Fund helps to ensure that both present and future generations can benefit from Norway’s petroleum wealth.

The Government Pension Fund is an instrument for general saving and does not have clearly defined future liabilities. Fund capital is not earmarket for pensions or other specific purposes. The investment objective is to maximise the purchasing power of the fund capital, given a moderate level of risk. The adoption of responsible investment practices supports this objective. (GPFG)
The GPFG is a large and complex international actor in financial markets worldwide.   I disucuss these at length here:
1. Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009.
2. Backer, Larry Catá, Sovereign Investing and Markets-Based Transnational Rule of Law Building: The Norwegian Sovereign Wealth Fund in Global Markets (December 1, 2013). Coalition for Peace & Ethics Working Paper No. 11/11; American University International Law Review, Vol. 29:1-122 (2013).
3. Backer, Larry Catá Backer, Remarks: The Norwegian Sovereign Wealth Fund: Between Private and Public, 40 Georgetown Journal of International Law 1271-1280 (2009).
Additional information ia available through the GPFG web site, one of the most transparent among SWFs and a model for others interested in transparency among these entities. (See Ministry of Finance, The Management of the Government Pension Fund in 2012).
The other is the Government Pension Fund Norway (GPFN).  The 2012 Annual Report to Parliament is available HERE; pdf HERE.
 The capital base of the Government Pension Fund Norway (GPFN) originates primarily from surpluses in the national insurance scheme between the introduction of the national insurance scheme in 1967 and the late 1970s. The organisation of the GPFN was changed in 2007 by highlighting the distinction between the assets making up the GPFN and Folketrygdfondet as the manager of these assets. The assets were deposited with Folketrygdfondet, which manages the assets in its own name and in accordance with a mandate issued by the Ministry. The return on the assets in the GPFN is not transferred to the Treasury, but is added to the fund capital on an ongoing basis. (GPFN)
The GPFN can be understood as a species of development fund as well as a futures fund, with a focus on Norway and Scandinavia.But rather than focusing on direct investment, like those of developing country SWFs, the GPFN more in line with its Asian counterparts, invests strategically in local business.
The GPFN is a major owner and lender in the Norwegian capital market. The Norwegian equity portfolio represents in excess of 10 percent of the market value of the main index of the Oslo Stock Exchange (adjusted for ownership stakes that are not freely tradable; so-called free float), thus making the Fund one of the principal investors on that exchange. The Norwegian portion of the GPFN fixed income portfolio represents about 5 percent of the value of the benchmark index for the Norwegian bond market. The large long-term holdings of the GPFN in the Norwegian stock and bond markets contribute to market stability. The rebalancing rules are an important part of this. These imply that the Fund acquires additional holdings in the asset class whose value has declined, in order to maintain the distribution between stocks and bonds stipulated by the Ministry. Hence, the Fund will purchase stocks during periods when others are selling, and thus contribute liquidity to the market. (Report to Parliament Meld. St. 27 (2012–2013); ¶ 3)
Operating through a special state corporation, the Folketrygdfondet, the GPFN is subject to investment restraints that are consonant with its development mission.
The portfolio's share of equity instruments shall constitute 50-70 percent, whilst the share of fixed income instruments shall constitute 30-50 percent of the portfolio. Folketrygdfondet may own up to 15 percent of the share capital or the basic capital in any single company in Norway. In Denmark, Finland and Sweden Folketrygdfondet may own shares representing up to 5 percent of total equity capital and basic capital in any single company. (Introduction to the GPFN and GBF).
The Folketrygdfondet "is a company by special law which manages the Government Pension Fund Norway and the Government Bond Fund according to mandates given by the Ministry of Finance. The capital is deposited as contributions in Folketrygdfondet and is invested in Folketrygdfondet's name." (Folketrygdfondet).
The board of Folketrygdfondet is responsible for the management of the fund. The board consists of nine members with personal deputy board members, all appointed by the The Norwegian Ministry of Finance for four years at a time. When handling administrative issues, the board is supplemented by one additional board member and one observer elected by the employees.

Folketrygdfondet carries out the current management of the capital it is entrusted by the Norwegian Ministry of Finance. For the time being Folketrygdfondet has 45 employees. We emphasize occupational skill, personal integrity, co-operation and a good and educational working environment. (Folketrygdfondet, About).
The Government Bond fund might also be considered as part of Norway's sovereign investing program. It is connected most directly to the GPFN
The Government Bond Fund was established in March 2009 to contribute to increased liquidity and capital inflow to the Norwegian corporate bond market. The Government Bond Fund is placed as a capital contribution with Folketrygdfondet.

The Government Bond Fund's capital can be placed in account loans, deposits and fixed income instruments where the issuer is resident in Norway. It cannot be invested in loans issued by the State or local governments. Up to 10 percent of the capital can be invested in accounts receivable, which by appointment shall have priority after the remaining claimants (subordinated loan). Opposite party for deposits, security loans and derivate trades may be resident in Norway as well as in USA, Great Britain, Denmark, Finland, France, Italy, the Netherlands, Spain, Sweden and Germany. The Government Bond Fund's capital shall be invested to commercial conditions. To ensure this, there is inter alia a requirement that investments shall be done together with other investors.

To limit risk in the portfolio, certain requirements on fund investments are in place. This includes quantitative restrictions on sector composition, together with a minimum corporate credit rating at the time of investment of B- or better according to Standard & Poor’s classification.

No more than 5 percent of the Government Bond Fund maybe invested in bonds issued by any single issuer. A benchmark portfolio for The Government Bond Fund set by the Ministry will not come into force until 20 percent of the capital is invested. At yearend 2012 the invested portion was about 15 percent. (Introduction to the GPFN and GBF).
The GPFN and GBF, like the more well known GPFG, is subject to the political and regulatory constraints of responsible investing. "It is important for us to take an ownership responsibility in companies we are invested in, both to ensure financial values and to contribute to a well functioning financial market. We are committed to being open about how we exercise our ownership." (Folketrygdfondet, Responsible Investment).  The Norwegian State has prepared an explanation of its policy of responsible investment that is meant to circulate to the masses.  It is written in English to ensure wide distribution.  (Norwegian Ministry of Finance, Government Pension Fund Global, Responsible Investment). Other commentators have suggested its uniqueness. "Other large sovereign wealth funds or major public pension funds do not have such an approach to responsible investing. Yet, even within our sample of funds, it is clear that responsible investment has no singular motivation and that there is no single strategy or set of approaches that is followed universally." (Elroy Dimson, Idar Kreutzer, Rob Lake, Hege Sjo, and Laura Starks, Strategy Council 2013, Responsible Investment and the Norwegian Government Pension Fund Global, Main Report (November 2013) ¶ 2.2).  The authors of this study noted similarities and differences among SWFs engaged in some form of responsible investment--all were tied to efforts aimed at domesticating international law and norms, and then projecting them outward into global priovate markets.
Ownership strategies can be pursued through a variety of platforms. This includes portfolio monitoring, voting, engagement, collaboration with other owners, dialogue with regulators, shareholder proposals, transparency, observation lists, and exclusions.
Portfolio monitoring. Many funds say they regularly screen their entire portfolio to identify companies that are potentially in breach of the UN Global Compact or the funds’ own guidelines. . . . .

Voting. Funds are increasingly exercising ownership rights, even with marginal stakes in companies. Some funds assign proxy voting services to cover the holdings in large portfolios. The challenge for most funds is to ensure that their own voting policies – which should be a product of the overall responsible investment principles – are incorporated into the voting decisions. . . .

Engagement. Most funds we reviewed say that they engage with companies, but the purposes of the engagements vary significantly as do the forms of the engagement and how success is measured and recorded. . . . .

Collaboration. Impacting company behaviour requires resources, a clear strategy, patience, and persistence. Funds say that this is a challenge. . . .

Dialogue with regulators, policy-makers and standard-setters. The funds we reviewed reported that they think it is important to take part in policy-making and standard-setting processes that affect the market as a whole. They seek to be active in influencing market-wide regulation, standards and ‘soft codes’ . . . , ESG disclosure standards  and international climate change policy. . . . 

Transparency. During our reviews of other funds we also found that they believe transparency is important for the maintenance of their stakeholders’ trust in their organisation and their investments.

Exclusions. Exclusions and “blacklists” are used to varying extents by the funds we interviewed. Some of the funds do not exclude any companies at all, or have very limited approaches to exclusion. (Ibid, ¶ 2.4).
Interesting, recent consultant reports gave sounded a note of caution, though not necessarily one that would force a constraint on the Norwegian State's selective use of responsible investment for political ends. 
The Fund must also be seen as a legitimate and responsible investor in non-Norwegian markets in which it does, or might, operate. If the Fund were to be regarded as an agitator or as an opportunist, or to be pursuing unclear agendas, this could undermine its capacity to invest on the best terms globally. For direct investments, such as real estate (currently) or potentially for other asset classes in the future, it is especially valuable to be seen as a desirable co-investor. Articulating and following accepted principles is one way of strengthening the perception of the Fund as a professional and predictable asset owner. (Ibid, ¶ 5.4).
It is in this context that the Report suggests that responsible investment in its current guise within the investing strategies of the GPFG poses challenges.  The challenges are exacerbated, they suggest, by the overlapping and perhaps inconsistent operational premises of the Ethics Council and the investment managers.  (Ibid, ¶ 5.4). Indeed, even as the Ethics Council has been strengthening its operational structures, the investment managers, the NBIM, have, since 2013, created a Corporate Governance Advisory Board to enhance its efforts at active shareholding.   
Norway's $760 billion sovereign wealth fund, the world's largest, has appointed a corporate governance advisory board in an attempt to be a more active investor, the Financial Times reported on Thursday.

The fund invests Norway's revenues from oil and gas production for future generations. It is one of the world's largest investors with holdings in some 7,500 companies.

The FT reported the fund is appointing Peter Montagnon, formerly of the Association of British Insurers; John Kay, Financial Times columnist and author; and Tony Watson former chief of Hermes Investment Management and a director at Vodafone , Lloyds Banking Group and Hammerson. (

"It will be a sounding board for both long-term ownership matters as well as specific issues," the oil fund's chief executive Yngve Slyngstad told the FT. (Norway oil fund appoints corporate governance advisory board -FT, Reuters, Aug. 8, 2013).

See also, Norwegian Fund to Raise Governance Bar, NACD Directorship, Sept. 3, 2013 ("The world’s biggest sovereign wealth fund has established a three-member corporate governance advisory board that will give it a louder voice in the selection of board members of investee companies. This move will allow the Norwegian fund to advise on ownership issues when firms go through major strategy changes, takeovers, or capital restructuring."). Perhaps with this in mind, among other things, the Report recommended a consolidation of responsible investment processes. (Ibid, ¶ 8 (Pillar Three Recommendations). Though these rules are not directly applicable to the domestic fund, they do bleed over enough that one ought to consider them as applicable across the operational differences of the three Funds.

What makes this interesting is not so much the recommendations of the Report but what the Report confirms about the Norwegian SWFs: a highly integrated set of governmental projections of state power into private markets with the object of both maximizing the economic performance of the SWFs and of levering that economic power into a political political project of domesticating international law and norms and projecting them through private markets. This more than anything else sets these SWFs apart. 

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