Norwegian Pension Fund Global Ethics Council Recommends Revocation of Exclusion of Singapore Technologies Ltd. and a Call for the Adoption of Conditional Revocation of Exclusion

This news release from the Norwegian Pension Fund Global:

Recommendation 21 December 2015 to revoke the exclusion of Singapore Technologies Engineering Ltd

The Council recommends revoking the exclusion of Singapore Technologies Engineering Ltd from the Government Pension Fund Global (GPFG). This company has been excluded since 2002 due to its production of anti-personnel landmines. This production has now ceased and there are no longer grounds to maintain the exclusion of the company.

Please find the Council’s recommendation here.

The text of the recommendation follows along with brief observations.

Observations:

The decision to revoke exclusion is interesting for two reasons. The first evidences the market power of the Norwegian Pension Fund far beyond mere access to the funds it holds for investment. It suggests the importance of the Pension Fund Global to the cost of capital and access to financial markets. That Singapore Technologies went to the trouble of seeking revocation of its exclusion suggests that such an action produced value for the company. That value might be in prestige markets among its peer groups. Or its value might be bound in access to capital markets either on the sense that such an exclusion might have increased the company's cost of capital (higher risk given exclusion) or that it might have sought funds from other sources in which the Norwegian exclusion might have proven to be an obstacle. To the extent that any of this is the case, then the power of exclusion has substantial political value in private markets. In this case we are not sure what moved Singapore Technologies to seek reinstatement in the Pension Fund's investment universe. It could hardly have been the essential need for investment by the Fund, when access to capital, including from other Sovereign Wealth Funds in Asia might have been readily accessed. Something else was at play. The symbolic element was likely important--as John Ruggie suggested in crafting the UN Guiding Principlesfor Business and Human Rights, a company's reputation risk and the need to preserve reputation has substantial value and can be managed for the production of behavior norm changes. But as well, the climate of lending is changing, as financial institutions are increasingly privatizing the soft law of corporate responsibility in their lending activities. It would be useful to begin to measure these effects.

The second evidences the need for the Ethics Council to begin to use its authority with greater governance effect. It has been the habit of the Ethics Council,, the Norges Bank, and in its time the Finance Ministry to adopt a fairly simpleminded approach to the remedial provisions of the Ethics Guidelines. That approach produced one of three results: exclusion, observation or no action. Likewise, elimination of the causes of exclusion presumptive moves a company back from excluded to fully embedded in the Pension Fund's investment universe. Yet it seems that the regulatory effect of the Ethics Guidelines suggests a possibly more integrated connection between the monitoring function of the Ethics Council--and Norges Bank--and the enterprises in which Norges Bank invests on behalf of the Pension Fund. This suggests that the active shareholder principles inherent in the structure of the operation of the Fund ought to be given greater effect. That greater effect might include, for example, conditional revocation of exclusion.

This is distinct from the traditional remedy of observation. Instead, it would require company compliance with a set of conditions relating to its human rights (and Ethics Guidelines) related conduct as a condition of reinstatement. Conditional revocation of exclusion arises from the inherent obligation of the Pension Fund, and its managers, to comply with their responsibility to respect human rights by ensuring an appropriate level of human rights due diligence in its investment activities, and to comply with the public duty to protect human rights as an overarching obligation of the Kingdom of Norway to ensure that its commercial and investment instrumentalities conform fully to the state's international legal obligations and pursue policies that further its moral obligation sin globalized activities. It is not clear that full revocation is always and necessarily the appropriate remedy when a company seeks reinstatement and offers proof of compliance.

In some cases. perhaps this is one of them, the Pension Fund, and the state which operates it, would have an obligation to investigate further, to exercise an obligation of extended human rights due diligence, with respect to the company's operations. The company would be reinstated subject to its agreement to comply. Generally that might entail some reporting in certain cases of ongoing violation. Or it might require certification, grounded in evidence, with respect to compliance with the entirely of the Ethics Guidelines in general, and the U.N. Guiding Principles, specifically. To fail to undertake this analysis appears to substantially reduce both the effectiveness of the work of the Ethics Council and of the value of the Ethics Guidelines as a globally integrated set of regulatory governance techniques meant to move the project of business and human rights forward in both the societal and public spheres.

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UNOFFICIAL ENGLISH TRANSLATION

To: Norges Bank
21 December 2015
Recommendation to revoke the exclusion ofSingapore Technologies Engineering Ltd from the Government Pension Fund Global

1. Summary

The Council recommends revoking the exclusion of Singapore Technologies Engineering Ltd from the Government Pension Fund Global (GPFG). This company has been excluded since 2002 due to its production of anti-personnel landmines. This production has now ceased and there are no longer grounds to maintain the exclusion of the company.

2. Background

In 2001, the Government Petroleum Fund's Advisory Commission on International Law and the exclusion mechanism to secure that the Fund's investments did not conflict with Norway's obligations under international law were established. In 2002, the Advisory Commission submitted a recommendation to the Ministry of Finance that Singapore Technologies Engineering Ltd., which produced anti-personnel landmines, should be excluded from the Fund.1 The reason for this was that the Fund's investment in this company could be regarded as conflicting with Norway's obligations under the Anti-Personnel Landmine Convention, more specifically with the prohibition against «assist, encourage or induce», as stated in article 1(1) of the Convention.2 This recommendation was complied with and the company was thus excluded from the Fund.

The exclusion was upheld under the current guidelines for the observation and exclusion of companies from the Government Pension Fund Global3 and has been maintained up to now.

According to section 5(5) of the guidelines, the Council may, based on new information, recommend that Norges Bank revokes the exclusion of a company.

3. Information from the company

In November 2015, the company published a declaration stating that it no longer has any activities relating to the production of either anti-personnel landmines or cluster munitions:

«As a responsible military technology manufacturer, we are not in the business of designing, producing and selling of anti-personnel mines and cluster munitions or any related key components.»4

The Council has contacted the company and received confirmation that this declaration applies to all the company's operations and all its subsidiaries.5

4. The Council's assessment 

Based on the above, the Council finds there are no longer grounds to maintain the exclusion of the
company.

5. Recommendation

The Council recommends revoking the exclusion of Singapore Technologies Engineering Ltd. from the Government Pension Fund Global.

***
Johan H. Andresen
Chair
Hans Chr. Bugge
Cecilie Hellestveit
Arthur Sletteberg
Guro Slettemark

NOTES:

1. The Advisory Commission on International Law's recommendations:  http://etikkradet.no/en/history/.

2. The Anti-Personnel Landmine Convention (Convention on the Prohibition of the Use, Stockpiling, Production and Transfer of Anti-Personnel Mines and on Their Destruction): http://www.icbl.org/media/604037/treatyenglish.pdf.

3. Guidelines for the observation and exclusion of companies from the Government Pension Fund Global: http://etikkradet.no/en/guidelines/

4. The company's website:  http://www.stengg.com/corporate-governance/sustainability.

5. Email from the company to the Council dated 1 December 2015.