Change Comes to the Norwegian Sovereign Wealth Fund Global

(Pix (c) Larry Catá Backer 2015)

I have been writing about the Norwegian Sovereign Wealth Fund (the Government Pension Fund Global) (See here and here and here). I have been intrigued by the Norwegian state's efforts to leverage their public power through private market interventions. As well I have suggested the potential power of the Fund's ethical mandate structures for transposing international norms into state policy and market's disciplined social norms. (See Here).

But change appears to have come to Norway.  This post considers some of the more important aspects of these changes, and provides links to the latest set of recommendations for exclusion from the Government Pension Fund investment universe.



A change of government and the encouragement of a finance community eager to segregate more effectively the private markets activities of the Government Pension Fund from the operationalization of national policy through markets produced substantial official criticism of the ethics based system. In November, 2013 government-appointed commission, issued a report that recommended the abolition of the Ethics Council system, established by Royal Decree 19th November, 2004, and the transfer of some of its functions to the fund administrator--Norges Bank and NBIM. (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)). (discussed here and here).

The government has recently chosen to follow substantially the recommendations of the Main Report.  Several changes have been made to the Guidelines for observation and exclusion of Companies from the Government Pension Fund Global. The Ethics Council will no longer submit its recommendations to the Ministry of Finance, but to the Fund’s manager, NBIM, who will decide whether or not to exclude companies or place them under observation (Ethics Guidelines Section 6).  The new guidelines may be accessed HERE and are set out below.

To kick off the new regime a new Ethics Council has been established, chaired by Mr. Johan H. Andresen. The Council Members are recommended by Norges Bank and appointed by the Ministry of Finance. The Council members include the following:

Johan H. Andresen (Chair)
Johan H. Andresen holds an MBA from Rotterdam School of Management, and is the owner and chairman of Ferd AS. His previous positions include that of Product Manager for International Paper Co. in the USA and partner at the Tiedemann Group. He is a member of various boards, including Skandinaviske Enskilda Banken, Ungt Entreprenørskap i Norge, Junior Achievement – Young Enterprise Europe and the Norwegian Microfinance Initiative. Andresen also holds an appointment with the Confederation of Norwegian Enterprise’s forum for family businesses and active ownership.

Hans Christian Bugge (Vice Chair)
Hans Christian Bugge has a legal background, and is currently Professor Emeritus at the Department of Public Law and International Law at the University of Oslo, focusing on national and international environmental law issues. He has previously held various civil service positions at the Ministry of Environment and Ministry of Finance, and been a director at the Norwegian Pollution Control Authority, Secretary General of Save the Children Norway and a State Secretary in the Ministry of Development Cooperation.

Cecilie Hellestveit
Cecilie Hellestveit is a lawyer by background, specialising in international human rights, international law and company law. She holds a doctorate in humanitarian law and a Master’s degree focusing on Middle Eastern studies and Arabic. She is currently a senior adviser at the International Law and Policy Institute in Oslo, and has previously collaborated with various research institutions, including PRIO, SMR, NUPI and IKOS. She is a member of the Norwegian Refugee Council’s board of directors, and has held an appointment with the Immigration Appeals Board (UNE). She has also been a member of medical and health research ethics committees under South-Eastern Norway Regional Health Authority.

Arthur Sletteberg
Arthur Sletteberg holds a Master’s degree in economics from NHH – Norwegian School of Economics. He is currently CEO of the Norwegian Microfinance Initiative, and a member of the boards of DNB Livsforsikring AS, Entra Eiendom AS and Norfund. Sletteberg was previously Executive Vice President at Ferd AS, Chief Investment Officer at Oslo Pensjonsforsikring AS, an investment director at Storebrand Asset Management, an assistant director at DNB NOR Markets and an executive officer at Norges Bank.

Guro Slettemark
Guro Slettemark holds a law degree from the University of Oslo, with specialist studies at Aix Marseille University. She is currently Secretary General of Transparency International Norway. Her previous appointments include those of senior legal adviser at the Norwegian Data Protection Authority and political adviser to former Minister of Justice Odd Einar Dørum. She is a member of the board of the Norwegian Institute of Children’s Books and a deputy member of the University of Oslo’s University Board. (From Council on Ethics, Council Members)

In an important change from prior operations, NBIM will from now on maintain the list of excluded companies. The list may be found HERE.

The new Council has issued a set of exclusion recommendations.  They include the following:

--Innophos Holdings Inc. ;

 The former Ethics Council had recommended the exclusion of this company on the basis of its purchase of phosphate from Western Sahara. More specifically Innophos, by purchasing phosphate minerals from a Moroccan state owned enterprise that extracts the minerals from the Western Sahara, a territory Morocco controls but whose sovereign rights to that control remain disputed,  contributes to maintaining a situation of unresolved international legal status of the territory. This determination was in line with earlier decisions of the Ethics Council, which had been adopted by the Finance Ministry in 2010. For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE. 

--NTPC Ltd. ;

 The former Ethics Council had recommended the exclusion of NTPC Ltd. because of an unacceptable risk that the construction and operation of a coal fired plant in Bangladesh would cause significant ecological damage to the area. The Council considered the evidence it acquired of potential ecological damage in a 21 page opinion.  In the face of their assessment the Council rejected the contention that Bangladesh's conscious decision to undertake the project, as a sovereign nation, ought to be respected because the obligations run to the company as an independent entity rather than to the state and with reference to the biodiversity standards (World Bank/IFI Performance Standard 6 on biodiversity). The opinion is a reminder that the obligations of enterprises are not measured soly against their compliance with local law. For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE.

--China Ocean Resources;

 The former Ethics Council recommended exclusion of China Ocean Resources, a South Korean company, on the basis of its determination that its operations produced an unacceptable risk of contributing to severe environmental damage through its fishing activities. Specifically the Council faulted the company for  its targeted fishing of endangered species.  On the baiss of the information the COuncil considered, it concluded that the company engaged "in systematic illegal fishing in the management zones of the Inter-American Tropical Tuna Commission and the Western and Central Pacific Fisheries Convention. Investigations suggest that 15 of the 25 vessels identified by the Council engage in fishing in these zones without being licensed to do so." (Recommendation pp. 3).  It based its decision on a long line of prior cases in which it had established the standard for assessing severe environmental damage.  See e.g., HERE. For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE.

--Noble Group Ltd. ;

The former Ethics Council recommended the exclusion of the Noble Group Ltd., headquartered in Hong Kong,  on the basis of its determination that its activities posed an unacceptable risk of severe environmental damage to tropical forests to be converted for use as palm plantations on New Guinea Island, Indonesia. The case is interesting because the Council made this determination even in the face of the company's recognition of the need to protect biodiversity and the institution of efforts to protect biodiversity, protection that the Council determined was insufficient.  That determination curiously was based on an assessment that the efforts did not strengthen biodiversity to any greater extent than already required under national legislation (Recommendation pp. 1). The Council  noted  U.N. and World Bank REDD and REDD+ programs and that Norway was Indonesia's REDD+ partner. For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE.

--China Railway Group Ltd. ;

The former Ethics Council recommended the exclusion of China Railway Group Ltd because of an unacceptable risk that the company is involved in gross corruption.   The issue of corruption has been a sensitive one for the Ethics Council.  It's most well known efforts in this regard touched on the corruption and bribery scandals of Siemens. See, Siemens AG: Ministry of Finance Press release 24/2009; The recommendation from the Council on Ethics; The letter from the Council on Ethics; discussed HERE. See also Alstom, SA HERE (standard for gross corruption).  The most interesting part of the recommendations was  the recognition by the Ethics Council of the Chinese government's recent anti corruption campaigns.  Indeed, the corruption allegations arose out of the Chinese government's investigation  of a disastrous accident that occurred on its high speed rail lines in 2011. The Chinese government's efforts to deal with the corruption that may have contributed to the accident were noted with approval, but those efforts did little to aid CRG in avoiding exclusion (Recommendation pp. 8-10). More interesting still was that evidence relied on by the Council included "information relating to legal rulings and internal disciplinary processes in the Communist Party published in the Chinese Press." (Recommendation pp. 1). This might have raised eyebrows in the West, because the Council specifically referenced the Chinese Communist Party's system of shuanggui (Recommendation pp. 9), a practice that has been criticized in the West.  But see discussion here.  For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE.

--Tahoe Resources Inc.

The former Ethics Council recomended the exclusion of Tahoe Resources, a Nevada company, based on an unacceptable risk that the company's operations in Guatemala contributes to serious human rights violations.  Specifically, the Ethics Council criticized the way the company had handled its mining operations at the El Escobal mine in the context of community rights, community consultation, respect for indigenous rights, and the contribution to an atmosphere in the area that produced lawlessness and violence, especially against those opposed to the company's activities. The opinion is based on the application, by the Ethics Council of the U.N. Guiding Principles for Business and Human Rights (Recommendation pp. 2-3).  To that end it considered reports on the situation generated by the United Nations, court decisions and reports from civil society, including Amnesty International and indigenous groups. It rejected the company's contention that the conflict was caused by external factors unrelated to the mine. As in the recommendation against Noble, the Ethics Council gave little weight to the fact that the company had been working with a civil society corporate social responsibility organization (in this case Business for Social Responsibility) in this case primarily because  their work was not shared with the Ethics Council (Recommendation pp. 15)..  For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE.

The revised Ethics Guidelines follow:

Guidelines

(This translation is for information purposes only. Legal authenticity remains with the original Norwegian version)

Preliminary translation from the Norwegian version

Guidelines for observation and exclusion of Companies from the Government Pension Fund Global

Adopted 18 December 2014 by the Ministry of Finance pursuant to the Royal Decree of 19 November 2004 and section 2, second paragraph, and section 7 of Act No. 123 of 21 December 2005 relating to the Government Pension Fund

Section 1. Scope (1)
These guidelines apply to the work of the Council on Ethics for the Government Pension Fund Global (the Council) and Norges Bank (the Bank) on the observation and exclusion of companies from the portfolio of the Government Pension Fund Global (the Fund) in accordance with the criteria in sections 2 and 3.

(2) The guidelines cover investments in the Fund’s equity and fixed income portfolios, as well as instruments in the Fund’s real-estate portfolio issued by companies listed on a regulated market.

(3) The Council makes recommendations to the Bank on the observation and exclusion of companies in the Fund’s portfolio in accordance with the criteria in sections 2 and 3, and on the revocation of observation and exclusion decisions; cf. section 5(5) and section 6(6).

(4) The Bank makes decisions on the observation and exclusion of companies in the Fund’s portfolio in accordance with the criteria in sections 2 and 3, and on the revocation of observation and exclusion decisions; cf. section 5(5) and section 6(6).

Section 2. Criteria for product-based exclusion of companies
The Fund shall not be invested in companies which themselves or through entities they control:
produce weapons that violate fundamental humanitarian principles through their normal use
produce tobacco
sell weapons or military materiel to states that are subject to investment restrictions on government bonds as described in the management mandate for the Fund section 3-1(2)(c).

Section 3. Criteria for conduct-based observation and exclusion of companies Companies may be put under observation or be excluded if there is an unacceptable risk that the company contributes to or is responsible for:
serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour and the worst forms of child labour
serious violations of the rights of individuals in situations of war or conflict
severe environmental damage
gross corruption
other particularly serious violations of fundamental ethical norms.



Section 4. The Council on Ethics
(1) The Council consists of five members appointed by the Ministry of Finance after receiving a nomination from the Bank. The Ministry also appoints a chair and deputy chair after receiving a nomination from the Bank. The Bank’s nomination shall be sent to the Ministry no later than two months prior to the expiry of the appointment period.

(2) The composition of members shall ensure that the Council possesses the required expertise to perform its functions as defined in these guidelines.

(3) Members of the Council shall be appointed for a period of four years. Upon the initial appointment, the Ministry of Finance may adopt transitional provisions.

(4) The Ministry of Finance sets the remuneration of the members of the Council and the Council’s budget.

(5) The Council has its own secretariat, which administratively is under the Ministry of Finance. The Council shall ensure that the secretariat has appropriate procedures and routines in place.

(6) The Council shall prepare an annual operating plan, which shall be submitted to the Ministry of Finance. The operating plan shall describe the priorities set by the Council for its work; cf. section 5.

(7) The Council shall submit an annual report on its activities to the Ministry of Finance. This report shall be submitted no later than three months after the end of each calendar year.

(8) The Council shall evaluate its work regularly.

Section 5. The work of the Council on Ethics on recommendations concerning observation and exclusion

(1) The Council shall continuously monitor the Fund’s portfolio, cf. section 1(2), with the aim of identifying companies that contribute to or are responsible for production or conduct as mentioned in sections 2 and 3.

(2) The Council may investigate matters on its own initiative or at the request of the Bank. The Council shall develop and publish principles for the selection of companies for closer investigation. The Bank may adopt more detailed expectations relating to these principles.

(3) The Council shall be free to gather the information it deems necessary, and shall ensure that each matter is thoroughly investigated before making a recommendation regarding observation, exclusion or revocation of such decisions.

(4) A company that is being considered for observation or exclusion shall be given an opportunity to present information and viewpoints to the Council at an early stage of the process. In this context, the Council shall clarify to the company what circumstances may form the basis for observation or exclusion. If the Council decides to recommend observation or exclusion, its draft recommendation shall be presented to the company for its comments; cf. section 7.

(5) The Council shall regularly assess whether the basis for observation or exclusion still exists. In light of new information, the Council may recommend that the Bank revokes an observation or exclusion decision.

(6) The Council shall desribe the grounds for its recommendations to the Bank; cf. sections 2 and 3. The Bank may adopt more detailed requirements relating to the form of such recommendations.

(7) The Council shall publish its routines for the consideration of possible revocation of an observation or exclusion decision. Excluded companies shall be informed specifically of these routines.

Section 6. Norges Bank
(1) The Bank shall make decisions on observation and exclusion in accordance with the criteria in sections 2 and 3, and on the revocation of such decisions, after receiving recommendations from the Council.

(2) In assessing whether a company shall be excluded under section 3, the Bank may consider factors such as the probability of future norm violations, the severity and extent of the violations and the connection between the norm violation and the company in which the Fund is invested. The Bank may also consider the breadth of the company’s operations and governance, including whether the company is doing what can reasonably be expected to reduce the risk of future norm violations within a reasonable time frame. Relevant factors in these assessments include the company’s guidelines for, and work on, safeguarding good corporate governance, the environment and social conditions, and whether the company is making a positive contribution for those affected, presently or in the past, by the company’s conduct.

(3) Before making a decision on observation or exclusion or on the recovation of such decisions in accordance with section 6(1), the Bank shall consider whether other measures, including the exercise of ownership rights, may be more suited to reduce the risk of continued norm violations, or whether such alternative measures may be more appropriate for other reasons. The Bank shall consider the full range of measures at its disposal, and apply the measures in a coherent manner.

(4) Observation may be decided when there is doubt as to whether the conditions for exclusion are met or as to future developments, or where observation is deemed appropriate for other reasons.

(5) The Bank shall ensure that adequate information is available before making each individual observation, exclusion or revocation decision.

(6) The Bank shall regularly assess whether the basis for observation or exclusion still exists.

Section 7. Exchange of information and coordination between the Bank and the Council on Ethics
(1) To help ensure the most coherent possible use of measures in the context of promoting responsible management, the Bank and the Council shall meet regularly to exchange information and coordinate their work.

(2) Communications with companies shall be coordinated and with the aim to be perceived as consistent. The Bank shall exercise the Fund’s ownership rights. The Bank shall seek to integrate the Council’s communications with companies into its general company follow-up. The Bank shall have access to the Council’s communications with companies, and may participate in meetings between the Council and companies.

(3) The Council may ask the Bank for information on matters concerning individual companies, including how specific companies are dealt with in the context of the exercise of ownership rights. The Bank may ask the Council to make its assessments of individual companies available.

(4) The Bank and the Council shall put in place detailed procedures for the exchange of information and coordination to clarify responsibilities and promote productive communication and integration of the work of the Bank and the Council.

Section 8. Publication
(1) The Bank shall publish its decisions under these guidelines. Such publication shall occur in accordance with the management mandate for the Fund section 6-1(4). When the Bank publishes its decisions, the Council shall publish its recommendations.

(2) The Bank shall maintain a public list of companies excluded from the Fund or placed under observation pursuant to these guidelines.

Section 9. Meetings with the Ministry of Finance
(1) The Ministry of Finance, the Bank and the Council shall meet at least once a year. The information exchanged at such meetings shall be part of the basis for the reporting on responsible management included in the annual report to the Storting (the Norwegian parliament) on the management of the Fund.

(2) The Ministry of Finance and the Council shall meet at least once a year. The following matters shall be discussed at the meetings:

1.activities in the preceding year
2.other matters notified by the Ministry and the Council.

Section 10. Power of amendment
The Ministry of Finance may supplement or amend these guidelines.

Section 11. Entry into force
Section 4(1)–(3) shall enter into force immediately. The other provisions in these guidelines shall enter into force on 1 January 2015. The “Guidelines for observation and exclusion from the Government Pension Fund Global’s investment universe” adopted on 1 March 2010 shall be repealed on the same date.

Section 12. Transitional provisions
Recommendations from the Council which the Ministry of Finance has received, but not finally processed, by 1 January 2015 shall:

1.where the matter concerns a company in the Fund’s portfolio, be sent back to the Council for consideration of further handling in accordance with these guidelines
2. where the matter concerns a company not included in the Fund’s portfolio, be taken note of by the Ministry. Such recommendations shall be made Public.